The role of environmental, social and governance (ESG) factors in pension schemes investments is becoming an increasingly prominent topic within the pensions industry, as touched upon in our previous blog. In light of the governance aspect of ESG, which pursues integrity and diversity in the governance of companies and bodies, the Pensions Regulator (TPR) released guidance on 28 March 2023 for pension scheme governing bodies and employers on equality, diversity and inclusion (EDI). EDI ensures fair treatment and opportunity for all. It aims to eradicate prejudice and discrimination based on certain protected characteristics such as disability, religion and sexual orientation. The guidance comes after calls for greater EDI in UK pension schemes (for example, in relation to the gender gap in pensions which we discussed in our previous blog).

TPR has published two separate guidance pieces, one aimed at pension scheme governing bodies and the other at employers. Speaking on the new guidance, TPR's Director of Regulatory Policy, Analysis and Advice, Louise Davey, said "harnessing diverse views can help pension scheme governing bodies weigh issues in more detail and openly consider aspects important to those impacted by their decisions". She also stressed the important role of employers in considering EDI in their schemes with their "duty to support employees".

Governing bodies: EDI guidance

The guidance note for governing bodies is specifically aimed at trustees and directors (where the trustee is a company) of occupational defined contribution schemes, master trusts, defined benefit and hybrid pension schemes, as well as scheme managers and board members of public sector schemes. Although the EDI guidance for governing bodies gives several detailed recommendations for governing bodies, in this article we focus on developing an EDI policy, reviewing diversity on the governing body and the role of the chair.

Developing and maintaining an EDI policy

A clear EDI policy ensures all members of the governing body are clear on what behaviour is expected of them, as well as setting out a procedure for what to do if a problem arises. An EDI policy should also encourage people to speak out as there is a formal commitment to EDI.

The guidance suggests that EDI policies for governing bodies of pensions schemes are likely to include an agreed definition of EDI, the EDI aims of the governing body and an EDI training plan. Although developing an EDI policy is clearly a step in the right direction towards greater EDI, it is just as important as testing the policy to ensure it is suitable and maintaining the policy. Other points that could be included in an EDI policy to ensure this include having a complaints procedure in place and EDI monitoring commitments within the policy itself.

Reviewing diversity on the governing body

TPR's guidance encourages governing bodies to kickstart improving their EDI by looking inwards to see if the composition of the governing body is an accurate reflection of their members. For example, if you have a large proportion of members under the age of 30, do you have the perspective and insight of anyone under the age of 30 within your governing body? If not, this is something that may need to be reviewed.

One way of increasing EDI in governing bodies is by increasing the size of the governing body so that you have a larger pool of characteristics, expertise and life experiences. However, there is of course a balance to be struck between having enough people to carry out duties and being too large to operate effectively. There could also be extra costs of having a larger governing body in circumstances where trustees are paid. An alternative is to have an active succession plan in the pipeline which sets clear, desirable experiences for new recruits as well as EDI objectives for the recruitment process. Where a professional trustee is acting as a sole trustee (for example, a corporate professional trustee), the use of "shadow" diverse boards is recommended in the guidance so that decisions are not made by just one person.

Role of the chair

Throughout the guidance, TPR highlights ways in which the governing body chair can support EDI initiatives. The chair often sets the tone for discussions and so it can play an important role in driving and promoting EDI and ensuring that EDI policies are followed.

For example, the guidance suggests that the chair can make progress on EDI objectives a regular agenda item in meetings. This will hopefully encourage governing bodies to regularly think about EDI efforts and make steps for change in areas that are falling short of EDI. Additionally, the guidance urges chairs to encourage the use of sub-committees where appropriate so that other trustees have the chance to experience chairing a meeting and build up confidence in speaking up, which makes room for "safe spaces" to discuss issues in smaller groups.

Employers: EDI guidance

In the guidance, TPR emphasises the role of employers to ensure that EDI is considered by their pension schemes. The employer guidance aims to provide practical steps to help employers improve EDI through recruitment of members of the governing body and by ensuring their staff have sufficient time to carry out their role on the governing body effectively. It is worth noting the scope of the guidance for employers, in that it is not covering the EDI impact for employers who have Group Personal Pension plans and how employers should be engaging with their relevant provider (this being a matter for the FCA).

Governing body recruitment

Once the scheme rules and, if relevant, the corporate trustee's articles of association have been considered, the guidance for employers suggests several things that employers should consider when recruiting pension scheme trustees to promote EDI, including:

• promoting trustee vacancies as an opportunity for personal and career development through the gaining of new skills so that a wide variety of people apply for roles from a diverse background;
• carefully considering and complying with any obligations arising out of the Equality Act 2010; and
• joining up with any existing EDI initiatives within your organisation.

Earlier in this blog, we discussed the importance of the chair and its role in driving EDI through leadership. The guidance for employers therefore also encourages employers to appoint a chair who understands the importance of open, inclusive and diverse discussions, as well as appointing someone who does not shy away from challenging the status quo.

Supporting employees on the governing body

Although there are already statutory protections contained in the Employment Rights Act 1996 given to occupational scheme trustees who are employed by the scheme sponsor, the guidance for employers goes further than this. It suggests other ways in which employers can support employees who are on the governing body from an EDI perspective (for example, by setting aside time for the trustee role so that they can gain and maintain trustee knowledge as well as prepare for and attend trustee meetings). This should prevent barriers to becoming a trustee being created, and encourage a wider pool of applicants to apply for trustee roles, which, in turn, should provide for a more diverse governing body.

Comment

EDI in pensions schemes is an issue that is not likely to be solved overnight. The new guidance hopes to address EDI in pensions schemes on a governing body level, which should promote:

• better decision-making that reflects member needs and values;
• broader discussions which will encourage new thinking and approaches;
• improved value for money for scheme members;
• better communication with savers; and
• deeper understanding of the challenges that real-life savers face (for example, how can participation of younger members be encouraged?).

Please contact Eleanor Hart (eleanor.hart@dentons.com) if you would like assistance with developing an EDI policy for your pension scheme or for any other pension-related queries.