The Pensions Regulator will again consider whether a professional trustee on each board should be mandatory, it said in its corporate plan 2023-24 published on Friday. It also said it now aims to implement its defined benefit funding code no sooner than April 2024. The delay has been welcomed by the industry. 

 

The regulator published its corporate plan on Friday, saying it will “commence work to consider whether there should be a professional trustee on each trustee board, whether professional trustees should be accredited or whether we consider that there should be an authorisation process established for professional trustees”. 

 

It aims to create an option analysis on the future regulation of governance and trusteeship in Q4. 

 

Louise Davey, TPR's interim director of regulatory policy, analysis and advice, said the regulator acknowledges that “many schemes are well run, but far too many fail to meet our expectations, and this needs to change”. 

 

She added that for those schemes unable to consolidate or wind up, the right course may be to ensure accredited or professional trustees form part of the governing body. 

 

“We cannot currently force trustees to seek accreditation, but we think there is a strong case to develop and implement a framework that supports and encourages this,” Davey told mallowstreet.  

 

“There are challenges which must be resolved, and it may be that only an authorisation regime would ensure there is a clear framework for trustees to demonstrate they have the right skills," she added.

 

The challenges TPR is considering include how any framework it implements would change governance and the make-up of governing bodies, the impact on member-nominated trustees and improvements in equality and diversity, as well as how it defines what a professional trustee is and needs to demonstrate.   

 

Harus Rai, the managing director of trustee firm Capital Cranfield who chairs the Association of Professional Pension Trustees, noted that the APPT and the Pensions Management Institute set up an accreditation scheme that was supported by TPR in 2020. Close to 500 professional trustees are currently voluntarily accredited. 

 

“We feel that the next natural step is for accreditation to be mandatory for anyone acting in a professional trustee capacity, which is something we have been seeking for a number of years. We also welcome consultations on how accreditation schemes might be strengthened, but there needs to be care in moving at a pace that realistically can be supported by the market,” Rai said. 

 

Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said the liability-driven investment crisis has shown that much needs to be done to improve overall standards of governance, with appointing a professional trustee to each board being one route to doing so. 

 

“However, this would not be a realistic objective at this stage as there is nothing like sufficient capacity within the professional trustee sector to meet the levels of demand that this reform would create. It is also important to note that many smaller schemes lack the financial resources that such an appointment would require,” Middleton argued. 

 
If the appointment [of] professional trustees were to become a statutory requirement, formal authorisation would be essential, he added. Middleton noted that this would require primary legislation and would therefore be unlikely to happen before the next general election, due by January 2025. 

 

“Authorisation is however a logical development for the professional trustee sector,” he added, to give sponsors assurance about professional and ethical standards.  

 

 

The proposal to have a professional trustee on every scheme board goes back four years but was reopened through the IDI crisis last autumn, when pension fund governance and regulation came under fire by politicians and commentators.  

 

When quizzed by the Lords Industry and Regulators Committee in November, former TPR chief executive Charles Counsell said TPR should give “quite a lot of consideration to” the idea of regulating professional trustees. 

 

In the hearing, Lord Cromwell had told Counsell that TPR cannot have the view that trustees have very variable skill levels while at the same time holding them responsible as the ultimate guardians of a pension scheme. 

 

    

The proposals to have a professional trustee on board each scheme was made in a 2019 consultation by TPR on the future of trusteeship and governance. In its response, TPR said it had decided not to require pension scheme boards to engage a professional trustee, instead supporting the professional trustee standards by the Association of Professional Pension Trustees, as well as an industry accreditation framework for professional trustees.  

 

“A large majority of responses were against the proposal,” TPR said at the time. They cited market capacity, additional cost and burden on schemes, the potential to reduce trustee diversity and the fact that the APPT standards had at that point not had time to bed in.  

 

In its 2020 response, TPR said it had always recognised that it was not currently feasible to require a professional trustee to sit on every pension scheme board given existing capacity. However, it also kept things open by saying it “may well revisit this idea in the future”, once the impact of the trustee standards and accreditation on the quality of professional trustees, the effect of other activity on governance was clearer and the number of schemes had reduced. 

 

The defined benefit pension schemes universe consists of around 5,131 schemes, based on the Pension Protection Fund’s 7800 index. In July 2019, there were 5,450 schemes in the index. 

 

Meanwhile, there were 1,370 non-micro defined contribution schemes including hybrid schemes in January 2022 according to the regulator, down from just under 2,000 three years earlier. In total, there were 27,700 DC schemes, of which 81% were relevant small schemes or executive pension plans.  
 

Industry has focussed on the extension in the implementation of the DB funding code, which it welcomed as it gives pension funds more time to prepare. 

 

Tiffany Tsang, head of DB, LGPS and investment at the Pensions and Lifetime Savings Association, said: “TPR’s confirmation that the DB Funding Code of Practice will not come into implementation until April 2024 is the optimum outcome for DB schemes, something the industry has been lobbying for.” 

  

The extra time will allow for the details of the regime to be calibrated and give schemes much-needed time to prepare and carefully consider how they will comply, she argued. 

  

“Although there is greater flexibility in the draft code, DB schemes should be given more latitude over how to define maturity and on the requirements of schemes as they approach low dependency. Not all DB schemes are the same. Some are open, some are closed, and all are at different levels of maturity, and not all employer covenants are the same. Therefore, it is important for the final regime to fully recognise this and allow schemes the ability to take different - perhaps even riskier - approaches where appropriate,” Tsang added. 

 

What’s your view on trustee accreditation and potentially putting a professional trustee on every board?