Why poor pension governance is a risk – and tips to stay on top of it
“Anything that’s worth doing is worth doing well.”
Although governance is not a legal responsibility for employers offering contract-based pensions, good employers view it as much more than just a box-ticking exercise.
And rightly so, the difference between good governance and bad can be the difference between effectively mitigating risks to the business and driving good outcomes or not.
Before we look at those risks in detail, let’s look at what makes for bad governance. Simply ensuring that your pension scheme is automatic enrolment compliant, meeting minimum contribution and charging requirements and the fund’s own performance objectives isn’t going to go far enough in fulfilling the purpose of governance in driving better member outcomes.
That might be seen as poor governance not delivering fully for members, but how does it create risk to the business? We see that in three different ways:
1. Operational risks
2. Financial risks
3. Reputational risks
Operational risks come from not considering the administrative elements of running your pension scheme – oversight of enrolment processes, contribution payment deadlines and effective management of data. Overlooking these seemingly innocuous aspects of the pension scheme can create operational risks, which can turn into significant issues and even fines for the employer.
Financial risks are broad, from the fines described above, to the potential challenge of members complaining that the employer caused them investment loss, due to their lack of in-depth scrutiny of the investment performance of their provider/default fund. That isn’t so far-fetched, if employees could show the employer could reasonably have taken action.
Then there’s the potential reputational risk of failing to educate and support members or not providing a competitive level of investment into the pension scheme. With the availability of main outlets for employee opinions, a poor quality pension scheme can be exposed to the world far too easily by disgruntled employees. Similarly regulatory fines are often publicised.
With poor governance, many of these aspects of providing a quality pension scheme are overlooked by employers, leaving them potentially exposed, whilst believing that governing the basic elements of the pension scheme is sufficient.
For employers that want to invest more into pension governance, recognising the benefits to both the business and members, we would urge:
- Finding a trusted partner to guide you through the process: Our view is that there has been a drain on pension expertise inside employers over the last 20 years, whilst pensions have become increasingly complex (ESG, pension freedoms etc). Most companies are going to rely upon a partner to lead governance for them – choose wisely.
- Understand the types and nature of any risks and where they come from: If you aren’t covering all bases with your approach to governance today, undertake a review to identify what all of the potential risks are and start to monitor them closely, or challenge your adviser to do so.
- Make governance about taking action, rather than ensuring compliance: At the heart of governance is the intent to drive good member outcomes. This means knowing what levers you can pull to help employees grow their pension pots, not merely ensure you are meeting minimum standards.
And remember, not only is a workplace pension likely to be your most expensive and most valued employee benefit (which should warrant good management), as the employer, you are also the one who determines which provider and what charges the employee has to accept – “with great power comes great responsibility”.
In partnership with Howden Employee Benefits & Wellbeing
Howden provides insurance broking, risk management and claims consulting services, globally. We work with clients of all sizes to provide dedicated employee benefits & wellbeing consultancy.