The member voice in pensions governance

• Introduction and summary
• Background
• Research and findings
• Conclusion

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Progress to one-third member nominated trustees and beyond

1.1 Introduction and summary

1.1 At the TUC Congress in 2004, Secretary of State for Work and Pensions Alan Johnson announced a new power to enable the government to ensure that 50% of pension scheme trustees are member nominated.

1.2 The Pensions Act 2004 that followed stated that at least one-third of the trustees of every occupational pension scheme must be member-nominated, and included the power to increase this requirement to 50%.

1.3 The TUC believes that member nominated trustees (MNTs) bring an invaluable member perspective to the good governance of pensions. We have worked with affiliates to promote this role and to support trustees with education, information and opportunities to meet and share expertise and experience.

1.4 There have been some assessments of progress including the 2007 NAPF review of the Myners principles which found good improvements in trustee knowledge and understanding; and the 2006 Pensions Regulator scheme governance report which looked at the extent to which schemes were meeting MNT requirements at that stage. The Regulator did not repeat this question in its 2007 governance survey. As the opt-out provisions for the one-third requirement ended in October 2007, and the commitment was to move to 50% MNTs in the current parliament, now seems an opportune time to review the situation.

1.5 In April 2008 the TUC commissioned IQ Research Ltd to conduct a study of compliance with the one-third requirement, and attitudes and progress towards increasing the proportion of MNTs to 50%.

1.6 The research report shows high levels of compliance with the one-third requirement and overwhelming levels of support for the principle. It also shows support for the commitment to 50% MNTs and demonstrates that there is a lack of credibility in the frequently-cited view that it is difficult to find people who are willing to come forward as MNTs. The findings demonstrate that whilst there are some reservations about the change (several of which can be addressed through further support for trustees and so on), those who strongly oppose 50% MNTs are in the minority.

1.7 In addition, the study examined diversity among trustee boards and demonstrated that there is still a great deal of room for progress in making trusteeship accessible and relevant for the whole range of members that trustees act on behalf of.

1.8 The study raised a number of issues that would benefit from further exploration, including the guidance around the nomination and selection of MNTs and the importance of protecting trustees' right to time off for trustee duties, including training and preparation as well as meetings.

Background

2.1

Why 50% MNTs?

2.1 Speaking at the TUC Congress in 2004, the then Secretary of State for Work and Pensions, Alan Johnson explained the government and trade unions' shared belief in the importance of member trustees:

'We believe in the value of employee involvement..... Everyone agrees that member nominated trustees are a good idea. They add a different perspective to the trustee board and they allow those boards to have a wider range of skills and experiences to draw upon. If members are involved in the running of their scheme, it can make them feel that they have a real stake in their pension provision. So I can announce today that we have decided to take a power in the Pensions Bill to enable us to ensure that 50% of pension scheme trustees are member nominated'

2.2 The Pensions Act 2004 that followed stated that at least one-third of the trustees of every occupational pension scheme must be member-nominated, and included the power to increase this requirement to 50%, an aspiration that was reflected in the 2005 Labour Party manifesto: 'We will work to increase the proportion of pension fund trustees nominated by scheme members, along with access to proper training. We will keep this issue under review, with consultation in the expectation of further progress to 50 per cent member-nominated trustees'

2.3 Trade unions have supported increasing the proportion of trustees who are member-nominated for a number of reasons:

• MNTs are able to bring the views, experiences and interests of members to the governance of their pensions. This provides accountability for members, who are after all the ultimate owners of the investments that are held on their behalf through their pension scheme. Pensions are a central element of a worker's pay and conditions and as such can be seen as deferred pay. It is therefore essential that there is a clear member voice in the governance of pension schemes.
• MNTs bring a different set of skills and experience to the trustee board from those provided by senior employer trustees.
• MNTs, particularly union trustees, tend to have better links back to the scheme membership than employers and can communicate clearly with colleagues about pensions, and take into account member interests and priorities in determining strategies for the pension scheme. Many respondents to the survey emphasised the importance of member trustees in giving members confidence and involvement in the running of their scheme.
• Member involvement is essential to protect pension schemes from the few unscrupulous employers who may act without members' best interests at heart - in the research a number of respondents made specific reference to the Maxwell case.
• Member involvement in negotiating changes to the scheme is essential. There are separate roles for trade unions in negotiating with employers over changes to pension arrangements and all trustees have a fiduciary duty to act in the interests of all beneficiaries of the scheme. But member involvement in discussions at trustee board level brings an essential member perspective to this decision making. In risk sharing and DC schemes where more of the risk is borne by the member, this becomes even more important.

Supporting trustees

2.4 The TUC and our affiliated unions provide a range of support for trustees to help them to fulfil their role effectively. The TUC runs a network of around 1,000 member nominated trustees who are union members. We provide support in the form of briefings, regular newsletters, updates on regulation and investment issues, seminars, training and an annual conference. Several affiliated unions also provide tailored support services for trustees.

Trustee diversity

2.5 We were also interested in exploring who trustees are. This was partly prompted by a Hymans Robertson survey that indicated that trusteeship is a very male, white and middle-aged pursuit. We were interested to examine to what extent this is the case and explore some of the potential barriers that mean trustees are not representative of the make-up of their schemes. Having a range of trustees that reflects the membership of the scheme means that a range of perspectives, issues and concerns are brought to the board.

Research findings

3.1

Methodology and sample

3.1 IQ Research used an online survey, recruiting respondents via telephone and through the TUC's own member trustee network. They achieved a 30% response rate from those schemes for which they obtained contact details, and conducted a number of short telephone interviews and ten case study interviews in addition to the online survey. A total of 189 responses were received.

3.2 All of the pension schemes surveyed have over 1,000 members and many of them over 5,000. The combined value (assets under management) of the schemes surveyed is estimated to be over £149 billion.

3.3 The majority (117) were DB schemes, 57 were hybrid or sectionalised schemes, and 15 were DC only. This is in line with the estimates of the total universe of each type of scheme. 58% were closed to new members, although not necessarily to further accruals.

3.4 Pensions and HR managers and administrators were targeted in the recruitment of the sample, plus some trustees via the TUC network. A mixture of managers, administrators and trustees completed the survey, reflecting a range of experience and opinion.

3.5 Because not all respondents were able to answer or were asked all of the questions (this depended on what information they gave about their scheme and whether they completed the survey online or by telephone), absolute numbers are given in the report as well as percentages.

3.6 The survey included schemes where all of the trustees are corporate trustees and member nominated director (MND) rules apply. In this report the terms 'MNT' and 'trustee' are used to apply to both MNTs and MNDs unless specified.

One-third MNTs

3.7 The research found a high level of awareness about and compliance with the requirement for one-third MNTs. 86% of the sample had met the requirement.

3.8 There was some confusion about the detail of the legislation; with apparent misunderstanding of the fact that 'at least one third' means that a board of ten trustees should include four MNTs, not three. Whilst we do not see this as a major issue it could usefully be an area for further awareness-raising by the Regulator.

3.9 There was overwhelming support for the principle of having one-third MNTs, with 85% agreeing or strongly agreeing that having a minimum number of MNTs on the board is positive. The most popular reason given for this was that it gives members greater involvement and confidence in the running of their scheme. Respondents were also asked about any reservations they had about minimum MNT requirements, but the responses showed respondents felt that the advantages outweigh the disadvantages.

Recruiting trustees

3.10 82% of schemes reported that they had already met the requirement when it came into force.

3.11 Only 22 schemes (12%) reported facing issues in recruiting the required number of MNTs, with the most commonly cited reason (11 schemes) being that too few members put themselves forward for nomination. Whilst any schemes facing problems in recruiting trustees is a concern, the low numbers reporting problems provide a contrast with the commonly-reported industry view that it is difficult to get members to come forward as trustees.

3.12 Respondents were asked what vacancies they currently had on the board. Interestingly, slightly more (13 schemes) had vacancies for employer nominated trustees than member trustees (12 schemes).

3.13 Case study respondents suggested ways to increase recruitment including holding workshops and training before nominations in order to raise the profile and awareness of the trustee role.

Trustee diversity

3.14 The researchers asked a series of questions about the make-up of the trustee boards in terms of age, gender and ethnicity. Data on the characteristics of scheme members was also collected in order to assess whether the trustee board reflects the membership of the scheme as a whole. Finally, questions were asked about opinions on whether and how the trustee board should reflect the composition of the scheme membership.

3.15 The sample size for this part of the research was smaller than for the rest of the findings, as many schemes did not answer the questions or did not provide the information on the characteristics of the scheme membership. The conclusions are, however, still a useful indicator of the current state of play.

3.16 Looking at the whole sample that provided information on the gender of trustees, only 11% (132 out of a total of 1161 trustees) were women.

3.17 36% were in the 45-54 age bracket, with only 1% aged under 34.

3.18 Nearly all trustees about whom ethnicity information was provided were white, with trustees from other groups making up less that 1% of the total.

3.19 Overall the picture is of trusteeship as being dominated by white men over 45. In analysing the results it is important to note, however, that a large proportion of the schemes were based in the manufacturing sector, whose workforce has a high proportion of men.

3.20 Nevertheless the findings are interesting as they are so stark, and raise questions about how to make trusteeship more accessible for a range of individuals.

3.21 Opinions on whether trustee boards should reflect the characteristics of the membership were not strong, with 54% neither agreeing nor disagreeing, although slightly more people disagreed than agreed that this should be the case.

3.22 Case studies highlighted some of the difficulties around recruiting a more diverse range of trustees, with one highlighting the fact that a woman member who had been unable to become a trustee because of the time commitment clashing with childcare responsibilities. Again, this highlights the importance of ensuring proper paid time off for trustee duties.

50% MNTs

3.23 Respondents were asked about their views on the proposed increase to require 50% MNTs. Again, these were favourable, and although more reservations were expressed about this issue than the one-third requirement, those who opposed the move to 50% were in the minority. 47% either agreed strongly or agreed with the proposal, 23% were neither in favour nor against, and 30% disagreed.

3.24 In investigating reservations about the change with some of the case studies, concerns became apparent about the selection process for MNTs. Some reported fears that if the 50% requirement came into force without selection guidance being tightened up, it could lead to employers bypassing democratic processes and putting forward senior members as MNTs who would effectively be ENTs in all but name.

3.25 Another issue that arose was the importance of protecting MNTs rights to time off for trustee duties and training, which respondents argued would be particularly important with a larger proportion of MNTs.

3.26 Analysis of the actual composition of all the trustee boards surveyed shows that 24% (45 schemes) already had 50% MNTs. Only four respondents said that their scheme rules currently required this, although this question was only asked of those respondents who answered that their scheme rules stated they needed more than the minimum number of trustees. This demonstrates that even without compulsion, 45 of the schemes in the study have found it desirable and possible to move to 50%. The sample includes many of the largest schemes in the country, who would not make this move lightly if it was difficult or if they had concerns about the impact on decision making.

3.27 Reports of problems getting people to come forward were not borne out by the research, which only found a few schemes where this had been a problem. One of the case study schemes explained that they had high quality applications from more members than there were places, and so had started a reserve list of people willing to act as MNTs. Others cited difficulties such as time pressures and increasing responsibilities, which could be overcome through further attention to training, support and time off for trustees.

3.28 Respondents echoed many of the arguments that have been put in support of MNTs, including the role of MNTs in bringing a genuine member perspective to the governance of their pensions, confidence in the running of their scheme, transparency and accountability for members and protection from employer dominance in cases of misuse or mismanagement.

3.29 Twenty of the schemes interviewed were already looking to increase the number of MNTs or MNDs on their board beyond their current arrangements, using techniques such as working with members and unions through communications and education.

4.1

Conclusion

4.1 In a time of uncertainty around pensions, a strong member voice is more important than ever. Changes such as the shift to DC or an increase in risk sharing arrangements place a greater proportion of the risk on members. In addition, new developments in the pensions landscape make member involvement even more important. Member involvement in making decisions about whether buyout is in the best interests of members, for instance, is crucial. Where the link between the employer and the pension scheme is broken, MNTs have a critical role in stewarding the scheme through the change.

4.2 At the TUC Trustee conference on 27 June 2008, Secretary of State for Work and Pensions James Purnell reiterated the government's commitment to 50% MNTs and announced that the department would conduct research on the issues around recruiting, training and supporting more MNTs and the impacts of 50% MNTs.

4.3 The TUC believes that our research provides an important starting point for these discussions and a basis for further study. We would be happy to work with government on further research, and are well-placed to bring the views and experiences of current MNTs to the discussions. It is important that the research is carried out by DWP itself or an independent and impartial research organisation rather than an industry or regulatory body, in order to ensure the most accurate and impartial responses possible.

4.4 We accept that there is room for further exploration and tightening of regulations, for instance around recruitment and selection processes and strengthening the support for improving trustee knowledge and understanding. Again, we would be pleased to work with government and the Regulator to explore this further, and can provide examples from our affiliated unions. Specifically, in order to ensure the move to 50% increases genuine member involvement, it may be necessary to consider tightening up the regulations around the nomination and selection of MNTs to avoid the minority of unscrupulous employers manipulating selection processes and leading to a distortion of the role.

4.5 Despite these caveats, this research shows that 50% MNTs is both desirable and achievable, and we urge the government to move swiftly to deliver on their pledge.

Download the full IQ Research report (PDF)