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Codes of practice

Code of practice 07
Trustee knowledge and understanding (TKU)

The scope of knowledge and understanding

  1. Schemes vary enormously. Areas of diversity include the benefits schemes provide and the powers which are given to trustees by the scheme. As a result this code does not prescribe the exact body of knowledge which applies equally to all trustees in all circumstances. Instead, the scope outlined above represents a framework of matters which trustees need to know and understand. Within that framework, the requirement is that trustees' knowledge and understanding must be 'appropriate' to carrying out their functions as trustees.
  2. Appropriateness relates to the size, nature and complexity of the scheme and to the role of an individual trustee on the trustee board. However, the breadth of the knowledge and understanding achieved should be sufficient to allow trustees to understand fully any advice they are given, to challenge that advice if it seems sensible to do so and to enter fully into all decision making processes.
  3. Given the variety of schemes, and the differing expertise of trustees, we cannot prescribe for an individual the breadth of knowledge and understanding that is appropriate. The scope of the body of knowledge and understanding (above) indicates the broad areas of knowledge required. These are derived from the legislation.
  4. The regulator's Scope Guidance is published on the web and expands on the high level version set out above to give further detail. It will be kept under review to ensure that it remains relevant and up to date. Trustees should use it as a checklist to determine which elements apply to them. It will become apparent in doing this that there may be items that are not relevant to an individual.
  5. Trustees may eliminate items from that list because of their own expertise or experience. They may delete other items because they do not apply to their functions as a trustee of their particular scheme.
  6. This exercise of checking the learning requirements against the Scope Guidance to decide what is relevant should not be onerous because any good learning programme, traditional, distance or e-learning, will start by asking questions of each trustee which will help in the process of determining what is relevant for the trustee in question. Trustees should look for this facility in any learning programme they might follow. E-learning can achieve this by displaying initial diagnostic screens which ask each individual about current expertise and about their own scheme before designing a path through the programme for each individual participant. Providers of classroom learning can carry out a similar exercise to ensure that the learning they deliver is also relevant for each participant.
  7. Examples to illustrate the concept of deciding what is appropriate in relation to the type of scheme are set out in Box 1. These examples cannot cover every case and are only designed to illustrate how trustees might approach the task of determining what is relevant for them.
  8. On the other hand, there may be trustees for whom the items in the Scope Guidance are necessary but not sufficient. For them, extra learning would be appropriate. Examples might include trustees of particularly complex schemes, trustees of a multiplicity of schemes within a corporate group and trustees of centralised or industry-wide schemes.

Box 1

Examples of the different situations in which trustees may find themselves in relation to investment matters and how those situations may affect the learning requirements of individual trustees.

A. DB and DC

The differences in what is appropriate in these areas are so great that we have prepared separate documents for them, although there is much in common (e.g. trust duties).

Where DB scheme trustees run a DC section or a DC AVC arrangement they will also need to cover learning material for DC arrangements which is included in the DB Scope.

B. Investment
  • In a fully insured scheme, especially a with profits scheme, there is little discretion regarding investment decisions on the part of trustees. These trustees will need to understand how a with profits fund works and basic investment matters like the characteristics of fixed interest vs equity investments, but little beyond this.
  • Trustees of other schemes will only need to understand with profits funds if they invest in them. However, trustees of schemes which invest in with profits policies in relation to their AVCs should include the requirement to understand them.
  • Trustees of DC schemes with earmarked funds will need to know the characteristics of those funds and to appreciate the importance of any choices offered to members.
  • Where a scheme is very mature (e.g. where all members have retired), and trustees have selected assets with a predictable income stream (e.g. government stocks/bonds), they will need to understand those assets and why they are more appropriate than other assets with less predictable income streams (e.g. equities). Beyond this, however, they will not need to concern themselves with other asset classes than those in which their scheme is invested.
  • Trustees of larger schemes who take investment decisions should cover most of the ground at the level indicated in the Scope Guidance, even if they have an investment sub committee with more specialised expertise which makes recommendations to the board.
  • Where there is an investment sub committee which takes investment decisions then those sub committee members may need to build on the requirements set out in the Scope Guidance. This is because such a scheme is likely to be large and may need opportunities for a wider range of investment opportunities than is dealt with in detail in that Guidance.
C. The interface between occupational schemes and state pension provisions

Matters of importance under this heading will be different for contracted out schemes from contracted in schemes.

Trustees of schemes with a GMP, for example, will need to understand how GMPs work but that will not concern trustees of contracted in schemes at all.

D. Deficits and surpluses

Trustees of DB schemes with a large funding deficit will need to consider the implications of funding deficits in their learning, and they may decide to postpone serious consideration of surpluses until they have one. The reverse would be true where a scheme is in surplus.

E. Annuities

Trustees of schemes which fund benefits by buying annuities will need to understand the annuity market. Trustees of schemes which fund benefits out of their own assets will not have the same interest in the annuity market except in relation to AVCs. Any trustee may need to have some understanding of what it is that affects annuity rates in relation to transfer values and in relation to the purchase of annuities for members with AVCs etc.