What does EDI mean in a pensions context?
The Guidance includes the Regulator's view of what EDI means in an occupational pension scheme context. Much of this is likely to be familiar to employers who have considered EDI in other contexts - for example, as part of discussions about the breakdown of the broader workforce or more specific discussions about managerial or C-suite positions. Employers should note, however, that the Guidance adopts a broad interpretation of what EDI means, particularly in relation to diversity, with the Guidance encouraging employers "to look both to and beyond characteristics protected by law".
- Equality: the Guidance adopts the definition of equality used by the Equality and Human Rights Commission:
"equality is about ensuring that every individual has an equal opportunity to make the most of their lives and talents. It also the belief that no-one should have poorer life chances because of the way they were born, where they come from, what they believe, or whether they have a disability. Equality recognises that historically certain groups of people with protected characteristics such as race, disability, sex and sexual orientation have experienced discrimination".
- Diversity: the Guidance adopts a wider interpretation of diversity than the protected characteristics under the Equality Act expressing the view that diversity "encompasses [a] wider range of individual differences, for instance, socio-economic, educational history and accents." The Guidance goes on to say that
"We are also aware that our experiences of diversity are likely to be influenced by a multitude of factors. Each of us has some protected or other characteristics resulting in us having more than one 'identity', some of which we may share with others. The individual combination of characteristics may mean that our life experiences are different from others. Acknowledging this may help to identify and address the multiple levels at which discrimination and inequalities are experienced."
- Inclusion: according to the Guidance this means:
"the effective involvement of all individuals, creating an environment in which they can thrive and reach their full potential. In an inclusive environment, diverse characteristics are harnessed in a way which is mutually beneficial to individuals and organisations, enabling the best decisions to be made."
In our experience, employers' EDI efforts in non-pensions contexts have typically been more focussed on characteristics which are protected by law (particularly sex and race in the context of the gender and ethnicity pay gap). We are, however, also starting to see EDI efforts expand into other areas beyond protected characteristics, such as socio-economic backgrounds and menopause, and so the Regulator's wide interpretation is also consistent to some extent with how EDI is developing elsewhere.
What role can employers play in promoting EDI on trustee boards?
Occupational pension schemes are typically set up as a trust with trustees responsible for administering the pension benefits provided under the trust. But who appoints the board? It is common for employers to have the power to appoint trustees, subject to statutory requirements that at least one third of the trustees (or trustee directors in the case of a corporate trustee), must be member nominated trustees. In practice, this means that employers often have the key role in determining the composition of trustee boards and, by extension, the power to influence EDI on those boards, though, the power to appoint trustees to the board of occupational pension schemes will depend on how a particular scheme's governing documentation is drafted.
Why does EDI on trustee boards matter?
Employers have become increasingly aware of the importance and value of EDI. A key message from the Guidance is that many of the benefits associated with EDI strategies also apply in an occupational pension scheme context, particularly those around the benefits associated with better decision-making. The Regulator believes that "evidence suggests that diverse groups of people make better decisions and we believe this can improve scheme and member outcomes". The Guidance points to the following benefits of promoting EDI on trustee boards in particular:
- Wide discussion encouraging new thinking and approaches
- More effective decision-making that reflects member needs and values
- Improved value for money for savers
- Deeper understanding of issues that have a real-life influence on savers' outcomes
- Better decision-making that impacts quality of life for a wide range of individuals
- Greater understanding, insight and empathy for scheme beneficiaries on things like discretionary death benefits and ill health decisions
- Improved communications with scheme members.
Whilst these are primarily for the benefit of scheme members, the Guidance makes the point that, ultimately, good member outcomes are also good for employers. Pension benefits are a valuable part of overall remuneration packages and impact employers' reputations. In our experience, good decision making and good governance tend to lead to fewer member complaints, resulting in potential cost savings and enhanced reputational benefits.
How to increase EDI on trustee boards
The Guidance contains a number of recommendations:
- Identify and address diversity gaps
- Consider those outside of senior management - the Guidance notes that individuals outside Senior Management can bring valuable skills and life experience. In our experience, trustee boards have often been made up of more senior management (or ex-senior management) which can create a disparity between those responsible for administering and delivering financial benefit and the membership they support, particularly in relation to age and gender. In relation to age, we have seen younger representation on boards working successfully as part of the wider trustee team. The Guidance notes that support can be offered to new trustees in the form of relevant training, structured induction and mentoring systems which may help encourage individuals to take up trustee roles.
- Consider fixed terms of office - the length of a trustee's term of office is typically not fixed, but there is nothing preventing employers from doing this provided the scheme rules allow it, subject to continuing to complying with member nominated trustee requirements. The Guidance suggests this is a way to promote regular turnover and increase opportunities to address diversity gaps. The Guidance also suggests that regular turnover can help facilitate fresh perspectives at frequent intervals. The Guidance acknowledges that it is not always easy to find people to fulfil trustee roles but suggests that a shift in the way the trustee role is advertised, and the promotion of the advantages of fixed terms of office, may assist in attracting diverse applicants.
- Consider qualities required for the Chair of the board - the Guidance notes the important and strategic role of the Chair as the leader of the trustee board and encourages employers to consider the recruitment of an individual who recognises the importance of an open, inclusive and diverse culture for effective decision-making. For example, the Guidance suggests that the Chair could encourage training amongst the board on unconscious bias to promote a more inclusive environment, or can impact the way decisions are made by ensuring open discussion and full participation of the entire trustee board.
- Professional trustees and EDI - where the appointment of a professional trustee is being considered, the Guidance recommends including EDI as part of the selection criteria. The appointment of professional trustees (including sole trustees) is something which we are increasingly seeing in practice, with this reason being, amongst others, part of the rationale behind the appointment.
Supporting employees who are appointed to the trustee board
Employees who sit on trustee boards have certain legal protection:
- A right not to be subject to any detriment (section 46, Employment Rights Act 1996 ("ERA")).
- A right to reasonable time off during working hours to fulfil trustee duties, including any relevant training (section 58, ERA).
- Protection from dismissal because of an employee's role as a trustee of the pension scheme (section 102, ERA).
The Regulator interprets the scope of section 46 widely in the Guidance, not limiting it to the right of a trustee to rearrange their employment-related workload but obliging an employer to reduce its employees' workload by a reasonable amount for the employee to fulfil their trustee duties. In practice, it is not an area where we have seen claims from employees to date and it remains to be seen whether an Employment Tribunal would uphold the Regulator's interpretation of this provision, which is not binding on employers.
In addition, the Guidance makes clear that the Regulator considers that supporting trustees forms part of the employer's implied duty of trust and confidence. Again, this is a potentially robust view from the Regulator, and remains an untested area.
Actions for employers
The Guidance is not binding on employers but does provide a reminder of why EDI is relevant and important in the context of any DB or DC occupational pension schemes which an employer has. Some actions which employers may wish to consider:
- Conduct a gap analysis - consider conducting an analysis of the trustee board to identify areas of diversity in experience and skills on the trustee board and, where there are gaps, how these could be filled.
- Discuss EDI with the trustees - the Regulator's separate guidance for trustees recommends that trustees may wish to consider putting in place an EDI policy for the pension scheme. Understanding the employers' role in trustee board appointments is likely to be a key part of implementing such a policy.
- Review existing policies and documents where EDI is covered - would it be relevant to include a reference to any EDI efforts which are being taken in the context of any occupational pension schemes?
- If you are considering appointing a professional trustee to the trustee board - consider whether to build EDI into the selection criteria.
The Guidance for employers can be found here.
The Regulator's overview of EDI, which contains the Regulator's interpretation of what EDI means, can be found here.