Over the past few years, there has been significant attention from policymakers, the Pensions Regulator and industry groups on ESG (Environmental, Social and Governance) issues. However, this has largely focused on the environment.

Environmental issues will continue to dominate the ESG agenda as more schemes come in scope of the requirements to make climate-related disclosures and analyse the environmental impact of their portfolios. However, other ESG issues are increasingly receiving more attention. 
In particular, the diversity of trustee boards is becoming a hot topic at industry events and a focus for the Pensions Regulator.

How diverse are trustee boards currently?

A PLSA Diversity and Inclusion Guide in 2020 revealed that 83% of scheme trustees are male, one third of scheme trustees are over 60 and just 2.5% of scheme trustees are under 30. 

Unfortunately, there is a lack of data on ethnic diversity. However, research by Portfolio Institutional showed that in 2020 the top five UK DB schemes (excluding local government pension scheme (LGPS) investment pools) did not have a single BAME (Black, Asian and Minority Ethnic) trustee or executive board member.

Interestingly, trustee boards have been less effective than FTSE 100 boards at increasing their diversity, despite many of these being sponsoring employers of large pension schemes. 

Why is diversity on trustee boards important?

Trustee boards that are not diverse risk knowledge gaps, entrenched ideas, biased thinking and poor decision making. This can put members at a disadvantage and affect a trustee board’s ability to discharge its legal duties. 

For example, a key legal duty in trustee decision-making is the ability to take account of relevant factors and disregard irrelevant factors. Knowledge gaps caused by a lack of diversity may lead to trustees failing to consider all relevant factors. 

David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at the Regulator, has pointed out that typically investment or legal experience is favoured when recruiting trustees. However, this does not necessarily result in diverse trustee boards who understand, for example, climate change, shariah funds or social media communication. 

This is arguably more important than ever. Automatic enrolment has caused more people to join pension schemes, including more women, more young people, more people from ethnic minority backgrounds, more people with disabilities and more people on low incomes. 

What is the Regulator doing about this?

Scrutinising decision making is one of the Regulator’s strategic priorities. The Regulator has identified improving diversity on trustee boards as a key element of this. 

While the Regulator has not currently set out any requirements for trustees in this area, its Corporate Plan for 2022 to 2024 states that it plans to set out what its expectations are of schemes, employers and trustees.

We are also awaiting an action plan from the Regulator on how it plans to support the development of more diverse and inclusive trustee boards. This will hopefully shed more light on when these expectations are likely to be published and what they are likely to cover. The Regulator has also said that improving data, helping share best practice and providing tools and guidance on this issue will be key parts of its strategy to tackle this issue. 

What can trustees do to address this?

While we await further information on the Regulator’s approach to diversity on trustee boards, trustees should start considering the following questions:

• Do trustees have a formal diversity and inclusion policy in place?
• Do trustees monitor diversity and inclusion related data in their recruitment process?
• Do trustees have regular training on diversity and inclusion issues?