The Walker Report and the revised UK Corporate Governance Code – what does this mean for the pension scheme trustee?

18.03.10

 

This article was written by Vivien Cockerill, head of pensions strategy, in Wragge & Co's Pensions team and published in the Professional Pensions.

In this article Vivien takes a look at the issues faced by trustees and their advisers in light of the Walker Report and the revised Corporate Governance Code, the extent to which these issues will affect them and how they should respond.

The Financial Reporting Council (FRC) review of "The Combined Code on Corporate Governance" was brought forward so that corporate governance in other listed companies could be assessed at the same time as Sir David Walker reviewed the governance of UK banks and other financial institutions. On 1 December 2009, following its review and having considered the Walker Report, the FRC published proposed changes in a revised draft "The UK Corporate Governance Code". Although the FRC did not find evidence of serious failings in the governance of British businesses outside the banking sector, it believes the proposed changes will benefit governance in all major businesses. The deadline for responses is 5 March 2010 and the final version is expected in April or May 2010.

So, what does this mean for the pension scheme trustee?

Pension scheme trustees look to principles of good corporate governance to set a best practice benchmark for running their schemes. The revised code includes only a limited number of changes from the current code and is still advanced on a "comply or explain" basis. As such, it does not signal a drastic change. Nonetheless, there are some changes which suggest a shift in landscape. Of particular interest to trustees and their advisers are those changes which relate to:

• external evaluations of the performance of the board
• a personalised approach to training and developing individual directors
• the implementation of a "Stewardship Code" to encourage institutional investors to actively seek opportunities for collective engagement.

External evaluations of the Board

Many trustees complete annual self-assessment questionnaires and go through a process of peer assessment where, for instance, the chair will seek feedback on each trustee and review the feedback with the individual. The revised code recommends more objectivity through external evaluation at least every three years^[1], echoing the Walker Report's recommendation that, "The board should undertake a formal and rigorous evaluation of its performance...with external facilitation of the process every second or third year"^[2].

A personalised approach to training and development

Any performance evaluation is likely to identify issues relating to training needs. One of the proposed changes specifically addresses the need for a personalised and regularly reviewed approach to the training and development of each director^[3]. This is completely consistent with the views of the Pensions Regulator. Its Trustee Knowledge and Understanding (TKU) code of practice sets the minimum requirements for trustees and has "become embedded in trustee activities since implementation in 2006"^[4]. A revised TKU Code recently came into effect ^[5] and places greater emphasis on the Regulator's expectation that trustees use thetrustee toolkit to reach the minimum expected standard. Trustees can expect a two-fold approach to their training and development, i.e. both on a minimum generic basis and on an individually tailored basis.

A "Stewardship Code" to encourage institutional investors to actively seek opportunities for collective engagement

One area which trustees are likely to revisit is that of governance and engagement. The Walker Report recommends that pension funds, particularly those in the public sector, actively seek opportunities for collective engagement to promote good governance in their investee companies^[6]. As part of this, it recommends they are subject to a separate "Stewardship Code" sponsored and ratified by the FRC which will comprise principles converted from the Institutional Shareholders' Committee Code. A separate consultation designed to ensure this can be operated effectively is taking place with the outcome due to be announced in May or June 2010.

Where next?

In light of the proposed changes, trustee evaluation, development and engagement are set to become increasingly important for the pension scheme trustee. So, how should trustees and their advisors respond to the recommendations? A good starting point would be to consider current practices and ask:

• Is there sufficient external input into trustee assessment?
• How are the individual training and development needs of trustees met? Some schemes already adopt a two-fold approach whereby trustees collectively commit to a certain minimum level of training, while training is also organised on a personal basis to meet individual requirements. Schemes which haven't taken this approach should consider effective ways of making this shift in order to ensure that the training and development needs of individual trustees can be adequately addressed.
• Are the trustees meeting their obligations in relation to governance and stewardship? In a speech at the LSE Corporate Governance Seminar on 1 December 2009, Lord Myners said that a good starting place for trustees would be to, "let their fund managers know now that they will be asking searching questions about what their fund managers have done to challenge inappropriate remuneration practices and unwarranted payments across a swathe of the world's major banks"^[7].

Footnotes

[1] Provision B.6.2
[2] Recommendation 12
[3] Provision B.4.2
[4] The Pensions Regulator, "New requirements for trustee knowledge and understanding now effective", 8 December 2009
[5] http://www.thepensionsregulator.gov.uk/pdf/codeTkuFinal.pdf
[6] Recommendation 21
[7] http://www.hm-treasury.gov.uk/speech_fsst_011209.htm

For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Redding on +44 (0)121 685 2708 or Rebecca Lum on +44 (0)121 260 9973

This published article may contain information of general interest about current legal issues, but does not give legal advice.