What does a lack of democracy in pension funds mean for members?

Pardon the Interruption

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The election campaigns are in full swing as they would be in any democracy around the world, which, as we know, is the worst form of government apart from all others. 
 
Citizens cast a vote to elect a representative – no one has come up with anything better thus far, though the definition of ‘citizen’ has been subject to argument and change over the centuries. Age, for example, remains a contested boundary.
 
In a pension scheme, things are much simpler. Or are they? 
 

What is the state of representation in pensions?  

 
It seems that MNTs have felt under attack ever since the Pensions Regulator has said, in so many words, that professional trustees are doing a better job than lay trustees. Now it has proposed to put a professional on every single trustee board in the UK, despite consensus that this is not feasible, a proposal which could lead to even more entrenched positions on the issue of professional and lay trustees. 
 
In an ideal world, member-nominated trustees are keen proponents of member concerns, who challenge and question whether what is put before them really helps members – and on some schemes this may well be the case. But too often in the past it wasn’t, and so it’s no coincidence TPR has put the finger on governance, particularly in small schemes. The fact that it is becoming harder and harder to recruit MNTs as schemes close has not helped their cause either. 
 
What is also often overlooked is the issue of conflicts among MNTs. Pensioner trustees are not affected, but where trustees are still employed by the company whose pension fund they look after, they could be more reluctant to contradict what the sponsor, or a company trustee, wants to push through. 
 
Having no obligation for member representatives on master trust boards has been another setback for democracy in pension funds. Unions could play that part, but regulators and master trusts themselves have not shown any appetite for including members in decision-making. The argument that there are too many different groups of members to represent them all is weak; but in the absence of any other, it still sometimes gets dusted off and used. 
 

Can non-members act in members’ best interests? 

 
The big question then is whether a trustee board can act in members’ best interests if there are no member representatives. How do the trustees they know their membership, and consequently their best interests? Are membership surveys perhaps a better way of gauging what members need? 
 
Labour has openly supported member representation in pension funds and even wants to ramp this up, demanding that half of the trustees on pension fund boards should be members; currently the requirement is one-third, although there are a handful of schemes that already have 50% MNTs. 
 
Fifty per cent is an ambitious target, particularly given the frequently cited difficulties that trustee boards have recruiting MNTs in mature and mostly closed DB schemes. The problem with demanding more representatives is the track record of current and previous MNTs. If there was a clear indication that more member representation has led to better outcomes for pension scheme members, the argument would be clear, but to my knowledge, so far nobody has shown that this is the case. 
 

What does the erosion of democracy in pension funds mean for members? 

 
If members are removed from decision-making, they are turned from active stakeholders into passive ‘consumers’, as which the regulator increasingly refers to them. The Cambridge Dictionary defines a consumer as a person who buys goods or services for their own use. 
 
The shift from ‘members’ to ‘consumers’ can perhaps be viewed as a doomed privatisation of pensions language not dissimilar to that of railway lines. Just as commuters can’t switch rail company to get from A to B if they are unhappy with the service provided, members in occupational schemes can’t pick a different occupational scheme – their employer has and makes that choice, who is in fact the real ‘consumer’. 
 
But where views can’t be expressed through either representation or choice, the pension scheme member is effectively silenced. Given how much is being said about the need for member engagement, it is paradoxical that members should not be on the boards of most master trusts, for example. The fact that auto-enrolment builds on inertia does not absolve master trusts from representing the membership. 
 
Of course many master trusts have taken the precautionary step of appointing consumer champions to their boards, but whether this good intention survives as the sector develops is yet to be seen. Only Nest has created a member panel, which can make recommendations but has no decision power. 
 
It will be interesting to see if this will change as more people become aware of their ever-bigger DC pots, perhaps wondering how their interests are protected and represented if they can’t have their say. 
 

What do you think – do pension schemes have members who are stakeholders, or do they provide a service to consumers?