Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

The Department for Work & Pensions (DWP) has issued a call for evidence to aid its understanding around ‘trustee capability and other barriers to trustees doing their job.’ A new single code of practice for pension schemes is expected to be finalised this year, requiring trustee boards to have an ‘effective system of governance’ in place and carry out their own annual risk assessment.  A new funding regime is also expected in 2024. 

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:

  • Professional trustee
  • Pension Scheme Administrator
  • Secretary to the Trustees
  • Auditor
  • Scheme Actuary
  • Investment Consultant
  • Covenant Adviser
  • Legal Advisor

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.

How can small schemes meet the latest governance requirements without breaking the bank?

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?

Master trusts allow small schemes to access expertise on a cost-effective basis

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.

Service Provider 
 Investment Management abrdn Investment Management Limited 
 Actuarial Advice

XPS Pensions Group

 Investment Consultancy  XPS Pensions Group 
 Administration XPS Pensions Group 
 Scheme Secretary XPS Pensions Group 
 Covenant Advice XPS Pensions Group 
 Professional Trustee BESTrustees Limited 
 Legal Advice Shepherd and Wedderburn LLP 
 Audit RSM UK Group LLP 

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.