The Pensions Regulator prepares to issue an update of the Trustee Knowledge and Understanding (TKU) Code of Practice

The Pensions Act 2004 introduced the requirement for pension fund trustees to have appropriate knowledge and understanding of the law relating to pensions and trusts, the principles relating to the funding of occupational pension schemes and the investment of the assets of such schemes (“TKU”). In 2006 the Pensions Regulator published its first Code of Practice on the subject with an undertaking that it would be reviewed on a regular basis.

The first of those reviews has recently reached its conclusion and with a revised Code of Practice before Parliament, trustees can expect a tightening of the regulatory requirements as far as knowledge and understanding goes.

In this edition of Governance Matters we look at the main changes to the Code of Practice and comment on the implications for trustees.

Overview

Many of the revisions to the Code have primarily been made to take into account the availability of the Pension Regulators ‘Trustee Toolkit’, which was developed to help trustees meet the basic, generic requirements for TKU. Further revisions have been made as a result of the general ‘bedding down’ of the regime and its requirements or simply to make the guidance clearer. However, some of the revisions have more significant consequences for trustees.

What’s changed?

The main changes have occurred in the Scope Guidance documents which have been expanded to include reference to scheme wind-up, buy-out and buy-in as a result of increased regulatory interest in all three areas, as well as to Personal Accounts. In addition, more prominence has been given to administration and to employer covenant. To complement the existing documents for Defined Benefits and Defined Contribution arrangements, a third Scope Guidance document has been drafted for very small Defined Contribution schemes.

Despite the addition of some significant elements to the Scope Guidance, trustees are reminded that they are able to eliminate any elements of the Scope from their knowledge requirements to the extent that they are not appropriate in their particular circumstances.

Although the Regulator stops short of suggesting that the completion of its own Trustee Toolkit should be compulsory, it does point out that the Toolkit was designed to provide the knowledge and understanding requirements set out in the Scope Guidance. In its view, the Toolkit “is required study” for trustees unless they can find an alternative learning programme that satisfies the requirements of the Scope Guidance in sufficient detail. To support this, they refer to the indicative syllabus which sits alongside the Code and related Guidance.

Trustees are also encouraged to expect that “bespoke training providers” should check their prior level of knowledge and understanding, and tailor the training session accordingly, and that a certificate confirming attendance, participation and understanding should be provided.

In quite a significant departure from the original stance, with regard to “conversance”, the requirement to have a working knowledge is now accompanied by a recommendation that to acquire appropriate knowledge of the essential elements of the scheme’s trust documentation in particular, trustees need to have “thoroughly” read it.

And in case trustees are having difficulty getting the time off work that they need to fulfil their duties, the Code does set out a reminder of their statutory right to time off for the purposes of performing their duties as trustees and for relevant training.

Finally, the Code makes it very clear that should the Regulator make enquiries about their level of knowledge and understanding when discussing any regulatory issue of compliance with the legislative requirements, it will be the level of knowledge and understanding set out in the Scope Guidance and in this Code which will be expected, subject to the notion of ’appropriateness’ as it applies to the trustees in question.

Comment

The additional clarification and the extension of the Scope Guidance to reflect the realities of contemporary trusteeship is to be welcomed but there are some significant implications for trustees in applying this revised Code.

The Regulator reminds us on a number of occasions that the driver for an appropriate level of knowledge and understanding is the decision-making responsibilities of a trustee, including the need to be able to understand, and where appropriate to challenge, the advice provided. Whilst the period of grace afforded to acquire the appropriate level of knowledge is relatively short, the Regulator is at pains to point out that new trustees are responsible for all decisions made within that time period. We very much agree with the Regulator, therefore, when he encourages new trustees to take into account the likely decisions to be made at the first few trustee meetings when organising their learning. Decisions needing to be made, particularly those of a sufficiently significant or technical nature, should be a key influence over the specific training needs of the board of trustees – “just in time training” can significantly enhance the decision-making process.

Whilst on the subject of the six month period of grace, in our experience, we are seeing more trustee boards and pensions departments offer pre-appointment training. It is also often encouraging to see prospective trustees (whether or not yet nominated) having undertaken some, or all of, the Trustee Toolkit. Better pre-nomination or selection materials can be used to stress the importance of the TKU requirements and therefore the level of commitment demanded by the role.

A big change for trustees is the need to “thoroughly read” their scheme’s trust documentation. In his response to the consultation around the new Code, the Regulator gave short shrift to the notion that some documents were too technical and suggested that trustees should take whatever actions necessary to rectify the situation! A daunting task can be made more palatable by seeking help from legal advisers who can spend time face-to-face with trustees explaining the main powers and discretions. This can be accompanied by quizzes and workshops designed to help the trustees to navigate these documents.

The reminder about the statutory right to time off for training is to be welcomed. However, we often see that the problem doesn’t lie with senior company officials who generally recognise the importance of the role, but with line managers who are left with the problem of covering such absences. A more visible recognition of the role of trustee around the business at all levels can often help but is made more difficult in workforces where a significant proportion of the employees only have access to a contract-based arrangement for example.

Finally, the clarification about the level of knowledge and understanding expected by the Regulator is helpful and it does help to emphasise the need to maintain training and learning records, either individually or collectively. There is likely to be an impact for “bespoke traning providers” in terms of certification – it is not always easy to assess whether particular individuals have fully understood the messages you deliver in this capacity, but it is a fair challenge and one which ought to achieve better and more focused training.

Conclusion

The changes to the Code are to be welcomed and trustees (new and existing) will need to familiarise themselves with the updates in order to reassess their own learning needs.

The theme throughout the Code is the impact of knowledge and understanding on the decision-making process and this should not be overlooked. A decision made without appropriate knowledge is likely to be indefensible and could leave individual trustees seriously exposed.

How Mercer can help

Mercer’s governance team is able to help trustee boards assess their training needs through the use of an on-line gap analysis tool. The output from whole-board or individual inputs can be used to devise a specific training plan at board and individual level, and working with the trustees’ business plan, can be scheduled to coincide with specific decisions that are due to be taken.

We also have extensive experience of delivering training on a broad range of pensions related topics and using a wide variety of training techniques.