Pensions Authority sets out trustee best practice

The Pensions Authority recently published its report on supervisory activities conducted in 2024, write Ciara McLoughlin (small picture) and Ciara Kelliher (main picture) of William Fry.

The authority has confirmed that it expects trustee boards and their advisors to carefully consider the report's findings and evaluate their own practices to determine whether improvements are needed.

The authority has a statutory obligation to conduct supervisory reviews of the strategies, processes, and reporting procedures established by pension-scheme trustees.

This involves assessing the scheme’s system of governance, identifying the risks it faces, and evaluating the trustees’ ability to manage those risks effectively.

In 2024, the authority introduced its Supervisory Review Process (SRP) for a range of pension schemes, including multi-employer master trusts (MTs), defined benefit, and defined-contribution schemes.

The recently published report on these supervisory activities offers valuable insights and lessons for trustees.

Key takeaways

Regarding governance, the authority expects trustee board minutes to provide a clear summary of the discussions held and all decisions made, along with any actions identified and the timelines for completing these actions.

However, deficiencies were identified – including failure to log actions properly or assign responsibility, and a tendency for target action dates to be repeatedly deferred.

Trustees are also expected to ensure that their policies are tailored specifically to the scheme's needs, rather than being copied directly from the authority's code of practice.

Clear record

A clear record should be maintained of when these policies are reviewed.

On the operations front, trustees must have a robust outsourcing oversight framework in place to manage the risks posed by outsourcing and sub-outsourcing arrangements.

This framework should include regular consideration of key performance indicators, triennial critical reviews of providers, and clearly defined exit strategies in case an outsourcing arrangement must be terminated.

The authority identified instances where trustees failed to act in response to breaches of service levels. Many contracts with key service providers lack clear provisions giving trustees recourse when service levels fall below agreed standards.

Additionally, 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 actively with their providers to ensure these liability caps remain appropriate, particularly as pension funds grow.

Risk management remains central to the SRP and the trustee decision-making process. The authority’s review of own-risk assessments (ORAs) found they were often not comprehensive.

Common issues included a failure to specify whether a risk was within or outside risk tolerance, limited scanning of external risks beyond the trustees' control but still relevant for mitigation, and a lack of consideration of outsourcing risks.

In terms of communications, the authority found that many member-engagement policies were insufficiently detailed and focused primarily on statutory communication obligations.

Where communication functions had been outsourced to advisors, trustees frequently had limited oversight of the materials provided.

The authority also observed a lack of trustee oversight regarding member complaint handling.

Furthermore, communications related to member investments and charges often lacked detail, particularly concerning legacy funds and the clear, transparent disclosure of fees and charges – including those payable to advisors.

On investment, the authority noted that investment objectives were not clearly identifiable in some schemes, and that it was difficult to measure performance against these targets.

In other cases, investment documentation lacked sufficient detail on the performance measures used for funds and strategies.

Meeting minutes

Additionally, minutes from board meetings did not provide evidence that investment performance was discussed in sufficient depth or that trustees had sufficiently challenged the performance outcomes.

When considering fees and charges, the authority expects trustees to actively evaluate value for money.

However, it found little evidence that trustee boards had established formal processes for monitoring and benchmarking scheme charges.

Several multi-employer master trusts indicated their intention to participate in the Cost Transparency Standard (CTS), which will enable benchmarking of costs against peers.

For schemes not participating in the CTS, the authority expects trustees to obtain equivalent benchmarking data from alternative sources.

Conclusion

The report serves as a timely reminder to trustees of the central role the Supervisory Review Process will play in the authority’s supervisory approach in future.

Trustee boards and their advisors are encouraged to review the findings carefully and assess whether changes or improvements are necessary.

This report is a crucial item that trustees should add to the agendas of upcoming board meetings.

Given the likelihood that many more schemes will be subject to the SRP in the years ahead, embedding improvements now will better prepare trustees to navigate future supervisory exercises successfully.