Against this regulatory backdrop, it’s no wonder that the trend towards fully professional governance models is gathering pace. But how can small schemes meet the latest governance requirements without breaking the bank?

Increasing demands

Current rules place increasingly burdensome demands on trustees and sponsors of defined benefit (DB) pension schemes. Meanwhile, the number of members employed by sponsoring companies and willing to step in as trustees is decreasing, and the knowledge gap caused by the increasing complexity of regulation is also becoming much more apparent. Tightening regulations can feel even more painful for smaller, less well-resourced schemes. 

What does this mean for DB scheme governance?

Regulatory expectations – not to mention potential future changes in legislation – mean the time cost of 'in-housing' certain services to manage DB pension schemes is just becoming too much. It's becoming more important than ever for DB scheme governance models to include industry professionals with different areas of expertise, including professional or independent trustees and advisers in multiple fields. The table below shows some of the professionals whose services are essential for today’s governance models:

Impact on sponsoring employers

Aside from the cost impact of employing professional advisers (we will pick this up in another article), it’s important to recognise the number of stakeholder relationships that will need to be managed and the additional time required to do so.

But what's the alternative? Without these professional advisers in place to help manage day-to-day scheme requirements, the governance model may be deemed inadequate and there is an increased risk that the regulatory requirements are not met. For example, the gilt crisis in September 2022 highlighted that having a robust and nimble governance structure made a real difference to the financial outcomes of schemes and was not just ‘window-dressing’. For smaller schemes with less resource and funds to support expenses, the only option may be to hire in outside advice.

Could master trusts provide a solution?

Consolidation is gaining momentum in the DB industry, with master trusts available to help small-to-medium-sized DB schemes facing these problems. Through economies of scale, master trusts allow small schemes to access expertise on a cost-effective basis – such as external legal and covenant professionals – that simply would not be economically viable on a standalone basis. Would you rather pay 100% of professional trustee costs or an equal share of a single scheme fee?

The abrdn pensions master trust operates a ‘one-stop-shop’ approach with professional service providers appointed for every key area, as you can see from the table below.

This model is designed to take away the governance burden entirely from the current trustees, remove any trustee succession problems and provide reassurance to the sponsoring employer that the scheme is being run professionally. The main driver for all of this? Better outcomes for members and better value for sponsoring employers.