pwc*connectedthinking

Managing your pensions business*Key Results of the Third Survey of Major UK Pension Scheme Governance 2008

�

Welcome

We are delighted to introduce the findings of the 2008 PricewaterhouseCoopers Pension Scheme Governance Survey.

The survey builds on the previous PwC Governance Surveys undertaken in 2004 and 2006.

Governance remains a topical subject and this booklet contains the main findings from our survey on the views of Trustee Chairs, as well as our own commentary and interpretation of the results.

More than 80 participants from major UK Pensions Schemes responded. Our survey reveals a unique in-depth picture of Schemes today and shows how Trustees have responded to many of the challenges resulting both from increased regulation and from government and media scrutiny. The challenge for Trustees moving forward is to continue to stay in control of the governance-related demands placed on them.

Our surveys have revealed significant improvements generally over the years, particularly in relation to interaction with sponsors and managing conflicts of interest.

There is more to do to enhance the effectiveness of trustee decision making; more Schemes are recognising this and taking action although this remains challenging for many.

We thank you, the participating Chairs, for your continued support and interest in our survey.

Mark Harris

Andrew Evans

Chantelé Claassen

2

0� Roles and responsibilities

Chairs are concerned about the ability to deliver on action points within agreed timeframes.

The chart shows that most trustees read the papers in advance yet only 53% felt trustees are fully prepared to contribute to discussions.

Only �8% of Trustees indicated that action points are completed within agreed timeframes, a significant reduction from the 32% in 2006.

Are trustees prepared for trustee meetings?

53%

40%

6%

1%

0%

0% 10% 20% 30% 40% 50% 60%

Trustees read papers and attendthe meetings fully prepared to

contribute to discussions

The trustees read the papers inadvance of the meetings.

The trustees receive the papers ingood time before the meetings buthave not always read the papers in

advance of meetings.

The trustees regularly do notreceive the papers within good timeto prepare properly for meetings.

Papers are frequently distributed attrustee meetings.

What are the strategic items which the Trustees cannot delegate and therefore must be dealt with at full Trustee meetings?

Is enough time at Trustee meetings being devoted to key strategic issues?

Should more decision making be delegated to sub-committees and to the Pensions Executive?

Are Chairs being proactive where it is felt that all Trustees do not contribute fully?

Topics for discussion with Board

3

02 Knowledge and understanding

Continued progress has been made on the assessment of Trustee Knowledge and Understanding (TKU) with Trustee bodies reducing gaps in knowledge.

Trustees have embraced the law and the Pensions Regulator’s emphasis on TKU. 99% of Schemes have formally assessed TKU.

But TKU is only part of the story. Trustees also need appropriate skills to apply TKU effectively. It is perhaps only a matter of time before the Pensions Regulator’s focus turns to this.

Individuals’ knowledge and skills play an integral part in the appointment process for 87% of Schemes. Whilst there has been an increase in the number of Schemes requiring MNTs to demonstrate that they meet the generic knowledge and skills criteria prior to appointment, only �9% have a process in place that ensures that they can identify knowledge gaps and skills for Member Nominated Trustees (MNT) appointments.

There has been a �6% increase over the last 2 years in the number of Schemes requiring MNTs to demonstrate that they meet the generic knowledge and skills requirements prior to appointment.

How do you monitor your process towards meeting the TKU requirements?

Is there too much relative emphasis on TKU rather than enhancing the “softer” decision making skills?

Is there a fair and transparent process that leads to the most appropriate employer and member-nominated Trustees joining the Board?

Topics for discussion with Board

4

03 Conflicts of interest and sponsor interactionConflicts of interest are a significant challenge for Trustees. More time is being devoted to addressing them and establishing a formal policy to deal with them.

The chart shows that only 6% of Trustees have not considered a process for managing conflicts compared with 2�% in the 2006 survey.

67% of trustees say they have established an effective process for managing all conflicts of interest that might arise and that their approach to managing conflicts always reflects their obligations as Trustees.

56% of Schemes have a formal policy in place for identifying conflicts, compared with 20% in the 2006 survey but there is clearly work to do to manage conflicts.

We are seeing much greater interest from sponsors in the financial management of their pension Schemes through improved dialogue with Trustees. 88% of Trustees receive regular updates from the sponsor, with half of these also seeking external advice on the strength of the employer covenant, compared to 23% in 2006. The trend is in the right direction although the level of detail into which the Trustees go is in our experience extremely variable.

We further noted a 22% increase in the number of Trustees taking the lead role in all discussions with all parties when setting contribution rates.

The majority of Trustees meet regularly with the sponsor, as was the case in the previous surveys, although 20% of Trustees feel that there is minimal communication or no guaranteed access to decision makers.

How do the trustees manage conflicts of interest?

67%

12%

15%

0%

6%

43%

18%

15%

4%

21%

33%

5%

41%

2%

20%

0% 10% 20% 30% 40% 50% 60% 70%

The trustees have established an effective process for managing allconflicts of interest that might arise. The approach to managing conflicts

always fully ref lects their obligations as trustees.

The trustees have established a process for managing conflicts ofinterest. While the process is effective in complex situations, trusteeobligations, such as sharing all relevant available information, are not

always fulf illed.

The trustees have established a process for managing conflicts ofinterest. The process is always followed, but is not effective in complex

situations.

The trustees have developed a process for managing conflicts ofinterest, but it is not followed in practice.

The trustees have not considered a process for managing conflicts ofinterest.

2004 survey

2006 survey

2008 survey

Does your conflicts of interest policy drive the right behaviours when a conflict arises?

Has the Pensions Regulator’s consultation document on conflicts of interest, issued in February 2008, been scheduled for discussion at a Trustee meeting?

Do you monitor the strength of the employer covenant? Do you take appropriate action as a result?

Do you meet regularly to establish an effective working relationship to benefit both parties over the long term?

Whilst Trustees are legally responsible for setting investment strategy, is this integrated with funding and covenant discussions with the employer?

Topics for discussion with Board

5

04 Accountability: communication with members

Engagement with members remains a challenge for many Trustees.

Is there clarity over what and how to communicate with members?

Is the employer doing enough to educate active members on DC investment options? How should the Trustees help?

Is there adequate emphasis on DC data quality, administration capability and efficiency, range of investment options and member communication and education?

A third of Schemes have implemented a communication strategy covering what, to whom, how often and how they communicate with all classes of members. This is a small increase since 2006 but many Schemes are yet to tackle this subject.

39% of Schemes have established a process for responding to feedback from members, however, �2% of Schemes still have no mechanism for seeking and responding to members’ views.

The majority of Schemes offer a range of investment options to members, however only 32% have identified and

selected investment options specifically for members’ needs.

For DC pensions, where members must make investment decisions, good communication of information is important. However, there appears to be less opportunity than in the past for members to attend investment discussions. We were surprised that 5�% of Trustees provide only a list of investment options available together with standard information from the investment manager.

Topics for discussion with Board

6

05 Delegates and advisors

Trustees are gradually becoming heavily involved in the assessment of their advisers and delegates.

The chart shows that there has been a 9% increase in Schemes that provide feedback to advisors and delegates to improve performance, in addition to making regular assessments of performance using consistent criteria established by the Trustees. We strongly believe in the importance of establishing criteria for evaluation before embarking on the process to provide clarity and objectivity, but a large number of Schemes still use an ad hoc approach.

There has been a small but, we suggest, significant shift in that more Trustees are now likely to intervene when their advisers or delegates no longer meet the required criteria instead of waiting for a formal performance review.

How is the performance of advisers (e.g. actuary,investment consultant) and delegates (e.g. administrator, fund

manager) assessed?

37%

22%

7%

32%

2%

28%

20%

10%

41%

1%

23%

23%

17%

33%

5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Regular assessments of performance are made using consistent criteriaestablished by the trustees and feedback is given to advisers and delegates

to improve their performance.

Regular assessments of performance are made based on consistentcriteria that have been set by the trustees.

Regular assessments of performance are made but the criteria have beeninf luenced by the advisers or delegates.

Assessments of performance are made but are ad hoc and notstandardised.

Assessment of performance has not been considered or is viewed as toodiff icult .

2004 survey

2006 survey

2008 survey

Are objective criteria set for evaluation of delegates and advisors before embarking on the process of assessment?

Are advisers’ responsibilities clearly specified so that there is a clear understanding of expectations of performance?

Is there sufficient coordination of the roles of the various advisers to ensure that they are working together effectively and are you getting synergies and value for money?

Do the Trustees always make a clear distinction between when they are seeking technical expertise from their

advisers and when they are seeking facilitation of a debate?

How can Trustees encourage DC providers to become more focused on their customer’s needs?

Topics for discussion with Board

7

06 Compliance and risk management

Preparing and maintaining a comprehensive risk register is increasingly seen as a “need to have” rather than a “nice to have”. This is clearly now best practice and trustees who have not done so should remedy this as a matter of urgency.

66% of Trustees have put in place mechanisms to manage major risks and are updating changes to risks and/or mitigating controls regularly. This represents a 45% increase on the response in the previous survey.

There is no real movement in Myners report compliance. This suggests many Trustees feel this issue has been addressed, although we suspect that there is more to be done, particularly in measuring the Trustees’ own performance.

Where Trustees have arrangements in place to ensure that they are notified of legislative changes, active consideration of the implications of legislative change is carried out by 27% more trustees than in the previous survey.

Are Trustees convinced that they clearly understand their duties and discretionary powers?

Do Trustees refer sufficiently often to the Trust Deed and Rules for guidance in specific scenarios?

Do Trustees identify changes in legislation sufficiently to foresee all potential areas of non-compliance?

Has enough been done to embrace the Pension Regulator’s code of practice on internal controls?

For matters other than investment, are the Trustees using the governance principles established by Myners, for example to make decisions effectively, agree objectives and prioritise?

Topics for discussion with Board

8

07 Level of comfort with governance

Trustees are moving towards evaluating their own effectiveness but progress is slow

The chart shows that 44% of Boards have not established mechanisms to evaluate their own effectiveness although the majority of these believe this could lead to improvements.

We have found that although only 7% Schemes have not yet considered establishing a Governance Policy, there are still 40% Schemes that do not have a formal Governance Policy and instead only discuss governance priorities.

90% of Trustees do not have individual trustee objectives and some see it as impractical and inappropriate.

Only �0% of Trustees do not use their Governance Policy as a template for management processes and decision making in comparison to 38% in the previous survey.

Will a governance policy enhance decision-making? To do so, would it need to be action-orientated?

Where a formal governance policy is in place, is there monitoring and does this trigger appropriate action?

Would your governance arrangements withstand scrutiny by the Pensions Regulator?

Is trustee effectiveness firmly on your agenda?

How do the trustees evaluate their own effectiveness?

12%

31%

12%

24%

20%

16%

21%

16%

25%

22%

9%

17%

9%

18%

47%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

As point above and this is because they have a commitment to enhancing thepension scheme’s standards of governance. There has been demonstrable

improvement in effectiveness through change in response to the outcome ofthe process.

The trustees have implemented a formal process to evaluate their owneffectiveness, and all trustees part icipate fully.

The trustees have implemented a formal process to evaluate their owneffectiveness, though not all trustees actively part icipate.

There is recognit ion that an evaluation of their own effectiveness couldlead to improvement, but no mechanismhas been established.

The trustees have not evaluated their own effectiveness.

2004 survey

2006 survey

2008 survey

Topics for discussion with Board

9

pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.