Assessing climate risk and other environmental, social and governance (ESG) factors will be the biggest change to UK pension scheme governance over the coming years, new research suggests.
After surveying 172 trustees and pension managers of defined benefit (DB) schemes, Willis Towers Watson (WTW) found that 44% believe that increased focus on ESG factors will present the biggest governance change, while 39% mentioned the impact of climate change.
Alarmingly, the poll also found that just half of trustee boards currently review the effectiveness of their governance practices every year, and only 29% use some form of external validation.
This is despite the Pensions Regulator's (TPR) new code of practice requiring all schemes with 100 or more members to carry out an assessment of their risk, governance and effectiveness practices at least annually.
It will also require schemes to appoint an independent reviewer of their governance and risk management practices.
With climate-related regulations set to ramp up over the coming years, WTW's pensions governance lead, Jenny Gibbons, urged schemes to prepare for increased scrutiny of their practices now.
“We know that better governance leads to better outcomes – for schemes, sponsors and members – and it is better to start this process now, rather than wait for the combined code to make it mandatory.”
The survey also found that, for many schemes, independent professional trustees have had an important impact in improving governance and effective decision making.
Technology is playing an increasingly important role too, with 85% of respondents saying that it helped support them during and in-between meetings throughout the pandemic.
There is also evidence that the use of technology is beginning to shift from monitoring and tracking, to automated triggers that aid decision making.
Furthermore, the survey found that seven-in-10 trustees are aware that a lack of diversity is one of the key challenges facing the industry.
Although 54% feel that their own trustee board is sufficiently diverse in terms of life experience, only 28% said the same for diversity by age, gender and ethnicity.
“Measures being taken by some schemes to increase the diversity on their trustee boards include: actively encouraging applications from under-represented groups; subconscious bias training for existing board members; promoting trustee roles as career development opportunities; and changing meeting practices to attract a more diverse group of trustees,” said Gibbons.
“However, it must be said that currently only a minority of schemes are engaging and taking practical actions.”
Image credit: iStock
Author: Chris Seekings