UK Pensions Briefing: Equality, diversity and inclusion: how does your scheme shape up?

Introduction

The Pensions Regulator published guidance in March 2023 on equality, diversity and inclusion (EDI) for scheme governing bodies and employers. Following the guidance is voluntary but the Regulator is hoping that it will be used by schemes and employers to improve their decision-making. 

This briefing examines what EDI means for pension schemes, what trustees and employers need to know, and what actions they should consider taking.

EDI – what is it?

First, we’ll unpack the separate elements of EDI in the context of a pension scheme:

• Equality – this is the assumption that all members deserve the same opportunity to have their needs and demands met through the scheme. As far as the scheme itself goes, those involved in administering it should be selected from a wide pool of candidates from different backgrounds and offering a range of relevant skills.
• Diversity – although this can be focused on the protected characteristics outlined in the Equality Act 2010, it actually stretches much wider. It can include broader characteristics such as gender identity, social and demographic background, cognitive skill and neurodiversity. It is about recognising and respecting difference which in turn gives rise to improved decision-making.
• Inclusion – diversity is ineffective without inclusion. Different individuals should be allowed to participate fully, with their contrasting characteristics and range of talents impacting the group in which they participate.

Next, we’ll look more closely at what EDI means for a scheme and its trustee board.

Your scheme and EDI considerations

The emphasis modern society now places on fairness and inclusion in the workplace is being extended to pension schemes. One of the Regulator’s strategic objectives up to 2025 is to “promote high standards of diversity and inclusion in the regulated community”. 

There is no “one-size-fits-all” magic solution to implementing EDI either for trustees on the governing body or the employer which provides the scheme. The Regulator recognises that different scheme types, sizes and sectors face a variety of challenges. However, trustee decisions are under increasing scrutiny, and achieving board diversity and inclusion are recognised as ways of improving those decisions to ensure the best possible member outcomes. Diversity on a decision-making board is important. Harnessing different views helps governing bodies weigh issues in more detail and enables them to consider the effects on the wider population of those impacted by their decisions. 

What trustee board wouldn’t welcome the added assurance of knowing that an embedded EDI policy can mitigate scheme risks and avoid unintended consequences? There’s a lot to think about and below we’ve outlined just some of the areas for trustees to consider from an EDI point of view.

Scheme governance – how diverse is the trustee board and could it be improved by collecting diversity data when trustees are recruited? Are there gaps in the skills offered by existing trustees? Could the member-nominated trustee selection be improved to meet EDI objectives? Perhaps you need to rethink how MNT positions are advertised. Do sub-committees reflect the general diversity of the trustee board?

Member communications – trustees have a legal duty to ensure their member communications are fully accessible. Do the trustees understand the literacy and numeracy of their members? How do the trustees’ electronic communications cater for diverse member needs?

Scheme benefits – are all benefits equally available to all members? How are discretionary benefits such as dependants’ pensions offered? What about survivors’ benefits – do they reflect the structure of the modern family?

Making decisions – how are board meetings held and is the environment inclusive? Consider whether it could be beneficial for some trustees to attend by video link and arrange the timings of meetings to cater for those with caring responsibilities. 

The role of the Chair – diverse boards need Chairs who encourage and manage proper debate from all attendees. Being able to show that a scheme is run by an inclusive board which reflects the make-up of the membership can improve general employee engagement with pensions saving. This in turn may have a positive effect on contribution rates and the quality of retirement provision. 

Training – what about trustee training – is there a regular EDI focus?

Scheme advisers – do your scheme advisers’ firms have an EDI policy themselves? Are the advisers (collectively and individually) diverse?

Investments – are the scheme’s investment options sufficiently diverse? Trustees of affected schemes have had to take ESG considerations into account for some time, and diversity and inclusion fall squarely within the “S” under the ESG bracket. Does the scheme’s ESG policy take diversity and inclusion into consideration? Incorporating diversity into investment decisions need not come at the expense of returns but it does take concerted time and effort. For example, thought can be given to whether external managers meet diversity targets and holding them accountable if they fall short.

Next, we’ll look at how pension scheme governing bodies can get started with developing an EDI strategy.

Some practical steps to take to get started with EDI

It should be remembered that it is not a legal requirement to have a specific EDI policy and the Regulator acknowledges the challenges which some schemes may face due to their size or lack of candidates willing to put themselves forward as trustees. However, given the Regulator’s focus on effective scheme governance in its draft General Code and the strong evidence that the implementation of an EDI strategy improves decision-making, there is clear messaging that it can be beneficial and should be considered where feasible. Here, we make some suggestions for schemes which are just starting on their EDI policy.

Start the EDI conversation 

If you haven’t already begun, start by discussing what EDI means to your trustee board. Set out some objectives and keep a record of them. Perhaps the scheme’s sponsoring employer has an EDI policy you could use as a template?

Read the available guidance

The Regulator has published separate and specific guidance papers for trustees and employers, both of which offer a comprehensive framework for an EDI policy and provide case study examples. They are a good place to start. The PLSA has also produced a guide for trustees in its “made simple” series which explains how to take small but significant steps on a regular basis.

Update your scheme governance structure

Include EDI in your risk register and trustee training programme. Does your trustee board include the right mix of skills for your scheme? It might be useful to have an annual review with the help of an independent adviser. 

How does your trustee selection process take account of the breadth of your workforce? Could the board be made more accessible and recruit a wider range of skills? Does the recruitment process need to be reviewed?

Get some EDI training

Arrange some EDI training – perhaps the sponsoring employer has training which the trustee body could access? Then add EDI to the trustee meeting agenda as a regular discussion topic as it’s a fast-developing area in which it’s important to keep updated.

Consider the “social” component of ESG

Does your statement of investment principles include consideration of the social aspect of ESG? If it needs updating, ask your investment manager if they can evidence social governance aspects and EDI.

Develop and maintain an EDI policy

A properly implemented EDI policy can give confidence that there is a collective commitment to treat everyone fairly. It may be easier to establish some basic EDI principles first, around which a policy can be built later. Generally, EDI policies cover an agreed definition of EDI, the EDI aims of the trustee board, and an ongoing training plan.

Closing thoughts

As noted, it is not a legal obligation to have an EDI policy in place or to have a particular composition on trustee boards. However, the Regulator (as well as wider society) is clearly putting more and more emphasis on the importance of diversity and inclusion in helping make better decisions. As such, the guidance represents a useful reference point for the practical steps trustees can take to ensure EDI is incorporated within their governance processes. Please contact your usual NRF pensions adviser if you’d like to hear more about EDI and what the Regulator’s guidance may mean for your scheme.