The ‘governing body’, is a term introduced by the general code (the code) to add to an already broad landscape of roles and responsibilities!
The code’s definition is as follows: ‘The governing body is responsible for running a scheme. Governing bodies may be trustees or managers of occupational pension schemes, or, in public service pension schemes, the scheme manager. Legislation may apply to each governing body differently, depending on the type of scheme they govern
In practice, we are treating the governing body as the trustee board (or trustee if a sole trustee). However, it’s important to recognise the trustee board’s key support staff, such as the scheme secretary and/or pensions manager and other in-house support as they may be delegated operational responsibilities to a larger or lesser degree. This whole area of the ‘effective system of governance’ (ESoG) is about how it manages itself and any advisers and how both sets of stakeholders remain accountable, covering the following:
- board structure and activities
- knowledge and understanding
- value for scheme members (defined contribution schemes/hybrid schemes only)
- managing advisers and service providers
- remuneration policy
Having reviewed several schemes in preparation of the inevitable own risk assessment, here are a few things to consider when embarking on a review of the governing body parts of the code.
The importance of equity, diversity & inclusion (ED&I) – The Pensions Regulator has decided not to include ED&I in the final code but instead sets out in lots of detail its expectations and examples of good practice in ED&I guidance for Trustees and Employer issued in March 2023. However, ED&I has some direct references in the communications part of the ESoG, and also key references in the role of the board and chair code modules.
It’s a good time for trustees to consider ED&I and how they make sure all trustee board voices are encouraged and heard and exhibit the expected behaviors and standards. New trustee recruitment processes should engage a wide range of applicants, and that doesn’t just apply to member nominated trustees. So, when considering the governing body ESoG requirements we strongly recommend considering the ED&I guidance at the same time and have built our ESoG framework and tools to include ED&I requirements.
The role of the chair is key – there is a whole module on what is expected of the chair who the code states must be capable to operate in line with best practice. They need to be a leader and role model for the board, representative of all members, encourage others to contribute, be collaborative, organised, knowledgeable, challenging, independent when required, strategic, able to gather and understand diverse views and reach a consensus – that’s some list! Interestingly, the final code adds a new statement that the Chair need not have any greater pensions knowledge than other Trustees, so the focus is really on the chair’s skills and wider experience.
There is now a greater emphasis on schemes demonstrating consideration of their own skills and effectiveness, so we think incorporating proportionate and period trustee skills and effectiveness reviews becomes more important, and our ESoG framework will include the tools to undertake these reviews once trustee boards consider what is relevant for them
No need to reinvent the wheel, but you may need to invest in some alloys! – If you have existing articles of association, member nominated director/trustee (MND/T) policies, trustee training logs and the like then that will be a great start. However, most schemes will need to build on this to meet the demands of the code and be able to evaluate how well they are doing against how they say they will operate.
Knowledge and understanding assessments – while not a new requirement the list of items in the code trustees are expected to be familiar with over time comprises around a staggering 50 areas!
To be successful here, trustees will need a clear induction plan for new trustees with support and a way of assessing knowledge for future training, not just look retrospectively at a static trustee training log. We have built a simple assessment tool which aligns with the code and can be used to help capture future training needs. We have been using this on some of our early adopter schemes, with positive feedback.
Like all parts of the code, the area of the governing body is wide ranging. When looking at the modules involved, repeating the code’s mantra of being ‘proportionate to the size, scale and nature of the scheme’ is vital to avoid creating mini-versions of the Sistine Chapel or Golden Gate bridge – the framework within how the trustee board governs itself and its advisers must be practical but not over engineered to be both effective and auditable – and to drive continuous improvement on the trustee board.
There‘s a lot to consider and many trustee boards and their delegated support teams will need help to understand what is relevant to them. If trustee boards want to leverage efficiencies and gain improvements in performance they will need to know what is happening in the wider marketplace to know what is proportionate and effective, to ensure compliance with the code is not just a box ticking exercise.
If you have any questions, or want to find out more, please get in touch with the author Simon Lewis.
Please note this article first appeared on Professional Pensions: ESoG – A growing body of evidence
