The G Force - Good governance for good outcomes

We have seen enough high profile scandals in the commercial world, such as Enron and Worldcom, to know the damages of poor governance. For pension schemes, good governance delivers not only good outcomes for the scheme members and sponsoring employers that are sustainable, but also enables pension schemes to be agents for positive change, such as driving responsible investment and diversity and inclusion. That’s why improved governance is one of the reasons employers consider a Defined Benefit (DB) Master Trust, and also why the Pensions Regulator is introducing the General Code, focussed on an effective system of governance.

However, what does good governance for a pension scheme look like? What should a discerning employer who is interested in DB Master Trusts look for?

In this blog, I’d like to share some insight following a recent governance review at Citrus, which would hopefully help you think of some questions you might want to ask in your own due diligence of a master trust.

General governance structure

A pension scheme is similar to a business but operating in the complex world of pensions.  The key players involved are:

- the sponsoring employers who are responsible for funding the pension scheme and normally have powers to appoint or replace Trustees;

- the Trustee who is responsible for running the scheme and has the powers to delegate responsibilities and to appoint or replace service providers;

- the service providers such as scheme administrators, actuaries, investment consultants and legal advisers given that scheme operations and advice are typically outsourced; and

- the Pensions Regulator who acts as the referee and holds the Trustees and the sponsoring employers accountable;

Ultimately it is the Trustee’s responsibility to ensure that the scheme is well managed and members’ pension benefits are safe. 

Beyond cost, controls and procedures

Given how heavily regulated pension schemes are, many think that governance of pension schemes is about internal systems of practices, controls and procedures to govern the schemes and to make effective decisions. But it is more than that.

It is about the application of principles – the values and beliefs that drive behaviour, which in turn influences the culture of the entire team involved in running the scheme to ensure long term value creation. You may have heard of Peter Drucker’s famous line “Culture eats strategy for breakfast” – arguably a bit broad brush but you get the idea.

In short, good governance requires alignment of purpose, values and culture. This would ensure good outcomes are sustainable over the longer term.

Citrus review of governance

Last year, the Trustee of Citrus reviewed its governance effectiveness which led to a few important changes. They looked at Citrus’s:-

1. Purpose – It’s important to have a clear sense of what any Master Trust is trying to achieve. For Citrus, this has been clear and simple right from the start. Citrus is set up by employers for employers as a not-for-profit to deliver members’ benefits safely and cost-effectively. Its purpose is underpinned by strong core values.
2. Key stakeholders – Without a doubt, the key stakeholders are the pension scheme members and sponsoring employers. However, for many Master Trusts in the market, there is a commercial funder or provider to add to the mix. An important distinction for Citrus though is that there is no such commercial funder which could give rise to potential conflicts of interest.
3. Board independence – An independent board adds value by increasing accountability and making better decisions. At Citrus, the Trustee Board of Directors was previously made up of employer-nominated and member-nominated directors. Last year, this was replaced with only independent professional trustee directors, and a separate employer representative body providing oversight was formed. This governance structure mitigates potential conflicts of interest, whilst allowing for employers to have input through a regular Employers’ Forum.
4. Board composition – The composition of the Trustee Board has received a lot more attention in recent years. This is in conjunction with rising awareness that diversity and inclusion can demonstrably improve team performance. Diversity is not limited to demographics but also cognitive and experiential diversity and inclusion which is, of course, linked to culture. The Citrus employer representatives are mindful of this and, after a lengthy selection process, diversity was a key selection criteria when appointing the named professional trustees from ndapt ltd.
5. Independent service providers – This is important yet it is sometimes overlooked. By being independent, the Trustee can be more effective in holding the service providers accountable. By design, the Citrus Trustee is independent from its service providers.
6. Accountability – With the Trustee, sponsoring employers and service providers being independent of each other, clear lines are drawn with appropriate checks and balances in place. This is what the Citrus employer representative body has put in place.
7. Culture – Culture is values, beliefs and purpose in motion. Magic happens when there is a strong alignment. The culture is shaped by the leadership, and at Citrus, ndapt as Trustee plays that important role. At the heart of Citrus is a not-for-profit business protecting the interests of pension scheme members and sponsoring employers, and no one else. Independence, transparency, integrity, collaboration – they drive what we do and how we do things.

When looking to entrust the running of your company pension scheme to a DB Master Trust, I would recommend asking deeper questions about its governance and try to get to the heart of the matter.

For further information please get in touch.