LONDON, June 27, 2024 – A recent survey conducted by WTW has shed light on the evolving landscape of pension scheme governance in response to the newly implemented General Code, which came into effect in March 2024. The WTW 2024 Trustee Governance Survey focuses on understanding how pension schemes are adapting their governance strategies to meet both the new expectations and the proportionality flexibilities of the Code.
The report finds that most pension schemes are not overwhelmed by the new requirements, with only 1% of respondents expecting significant changes to comply with the Code. This suggests that the majority of trustee boards in the survey are already operating with robust governance frameworks that require only modest modifications to meet the new standards.
“In fact the majority of schemes are well on their way to compliance, with most requiring only minor to moderate adjustments.”
Jenny Gibbons | Head of Trustee Governance at WTW
Jenny Gibbons, Head of Trustee Governance at WTW, said: “Despite some trepidation before the final Code was published, in fact the majority of schemes are well on their way to compliance, with most requiring only minor to moderate adjustments. This is a testament to the strength and adaptability of the existing governance frameworks within these schemes.”
The General Code, which has been in development for nearly five years, emphasises the importance of proportionality in governance practices. This approach allows schemes to tailor their governance efforts based on their specific circumstances, size, and complexity.
"The introduction of the General Code marks a significant milestone in pension scheme governance. Instead of mandating one approach for all, the General Code sets out the concept of proportionality in governance, allowing schemes to tailor their approaches based on their specific needs and circumstances,” said Gibbons. “This flexibility is essential for schemes to effectively manage their unique risks and opportunities. But it should not mean that smaller schemes should always do less than their larger counterparts and there are some governance challenges, for example cyber risk, that need tackling irrespective of the size of the scheme.”
Let’s look at a few specific areas of focus:
The survey found that while two-thirds (67%) of larger* schemes consider risk management a priority, fewer than one-in-five (19%) of smaller schemes do. And while nearly half (43%) of larger schemes have already appointed a Risk Management Function (RMF), almost no smaller schemes (1%) had done so yet.
While the assignment of responsibilities for risk management functions and the management of internal audit frameworks remain undecided in many schemes, it is interesting to see a clear trend in larger schemes towards delegating these responsibilities to specialised sub-committees or external parties. This allows the trustee board to retain oversight by harnessing specialist risk management skills to take on the ‘heavy lifting’.
Approximately two-thirds (64%) of respondents have conducted stress tests on various investment scenarios and reviewed their business continuity planning in the past two years. Digging a bit deeper shows that this increases to 93% for larger schemes. This proactive approach is in line with the Code’s emphasis on comprehensive risk management.
The focus on cyber risk has intensified, with 65% of schemes now equipped with the appropriate skills and resources to manage this growing threat, up from 55% in the previous year. Additionally, annual training for trustees on cyber risk and adoption of a formal cyber governance framework has increased significantly. A more detailed analysis by scheme size shows the largest schemes clearly out in front on the full range of cyber risk policy, training, assessment and communication activities.
Nearly half of the schemes are reviewing the effectiveness of their trustee boards with a further 30% planning to do so in the next 18 months; a crucial component of governance that directly contributes to the overall resilience and adaptability of pension schemes.
Similarly, almost half (45%) of larger schemes have already reviewed board effectiveness, compared to only 15% of small schemes.
“As pension schemes move forward on their governance journeys it will be important to balance what is important with what is possible. The principle of proportionality allows trustees to focus in on those important areas, for example cyber risk, before moving on to consider how best to tackling less critical tasks,” said Gibbons. “What is possible is often constrained by access to suitably skilled and affordable support. Irrespective of scheme size, building a strong trustee board and investing in their training and effectiveness will create a solid foundation for future governance success.”
*Larger schemes are categorised as those with >£5bn Assets under Management (AuM), while smaller schemes are those with <£500m AuM.
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