The pensions industry has some way to go in order to meet the Pensions Regulator's proposed new list of governance expectations, a report by advisory company Willis Towers Watson found has found. Do pension professionals agree?

The report revealed that only a quarter of trustee boards currently independently review their governance. It also found that only half of trustee boards currently review their effectiveness annually, and just over a quarter use some form of external validation.

TPR’s new combined code of practice, on which a consultation closed last month, is expected to require all schemes with 100 or more members to carry out an assessment of their risk, governance and effectiveness practices at least annually. It also requires schemes to appoint an independent reviewer of their governance and risk management practices.

Some in the industry agree that pension trustee boards are not ready to comply with the new expectations.

“Trustee boards need to take a breath, have a look at the detail of what the regulator is looking for and then map that across what they are doing,” says Michael Clark, managing director of professional trustee firm CBC Pension Services. He warned against letting complacency set in: “They may well think that they are operating with good governance, but I suspect that there is work to be done by the vast majority of schemes in order to meet TPR’s wishes.”

Others are however confident that the new rules will simply confirm existing best practice. Bart Heenk, managing director of consultancy Avida International, says that the expectations are “nothing more than what trustees should have been doing in the first place”.

The report by WTW also shed a light on the effect of increased regulatory complexity. It found that almost three-quarters of respondents believe the role of the trustee has significantly more risk attached to it now compared with the past, and 65% say it has become more difficult.

"For the trustee side who are the main people affected by the code of practice, I guess there is that worry about more governance, more regulation.... It is a big burden,” says Laura Andrikopoulos, head of governance consulting at consulting firm Hymans Robertson.

Heenk says the underlying objective of the regulations is to force people to ask themselves some potentially uncomfortable questions.

"For some small schemes this would be a catalyst for existential questions - ‘Do we really need to continue running our schemes ourselves or do we want to sort of be absorbed in a larger entity?’,” he said.

One thing people can agree on is the need for better diversity and inclusion. Diversity is clearly thought to be an issue, as the report found seven in 10 trustees are aware that a lack of diversity is one of the key challenges facing the industry.

“I think we’re a little bit behind the corporate governance world on [diversity and inclusion]. It’s definitely high on the agenda,” says Andrikopoulos.

While over half of respondents feel that their own trustee board is sufficiently diverse in terms of life experience, only a quarter can say the same for diversity by age, gender and ethnicity – putting the former statement into question.

“We’ve been quite bad at age diversity in the pensions sector, but that is headed to change a bit,” says Andrikopoulos.

Senior adviser at governance specialists Muse Advisory, Julia Land, notes that an initiative to help formulate D&I policy has been supported widely by the industry, with over 70 volunteers involved.

However, less than a quarter of respondents from the WTW report say they are actively targeting diversity and inclusion as a key priority which should be addressed over the next three years.

The regulatory focus on this issue could however force trustees to pay more attention to it in the governance reviews set to be mandated. According to Land, TPR is seeking to “walk the talk, improving D&I in its own organisation and in its community engagement”.

The report found that the biggest change to scheme governance is expected by participants to be an increased focus on environmental, social and governance factors (44%) and assessing the impact of climate change on pension schemes (39%).

“Often the younger members are a lot more engaged in things like climate change,” says Andrikopoulos. “So I think there is a trend now, trying to get younger members on board because they have a different perspective that could be really valuable.”

Although some trustees may not feel ready for these changes, there is still time to prepare.

“We won’t see the final code for a few months yet,” says Land. “So useful strategic and governance planning work can be undertaken over the coming year to get ahead and be ready.”