EDI and Pension Scheme Governance: how should trustees react to recent developments?

Despite recent shifts in corporate practices in the US, UK pension scheme trustees should continue to prioritise and develop their EDI strategies in line with The Pensions Regulator's guidance.

The expectations

Trustees and governing bodies of pension schemes (which we’ll refer to collectively as “trustees” for convenience’s sake) should by now be aware of The Pensions Regulator’s (“TPR’s”) expectations and guidance on equality, diversity and inclusion (“EDI”) issues in the context of scheme governance. EDI is baked into the General Code, with trustees explicitly directed to consider it when making decisions about investments, member communications and, crucially, the composition of the trustees as a decision-making body. 

Arguments supporting EDI strategies are now well-rehearsed. Research shows that diverse groups make better decisions, based on more thorough processes, a greater breadth of thinking styles, views and experiences (often referred to as “cognitive diversity”), and greater empathy in handling sensitive decisions. TPR believes EDI within trustee bodies is vital to ensuring members feel represented and heard, and to improving financial outcomes for them.

However…

Unless you’ve been living in a cave over the last few weeks, you cannot have failed to notice something of a sea change in the approach to EDI in the US (or “DEI”, as it’s generally referred to there). A number of global businesses have followed the lead of the federal government and announced intentions to roll-back / sunset / retire their EDI programmes.

Some argue they are doing so because the programmes have served their purpose and are no longer needed. Others claim the policies are ineffective, expensive and are holding back growth and productivity. Some argue that EDI policies prioritise certain demographics and individual characteristics over merit and are themselves discriminatory against white male candidates and employees. Some have even argued that EDI policies are actively harmful, putting unqualified people into positions they are not capable of carrying out safely, purely because an EDI quota needed filling. Of course, as ever there are a variety of approaches and some companies have reconfirmed their EDI programmes.

So, what should trustees be doing?

In the circumstances, trustees could be forgiven for wondering where all this leaves them, and to what extent they should be putting time and energy into developing an EDI strategy. Trustees of schemes with a US-based sponsor or parent will almost certainly have questions. 

Despite the rhetoric coming from across the pond, there is no indication at present that the UK is likely to follow suit. It also appears that, among the US companies that have revisited their EDI initiatives, the change may be one of form rather than substance. According to this Financial Times article (subscription may be needed) “workplace experts say most companies are likely to be striving to find a middle ground between abandoning programmes that had benefited them and positioning themselves as targets for conservative activists” with “legal risks and polarised messages… causing leaders to pause and recalibrate”. However, these companies are “more likely to be reframing rather than retreating”, particularly in the context of financial constraints. 

More specifically, TPR has given no indication that its EDI expectations have changed. Discussing the roll-back of EDI initiatives in the US in a recent episode of the VFM Pensions podcast, TPR Chair Sarah Smart praised the progress made by the pensions industry on diversity issues, and emphasised the need for meaningful diversity among trustee boards.  For TPR, she said, EDI is not about quotas, but “about changing behaviour, seeing those different sort of recruitment practices start to really be embedded across the industry, and getting that different debate”.

Regardless of policy changes that may be happening (or anticipated) at sponsor-level, TPR’s EDI guidance remains intact and in force, and trustees should therefore continue to apply that guidance to their own governance practice. For trustees who do not yet have an established EDI policy, they should work towards developing one.

EDI and ESG

As a slight aside, trustees should also remain aware of EDI as an essential component of their scheme’s ESG strategy, presenting both risks and opportunities for investing assets, and potentially affecting their sponsor’s covenant. As a case in point, reports over the weekend indicate that US giant Target is facing a backlash after dropping its EDI initiatives last month, with customer footfall down 10% as compared to the same period last year, and its share price falling since the announcement.  In contrast, Costco (which has resisted pressure to drop its EDI initiatives) has reportedly seen customer footfall increase in the same period. 

It's too early to say whether and to what extent the change in strategy has driven consumer behaviour (and whether any impact will be lasting), but it serves to illustrate the point that EDI issues could have a tangible impact on scheme funding.

If you’d like to understand more about how ESG factors affect your scheme, our free, interactive Pension Schemes ESG Tool is designed to help. 

Building an effective EDI policy 

Before going further, it’s important to be clear that an EDI policy does not require trustees to set and fill quotas, appoint or promote people who are not suited to a role on the governing board, or to prioritise the interests of one group or individual over another. Rather, it should set out a framework for what EDI means in the context of their scheme, demonstrate an understanding of how EDI issues might impact the scheme’s governance, and explain how EDI issues will be factored into the trustees’ decision-making processes. 

TPR explains that “having an EDI policy ensures everyone is clear on what behaviour is expected of them and helps solve problems if they arise. If it’s implemented properly, it will give confidence that there is a collective commitment to treat everyone fairly.”

TPR suggests that EDI policies should cover:

• an agreed definition of EDI
• the EDI aims of the governing body
• an EDI training plan for the governing body

As a starting point, trustees may want to consider adopting the definition used by TPR and the PLSA and building their policy around that. Once you’ve agreed your overarching policy, you can then identify areas where action is needed, and how to measure the success of any changes you decide to make. TPR suggests you could:

• test your policies, procedures, governing documents and communications against an agreed definition of EDI
• align aspects of the governing body’s policy with your employer’s EDI strategy, policy and definitions
• introduce EDI training during the induction process and refresher training at appropriate intervals
• use your employer’s EDI training materials
• highlight the EDI policy to your members through publications and progress updates

The policy could also include guidance on the role of the chair in overseeing EDI initiatives and ensuring the board is run in an open and inclusive way. TPR also suggests that the board’s performance assessment should include commentary on how well EDI has been embedded in a scheme’s processes. 

An EDI policy need not be threatening, and for most schemes should not be thought of as a “nice to have”. Rather, it should be an integral and helpful part of a scheme’s governance, supporting a meaningful breadth of experience, skills and thought across the board, to ensure the interests of the scheme’s members are accurately represented.

We'd love to help you to start thinking about how EDI affects your scheme and its members, and to support you in putting an effective EDI policy in place. If you'd like to know more, please get in touch with Alice Honeywill or Charlotte Osmond, or your usual contact in the Burges Salmon Pensions and Lifetime Savings Team.  

With thanks to Amy Davies who largely wrote this piece.