The Pensions Authority (the Authority) recently published its report on the supervisory activities that it carried out in 2024. The Authority confirmed that it expects trustee boards and their advisors to consider the report's findings and evaluate their own practices to establish if any improvements are required.
The Authority has a statutory obligation to conduct a supervisory review of the strategies, processes and reporting procedures established by pension scheme trustees. It does so by assessing a scheme's system of governance, the risks that the scheme faces and the ability of the trustees to manage those risks.
Last year saw the introduction of the Authority's supervisory review process (SRP) for a number of multi-employer master trusts (MTs), defined benefit and defined contribution schemes. The Authority recently published a report on its 2024 supervisory activities (the Report) .
A high-level summary of the Report's key findings and the takeaways for trustees is below.
Governance
- Trustee board minutes: The Authority expects
board minutes to contain a summary of discussions held and all
decisions made, as well as any actions identified and timelines to
complete these. Deficiencies identified included:
- a failure to log actions and assign responsibility; and
- target action dates being persistently deferred.
- Policies: These should be tailored to the specifics of the scheme and not merely copied directly from the Authority's Code of Practice for trustees. A record should be kept of when these policies are reviewed.
Operations
- The Authority expects trustees to have a robust outsourcing oversight framework to manage the risks posed by outsourcing and sub-outsourcing arrangements. This includes the regular consideration of key performance indicators, triennial critical reviews and exit strategies where an outsourcing arrangement must be terminated.
- The Authority identified instances of trustees failing to take action in response to service level breaches. The Authority noted that in many contracts with key service providers, trustees lack clear recourse if service levels fall below the agreed standard.
- The Authority also noted that some service providers have limited their financial liability in the event of financial loss to the scheme. While this is not uncommon, the Authority expects trustees to engage with providers to ensure such liability caps remain appropriate. Over time, liability caps which have been agreed with providers may no longer be appropriate relative to the size of a pension fund, particularly where funds under management have increased since those contracts were put in place.
Risk Management
Central to the SRP and the trustee decision making process is the ability of trustees to manage scheme risks. The Authority focused on own-risk assessments (ORA) and found they were not comprehensive. Issues identified with ORAs included:
- ORAs did not specify whether a given risk was within or outside risk tolerance;
- limited wider risk scanning of external events outside the control of trustees but for which mitigations could be considered; and
- outsourcing risks were not considered.
Communications
The Authority found that many member engagement policies were not detailed and overly focused on statutory communication obligations. Where communications were outsourced to advisors, the Authority found trustees had limited oversight of those communication materials. It also found lack of trustee oversight of member complaint handling. Further, the Authority found that some communications relating to member investment and charges lacked detail on legacy funds and clear and transparent information on fees and charges, including those payable to advisors.
Investment
The Authority found that:
- The investment objectives were not clearly identifiable with some schemes and performance relative to these targets could not be measured. In other schemes, investment documentation lacked detail on the performance measures for funds and strategies.
- The minutes of board meetings did not provide evidence of sufficient discussion or probing of investment performance.
Fees and charges
The Authority expects trustees to evaluate value for money but found little evidence that trustee boards have established processes for monitoring and benchmarking scheme charges. It was noted that several MTs intend to participate in the Cost Transparency Standard (CTS) which will allow them to benchmark their costs against their peers. The Authority expects schemes which are not participating in the CTS process to have equivalent data, from whatever source.
Conclusion
The Report provides a timely reminder to trustees of the central role the SRP will have in the Authority's supervisory approach going forward. The Authority confirmed that it expects trustee boards and their advisors to consider the Report's findings and evaluate their own practices to establish if any improvements are required.
This is an item that trustees would be well-advised to add to their agendas for upcoming board meetings. It is clear that the Authority will put many more schemes through its SRP exercise in the years ahead. Embedding improvements in current practices based on the Report should help trustees navigate any SRP exercise successfully.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
