Why diversity should be high on your pension scheme's agenda 

DEI is a vital element of the drive to embrace environmental, social and governance (ESG) considerations. Organisations that take DEI seriously meet the evolving expectations of investors, consumers, employees and other groups in society — and diverse leadership has been shown to lead to better governance.

Mercer’s Overcoming Racial Inequities in UK Organisations report shows 55% of employers have felt pressure in the past two years to improve outcomes based on racial and ethnic DEI outcomes. More than one in eight companies say employees are driving this momentum and many also report pressure from customers, competitors and their boards of directors.

DEI is spreading inevitably from the corporate agenda to companies’ pension schemes. You can’t afford to ignore the significance of DEI.

 

Learn more about other pension scheme risks - cyber and climate.

DEI refers to policies or practices designed to make people from all backgrounds feel welcome and support them to fulfil their potential. The three elements of DEI are interlinked:

These values are already affecting the governance of UK pension schemes. The Pensions Regulator (TPR) has made it clear it expects schemes to improve in these main areas:

TPR is seeking to lead by example and work with boards to help overcome barriers to greater diversity. In July 2023, TPR advised that it was calling on all occupational pension scheme trustees to take part in an important exercise to build a clearer picture of trustee diversity. All trustees of defined contribution and defined benefit schemes were eligible to take part in an anonymous online survey gathering diversity and inclusion data about their scheme’s board. TPR expects to release results from the survey before the end of 2023. 

Research into corporate governance shows¹  that organisations representing a diverse range of experiences make better decisions and are more responsive to changing markets and norms. Embracing DEI is in the best interests of your scheme and, most importantly, your members.

Here are some important factors driving adoption of DEI within pension schemes:

• Parent companies with ambitious DEI agendas want their pension schemes to be aligned with corporate goals to protect their reputations.
• Society has changed and auto-enrolment has brought a wider range of members into pension schemes.
• Good governance requires a range of voices to avoid groupthink and make effective decisions. A diverse trustee board will have stronger debates that ensure issues are thoroughly tested by people with different views.
• Member engagement is crucial, especially when inflation is affecting investment returns and putting household budgets under pressure. Embracing DEI will help schemes communicate effectively with members. (Read more about improving member engagement and outcomes)
• Investment returns could be improved if people with a range of views make decisions and review strategies. If five people start off with a similar perspective they are less likely to consider alternative courses and the decision may not be the best.
• Diversity is also about making sure a trustee board has a wide range of skills and experience. If all the trustees have investment experience and none of them understand member communication or are willing to take part in a risk sub-committee, the trustee board is weaker.

To see how these things can work in practice, think about two basic activities for a pension scheme — meetings and recruitment:

• If all meetings are after work, trustees with caring responsibilities may struggle to attend and this could mean losing an important voice.
• If all meetings are after work, trustees with caring responsibilities may struggle to attend and this could mean losing an important voice.
• If new trustees are recruited based on who the board knows, there will be limited scope for new viewpoints and ideas.

What are your beliefs when it comes to DEI? What more would you like to know? Does the trustee board have a shared view on key subjects — and if not how can you resolve this? Once you have come to a view, do your advisors think the same way?

Your pension scheme may not have done much to address DEI but there’s no need to panic yet — you are not alone. Many schemes have done little or no work to assess where they stand and how they can improve.

However, you need to make a start. Forward-thinking schemes are already carrying out extensive work to align their DEI practices with those of parent companies. As other schemes benchmark themselves against these early movers, best practice may change quickly.

There are risks attached to standing still and not making your scheme more diverse, equitable and inclusive. These include:

• Reputational risk for parent companies and trustees if trustee boards do not reflect the employer’s stated values
• Falling behind on expectations and standards as best practice develops and spreads from forward-thinking schemes that are already embracing DEI
• Best practice that shapes specific measures prescribed by regulators, putting further pressure on schemes that have not acted
• Poor member outcomes that prompt scrutiny of the scheme’s governance, exposing a lack of diversity on the trustee board
• Challenges appointing trustees that bring diversity if you leave it too late and there is a shortage of candidates

 

We are already working with schemes that are taking a lead in adopting DEI principles and practices. We are helping these schemes with matters such as:

We will be producing more material to help you decide on your course of action. In the meantime, if you would like to find out more please contact your Mercer representative.

Schemes want members to take more interest in their pensions and they are more likely to do so if they feel represented. If your scheme embraces DEI, engagement and outcomes should improve. 

• If a trustee board represents, at least to some extent, the scheme’s membership or wider society, it will be better at gauging member reactions and understanding their needs.
• A diverse trustee board will also be better equipped to understand the differing needs of members, whether that be, for example, younger workers, single parents or ethnic minorities.
• A range of experiences and approaches could lead to better investment choices — not just in terms of risk and return. Does your scheme offer investment options that are appropriate for your members’ beliefs?
• Trustees of many schemes are increasingly open and accessible to members, either one to one or at seminars and drop-ins. This approach is likely to be more successful if there is a mix of trustees for members to meet.
• Member communication is vitally important, especially at a time of economic stress. Acknowledge the diversity of your membership and adjust how you communicate according to their needs.

¹ Financial Reporting Council. Board Diversity and Effectiveness in FTSE 350 Companies. 2021