The pensions market is moving towards a system of fewer, larger ‘mega’ schemes which have the potential to not only deliver better outcomes for savers but could also benefit the UK economy. At the same time, new business models and innovative provision of scheme services have emerged which influence scheme governance.
In response to the changing landscape, we at TPR have been shifting our approach to a more prudential style of regulation, seeking to address not only risks to saver outcomes that arise at an individual scheme level, but also those which derive from the market and wider financial ecosystem.
As part of this shift, we want to better understand industry risks and opportunities by learning more about the business models and products of those we regulate. This will help us assess risks to good saver outcomes and set clear expectations for the future.
The professional trustee industry has experienced huge growth, with a significant proportion of UK schemes using a professional or sole trustee. In line with our new prudential style approach, we have been working with and building relationships with the largest firms in the market. Our engagement sought to identify risks and challenges which could put saver outcomes at risk, opportunities to improve outcomes and ways we can support the sector and drive compliance.
This report sets out what we have learned so far through our engagement with professional trustees, and how this will shape our future focus for the sector.
The professional trustee industry
Broadly, professional trustee firms are corporate entities that provide professional trustee services to individual schemes. The corporate entity is generally appointed as trustee, with services often delivered through individual trustees with delegated responsibility. We expect all corporate and individual professional trustees to meet our professional trustee standards.
The professional trustee industry is growing in influence and becoming more strategically important across the pensions landscape. There are several industry publications which illustrate the growing reach of these firms, including survey reports by LCP, Isio and Willis Towers Watson.
Findings from these pieces of research include the following.
- Around half of UK pension schemes have a professional or sole trustee, with appointments of sole trustees growing most quickly in recent years.
- Professional trustee firms have assets under management of over £1 trillion, with around £75 billion managed by sole trustees.
- The market is very competitive, with firms seeking to differentiate from each other. Many offer wider services beyond traditional trusteeship, such as project management and procurement.
- Willis Towers Watson’s survey found that 27% of their respondents thought that professional trustee appointments would increase by at least 25% in the next three years, and sole trustee appointments by 47%.
Our regulatory approach
Our regulatory priorities for trusteeship are to make sure that all schemes:
- are well run and well governed
- have high standards of administration and good data quality
- are operationally resilient, including against cyber risks
Professional trustee firms could now have a significant impact on whether these outcomes are delivered.
That is why over the past six months, we have been working with 11 of the largest professional trustee firms to understand more about how their businesses work and the risks and opportunities that arise.
Through in-depth discussions with each firm, we sought to understand five key areas including:
- ownership structure
- skills and experience
- diversity, equality and inclusion
- conflicts of interest
- fees
Insight from our engagement
Several insights emerged from our engagement.
There are different business models and services provided by different firms
There is a variable service offer within professional trusteeship and sole trusteeship. Several professional trustees firms are part of groups that provide additional services, including secretariat, administration and professional advice. This provides opportunities for efficiencies and value for money services but also introduces a risk of conflict of interests.
Firms can provide additional ‘back office’ support to professional trustees
Some firms use a wider network of employed staff including governance specialists to support trustees in managing a scheme. This brings opportunities for specific expertise to be drawn on by professional trustees but also risks around accountability and quality assurance if there is sub-delegation.
Firms are expanding and hiring
Several firms are recruiting extensively to fill the expected future demand for professional trustees as well as current opportunities. This means that more schemes will be able to access a professional trustee should they wish but also draws focus on the standards and entry criteria for new hires.
Our future focus of engagement
Through our work with the industry, we identified several areas where we consider that risks to savers’ outcomes could arise and where we intend to focus engagement.
These include the following.
Relationship with employer
How professional trustee firms manage relationships with employers.
Profit and remuneration model
Whether these models could affect trustees’ decision making. In particular, we want to understand whether there is any risk that services could be compromised to reduce costs, for example if some schemes are prioritised over others.
Sole trusteeship
A sole trustee is an individual or entity which solely performs the trustee role for the scheme. We want to understand the reasons behind the appointment of sole trustees to schemes, for example whether it may be driven by cost. We also wish to understand what internal controls sole trustees operate once appointed.
In-house advisers
Whether there is a risk that the presence of in-house advisers could lead to compromised decision-making or compromised advice to schemes. For example, whether there is a reluctance from professional trustees to properly scrutinise advice from, or to pursue errors by, in-house advisers. We also have concerns over whether in-house advisers could face issues with indemnity insurance, for example coverage limitations, conflicts of interests and concerns around internal investigations.
Scheme decision-maker
Who makes daily decisions on behalf of schemes and the level of knowledge and understanding they have of pension scheme governance. We want to probe firms’ internal controls and be assured that their operating models do not encourage inappropriate delegation. We are keen to ensure there are appropriate levels of accountability, transparency and support.
Next steps for professional trustee oversight
Taking a risk-based approach, we will begin targeted, expert-to-expert, engagement with some of the firms over the summer. We expect our oversight to expand to cover the remaining firms by the end of the year as we test and refine our new framework for education and engagement. As part of this we will explore methods of proportionate and targeted data collection and seek to foster a culture of open regulatory dialogue.
This market oversight should enable us to assess the risks we have identified in greater detail. We will then make clear our expectations and work with the professional trustee industry to identify appropriate mitigations that can be implemented.
Where we identify material risks, and firms do not meet our expectations, we will also consider how we might make use of our existing powers to mitigate those risks.
Through this work we also want to highlight good practice and raise standards across the market through regulatory dialogue and external communications. We hope this will better inform employers and trustees in choosing their professional trustee provision.
Importantly, we also want to hear views from industry and would urge anyone with information on, or experience of, these risks to contact us through our customer support service.
This is part of a wider evolution of our supervisory approach beyond DB and DC schemes to also consider wider market actors who influence the delivery of good saver outcomes. This also includes administrators where we have established relationships with eight of the largest commercial and non-commercial administrators in the market.
Focusing our engagement this way allows us as a regulator to maximise impact, reduce unnecessary regulatory burden, and enhance protections to savers.