How to know whether those involved in the operation of your pension scheme are operating with independence

This article looks at the areas to consider to gain comfort that there is an appropriate level of independence in the operation of your pension scheme. Although primarily focussed on the approach when carrying out a review of your service providers, the principles can be applied more broadly.

Independence: defined as ‘the complete freedom of control or influence from another party, be it a single individual, a group of people, or an organization’.

When thinking about the pension scheme that you’re running, it is perfectly reasonable to ask yourself whether all of the Trustees and Advisers act with independence at all times.  In today’s regulatory environment, it is arguably a high value governance question to consider. Particularly when it comes to reviewing a service provider. Everyone should be confident that decisions are made ‘free from outside control or influence’. And that no unconscious bias creeps into some of those critical reviews. Whilst it might be your instinct that there is no outside influence, there are some aspects to consider.

Are your advisers acting independently?

As a trustee or sponsor of a pension scheme there are questions which can be asked to validate whether your advisers and consultants are acting independently:

  • When reviewing services, does your adviser also provide those services? Do they have any other related connection. (e.g. if you are sourcing a master trust do they themselves offer a master trust? Do they provide services to any other master trust? Or do any of their senior team sit on the trustee board of a master trust?).  This isn’t always obvious so it’s worth checking.
  • At times, the review of a service (or procurement of a new service) will lead to the termination of some of your current providers. For example, if you are considering a move to a master trust you will no longer need your TPA, Actuary, Investment consultant etc. Is the consultant carrying out your market review connected with those services and hence likely to lose your business?  Our industry acts with very high professional standards but this is an important point to cover off.
  • If you use an Independent Trustee, ask yourself what other services they or the associated firms within their Group provide. Are they connected to a firm that provides other pension scheme services?  This is generally a straightforward point as these trustees should be declaring an interest for the conflict register.
  • Several consultants (also known as third part evaluators or TPEs) who carry out service reviews also provide the service they are reviewing. Is the TPE you are considering to use truly independent? Have you selected a consultant who is independent from your scheme and your sponsor, but not independent from the market you are reviewing?  It can be easy to appoint a trusted adviser and unwittingly create this potential issue.

And it’s not only about impartiality….

Following on from the final point above, something that is not commonly known is how the market reacts to each of the consultant / TPEs.  Service providers being invited to tender may not be open to sharing their intellectual capital with a competitor. Indeed, some providers may refuse to participate in a tender exercise being run by a competitor. This may mean you are not reaching the whole market and ultimately not getting the best result. This is unfortunate as it may mean starting again with new consultants, or accepting a limited set of proposals.

It is fairly easy to find out so why give yourself these concerns when there are genuinely independent firms available?.

Conflicts of interest and market overlap

Conflicts of interest is not a new concept to pension schemes or trustees.  

In its campaign to improve the standards of trustees managing workplace pensions, TPR calls out that conflicts of interest can arise ‘because your advisers and service providers may recommend services or products offered by related parties, for which they may gain financial or non-financial benefit .

No doubt you have an appropriate conflicts policy. Take care not to simply pay lip-service to the issue of conflicts. The risk of conflict may be greater than apparent at first sight. Each Trustee should consider their own conflict position carefully and declare anything that could be even an arm’s length conflict. And you should ask your consultants how they manage conflicts of interest and how they provide assurances of their independence. As part of this, check carefully how any reported ‘Chinese walls’ operate in practice. Or simply avoid the risk and seek an independent firm from outset.

Market data

To the point made by TPR regarding ‘products offered by related parties’, Go Pensions’ research reveals some of the overlap in the pensions industry:  

  • Of 19 biggest TPAs,
    • 15 also offer actuarial services,
    • 14 also offer investment consulting,
    • At least 13 of them also offer Trustee Secretariat services,
  • Out of some 40 firms providing Independent Trustee services, over half are affiliated with a provider of other pension scheme services. They may be lawyers, actuaries, or part of a broader consulting group.
  • Of the 24 commercially available DC master trusts, over one-third are owned by firms that offer broader employee benefit consulting as a service
  • When we look at the DB master trust / consolidation market, there are only 2 available with no association to firms offering wider pension fund services

This perhaps underlines the need to make appropriate enquiries to understand your advisers and providers fully.

Specialist Third Party Evaluators (TPEs)

In a complex market, it is clearly important to have a good understanding of the various overlaps and connections.  Asking the right questions will help the process considerably.

There are TPEs who specialise in independent arm’s length reviews without having any connection to the services offered and are experts in their field. They spend their time keeping up to date with the market developments and services available from the provider market. They meet regularly with all of the providers as part of their R&D activity. Using a specialist TPE could help you access the whole market and instantly remove potential conflict challenges.

You can read about Go Pensions’ approach to sourcing here. We would be happy to talk to you about your upcoming reviews or tender projects. We have a trusted approach that we use to ensure an objective review. Please contact Susan on 020 8213 5860 or email to discuss this further.