More people than ever are reliant on their workplace pension for a favourable retirement outcome. The introduction of automatic enrolment in 2012 has transformed the pension savings landscape in the UK, moving a workplace scheme from the “nice to have” category to “must have”.
Data from the Department for Work and Pensions (DWP) shows that employees across the UK saved £144.6bn into their pension in 2021 – a real-terms increase of £32.9bn on the 2012 figure. As the DWP notes, workplace pension saving is now normalised, and a culture of retirement saving has helped to foster a greater sense of security among the workforce.
However, the sheer scale of workplace saving shows just how much is at stake – meaning good pensions governance is essential if employees are to maintain that sense of security.
Protection from risk
Alan Morahan, chief commercial officer at Punter Southall Aspire, explains: “We all know employees bear the ultimate risk for the size of their pension but, among other things, good governance means they are supported by their employer and trustees and shielded from risks beyond their control, such as the impact of regulation on the changing shape of auto-enrolment, and what schemes need to put in place to comply.”
As Morahan suggests, a scheme’s trustees are the driving force of pensions governance. Legislation requires that most occupational pension schemes are set up as trusts, and a trustee – acting separately from the employer – holds assets in the trust for the scheme’s beneficiaries.
Trustees have the responsibility of ensuring that the pension scheme is run properly and that benefits are protected. The interests of scheme members – and, in the case of workplace pensions, that means employees – are at the forefront of the governance agenda, so it’s important that employers fully understand the role of trustees.
According to The Pensions Regulator (TPR), trustees governing a scheme need a strong clarity of purpose and strategy. Other essentials outlined by TPR include relevant skills and experience, effective decision making and a willingness to work with advisers.
“Trustees or trustee boards play a vital role as the guardians and stewards of trust-based pension schemes,” explains Jay Solanki, head of governance at pensions advisory firm Isio. “Their primary responsibility is to ensure the effective and efficient operation of the pension scheme, ensuring that members receive their benefits in accordance with scheme rules.”
According to Solanki, there are four “fundamental pillars” that trustees should be well acquainted with:
Financial: Trustees need to understand the financial aspects of the pension scheme, including its funding mechanisms, actuarial assumptions when valuing benefits, and the required contributions from the company in case of a deficit.
Investments: Understanding how to invest the scheme’s assets – including determining necessary returns and managing associated risks – is a critical component of the trustee’s role.
Administration: Trustees are tasked with overseeing the accurate calculation and timely disbursement of benefits to scheme members.
Governance: Trustees must ensure that all necessary policies and processes are in place to comply with relevant legislation and regulations.
Risk management is obviously an imperative part of the governance function, and trustees need to identify key risks in operating the pension scheme. According to Solanki, these are best managed by categorising them into the four pillars above.
“It is very important for trustees to recognise that having a risk register is not just to tick one of the governance boxes but that it is reviewed regularly to ensure that the risks are actively managed,” he says.
Anne Sander, client director at Zedra Governance, agrees. “The days of creating a risk register and having it sit in the bottom of draw until an annual review are over,” she says. “Good pension scheme governance means thinking about the risks to the scheme and to members from making, or not making, a decision even between trustee meetings.”
According to Sander, trustees of DC schemes need to periodically consider if the default investment strategy is still fit for purpose in the context of how members actually take and use their retirement funds, as well as how they can help DC members make good decisions as they approach and enter retirement.
Employers can also play their part by monitoring the arrangements they have in place “to ensure that employees are still receiving good value for the spend they are making on pension provision”, Sander adds.
Compliance and communication
As well as risk and value, compliance is at the heart of good pensions governance, and trustees will soon have the new TPR general code of practice to consider. Expected to come into force by April 2024, this will combine a number of TPR’s existing codes of practice into an updated format.
It will also include additional content to reflect statutory governance requirements, including how to establish and operate an “effective system of governance” and how trustees must assess their compliance with an “own risk assessment”.
According to Andrew Worthington, associate director at Sackers, trustees of well-governed schemes shouldn’t be daunted as they should already be meeting many of the general code’s requirements.
Worthington also emphasises the importance of good communication. “Transparency with members helps to drive engagement and ensure that employees make the most of such a valuable workplace benefit,” he says. “Issuing clear communications helps to avoid members making knee-jerk decisions.”
Communication between trustees and employers is another important component to good workplace pensions governance. Jonet Dunmore, head of pensions at Cadent Gas, explains: “We’ve got a DC governance committee and we do regular meetings and talk to them about engagement and investment. That’s the point of having professional trustees. They report to you and you can ask questions.”
So, when it comes to workplace pensions, peace of mind and a sense of security is important for employees and employers alike – and that can only come with good governance.