The pensions industry is responsible for the retirement savings of a real cross section of the population. Particularly since the introduction of automatic enrolment in the UK beginning in 2012, pension savers are now an increasingly diverse group. Those running pension schemes need to understand the range of perspectives and needs of those savers to ensure that pension schemes are governed in the best possible way.
The key decision-maker in trust-based pension schemes is the trustee board, typically supported by a range of advisers and third-party service providers. The body that regulates trust-based pension schemes in the UK, the Pensions Regulator, has made clear that it believes diverse trustee boards make better decisions: ‘Pension boards benefit from having access to a range of diverse skills, points of view and experience as it helps to mitigate against the risks of significant knowledge gaps or the board becoming over-reliant on a particular trustee or adviser’ and ‘less diverse and inclusive organisations miss out on these opportunities’.
Good governance of pension savings is especially important since we know that certain groups are disproportionately disadvantaged when it comes to pension wealth. For example, while there is no official measure in the UK, the gender pension gap is estimated to be significantly larger than the gender pay gap.
Trustee boards of many UK pension schemes are required to ensure that at least one-third of the board is nominated by the pension scheme members. This requires trustee boards and employers to consider a wider pool of potential trustees. This law has been in place since 1997, and evidence suggests this has improved socio-economic diversity of trustee boards.
More recently, significant steps have been taken by the government and across the industry to encourage better engagement between pension schemes and their members. The government has introduced various requirements for trustees to make information about their pension scheme publicly available, promoting transparency and accountability. Separately, organisations like Make My Money Matter encourage savers to actively review where their pension savings are invested.
But while engagement may be improving, statistics show that pension boards continue to lack diversity, even more so than company boards. Research summarised by the Pensions and Lifetime Savings Association in its 2020 report ‘Diversity and Inclusion Made Simple’ indicated that 83% of pension scheme trustees were male compared to 67% of FTSE 100 company board members, and 50% of chairs of trustee boards were over 60 years old compared to 19% of FTSE 100 chief executives. Credible statistics for Black, Asian and minority ethnic trustees were ‘scarce’ but it was ‘fair to assume that representation is very low’ according to research carried out in 2016.
There is no legal requirement in the UK for pension boards and those advising them to reflect the make-up of the pension scheme membership. There is also no requirement for boards to report on the steps they are taking to increase diversity. In fact, a 2020 survey found that few pension schemes have any plan in place to improve the diversity of their decision-makers. Our experience, though, is that this is changing. Trustee boards are increasingly interested in taking active steps to improve diversity and inclusion, but find it challenging to identify what those steps should be. So what can we do?
Change requires a long-term commitment to thought and action. The first step is therefore acknowledging the importance of making, and investing resources in, this commitment.
The pensions industry is often accused of having a public image that is not particularly exciting or glamorous, but this does not mean trustee boards should simply accept that an advertisement for a role on the board may have limited appeal and will generate a small number of responses. Boards should ensure they are recruiting new trustees from as large and diverse a pool as possible by examining their application process, and thinking about how it is perceived by their target audience.
Some of our clients have improved their board diversity by enhancing role advertisements with tools like employee forums, ‘meet the trustee’ days or videos, and information highlighting the career benefits of being a trustee.
Trustees should be comfortable that their advisers have a mix of skills, experience and backgrounds suitable for their pension scheme so that they are providing the best possible advice and properly supporting good decision-making. This could involve reviewing publicly available information such as gender pay gap reports, requesting diversity statistics as part of a procurement process, and asking wider questions to understand the organisation’s culture.
Improving diversity is only part of the story: everyone must also be able to speak and be heard. It will often fall to the individual chairing meetings to encourage all board members to participate in discussions, but everyone has a role to play in creating an inclusive culture – including advisers.
Trustee boards can work on this by considering whether the way they operate indirectly creates barriers for particular groups. Holding meetings virtually, as many of us have become accustomed over the last couple of years, can improve access for those with disabilities or caring responsibilities, for example. If regular social routines like after-work drinks could exclude others, the board might consider how these can be mixed up with more inclusive and accessible events.
There are no quick or easy solutions, so we need to make sure this issue remains a priority and that we keep discussing and sharing ideas. Improvements may be incremental, but this progress is valuable in making sure we can produce the best results for pension savers.
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