Trustee Forum: More balance needed in disclosure regulations

At the Pensions and Lifetime Savings Association’s recent Trustee Forum in March, chairs of trustees and senior trustee directors from some of the UK’s biggest pension funds, regulators from The Pensions Regulator and Financial Conduct Authority and PLSA representatives, gathered to share insight on the industry’s most pressing issues.

Discussions centred on systemic risks, good governance, and the changing regulatory landscape.

Burdensome disclosure

Given the many regulatory changes due to take effect this year in the pensions sphere, it will be important that what comes out is practical and results in good outcomes for members. But attendees voiced concerns about the unintended consequences of increased regulation and disclosure, with some wondering whether trustee boards are turning into governance bodies.

Conversations honed in on what was seen to be burdensome, excessive, and costly disclosure – particularly on smaller schemes – such as the Taskforce for Climate Financial Disclosure (TCFD). A particular worry is it will do little other than provide yet more documentation and information but fail to deliver better value for members. There were calls to have the right balance in regulatory disclosure and many flagged that the default answer to all pension issues is more disclosure.

The industry is still waiting for the DB funding code to be finalised, but concerns were raised that much of The Pensions Regulator’s draft code, which is due to come into force in October, assumes most schemes are closed or close to their end-game – but it does not work so well for open schemes.

Some attendees also highlighted that pension schemes have little time to prepare given the code is still in draft form.

The PLSA has urged for a delay to the code to make sure schemes can prepare and has emphasised the need for more focus on open schemes in the Code.

LDI crisis has wide-ranging impact

Speakers at the Forum talked about the wide dispersion of outcomes over the past few months since the liability-driven investment crisis, with some schemes going forward while others have moved backwards.

Some are now in a better funding position than ever and closer to their end-game but will have to wait to go to buyout due to the recent market volatility and the rising proportion of their illiquid investments. There were also differences between how investment consultants and asset managers coped during the LDI crisis, and there is now an increasing need for daily-dealt funds.

Some of the positive things that trustees have achieved in the last 12 months include improved governance, clearer direction of travel towards their endgame, and using the LDI crisis to increase their hedge ratio.

When asked what keeps them awake at night, trustees cited concerns around service providers doing their jobs properly, transparency, and staff resourcing issues.

Systemic risks

The recent emergence of systemic risks in the banking system, spotlighted by the problems at Credit Suisse and Silicon Valley Bank, is causing trustees to worry with some warning that visibility beyond the short term is difficult right now.

At the Forum, discussions centred on how trustees do not have time to take a step back and think about big systemic risks and potential contagion as they already have so much to do on a day-to-day basis.

One trustee highlighted the importance of thinking ahead as earlier as possible and commented that “we’ve become good at identifying key risks but not at accurately assessing risks when they are bad”.

Another cautioned against looking to the past for lessons on what to do in the future, and that it’s better to prepare for generic events happening rather than specific risk events.

Is regulation heading in the right direction?

During the regulatory session, discussions turned to the increasing burden on both DC and DB pension schemes, with some suggestions that regulators are viewing them as systemically important entities.

Regulators want end consumers to have good outcomes and the same outcomes regardless of what legal structure they are in.

One area of discussion was what does value for money mean in DC schemes, that cost is only one part of value and quality of service is critical. Trustees pointed out that value for money is different in DC and DB schemes and that it is important not to treat both the same.

Attendees pointed out that there is a difference in competition discussions at the regulatory level, and that there is tension between regulating commercial pension providers and trust-based schemes.

LDI and the Taskforce for Climate Financial Disclosure (TCFD) are both on the programme at our upcoming Investment Conference in Edinburgh. Find out more and book places.

Go deeper: Read the full report from the Trustee Forum: Lessons from LDI for scheme governance and risk management models