Merchant Navy Ratings Pension Fund - Regulatory intervention report

Updated regulatory intervention report issued under section 89 of the Pensions Act 2004 in relation to the Merchant Navy Ratings Pension Fund.

Published: 16 December 2020

Updated: 5 May 2022

Summary

This report highlights to the pensions industry the governance standards we expect of trustees and the action we will take when the required standards are not met.

We opened an investigation into the governance of the Merchant Navy Ratings Pension Fund (MNRPF) in November 2018 and issued a Warning Notice in May 2019 setting out our recommendation to appoint an independent trustee to the MNRPF due to numerous governance issues. Throughout this period, we engaged with the trustee and the other directly affected parties to improve the governance of the scheme and protect savers. This regulatory action concluded with a hearing before our Determinations Panel and a Determination Notice being published in February 2020.

We engaged with the trustee again in 2021 when potential governance issues were highlighted to us that threatened the trustee’s ability to make decisions on a number of critical, time-sensitive matters. As part of our engagement, we put forward a proposal to restructure the trustee board to resolve the potential governance issues. Our proposal was agreed and implemented by all relevant parties.

Illustrated summary

25,691 members as at 31 March 2017.
Over £1 billion in assets as at 31 March 2017.
Over £1 million of additional costs to scheme because of governance issues.

Background

The MNRPF is a multi-employer DB scheme with over 25,000 members and assets of over £1 billion. The MNRPF has a sole corporate trustee – Merchant Navy Ratings Pension Fund Trustees Limited – which is controlled and run by a board of directors. Before our involvement, the trustee’s board was structured as follows:

two independent directors (one of which was the chair)
five directors nominated by MNP EG Limited, a company representing the MNRPF’s largest participating employers, known as the employer directors
five directors nominated by the National Union of Rail, Maritime and Transport Workers (RMT), known as the beneficiary directors, of which one was elected from the MNRPF’s pensioner members^[1]

The trustee board recognised that there were issues regarding the governance of the scheme and Muse Advisory (Muse) were commissioned to undertake an independent governance review. Muse completed its report on 19 May 2016 (the Muse Report). It made a series of findings regarding governance failures within the scheme, identified behaviours of the trustee’s directors that were not appropriate, made a series of recommendations for improvement and worked with the trustee board to help implement those recommendations. Those recommendations related to practical measures intended to govern how the trustee’s directors conducted themselves and how the business of the trustee board was to be conducted in the future. One of the report’s recommendations was the appointment of an independent chair.

Although the trustee board had commissioned the Muse Report, this did not resolve the governance issues as not all the recommendations of the report were implemented. In many cases where recommended processes were put in place they were not put into practice by the trustee’s directors. As a result, the same governance failures and poor behaviours continued.

To address the ongoing behavioural issues within the trustee board, they commissioned a second independent governance review. The review was undertaken by Baroness Drake and was completed on 14 August 2018 (the Drake Report). The Drake Report made a series of recommendations regarding the governance of the MNRPF that followed on from the recommendations of the Muse Report. Despite having commissioned the report themselves, the trustee directors again did not implement the majority of the Drake Report’s recommendations. Instead, members of the trustee board were critical of the Drake Report, the independent chair appointed following the Muse Report, and their own professional advisers. This criticism led to the independent chair resigning on 4 December 2018.

We opened our investigation in November 2018 after becoming aware of the conclusions and recommendations of the Drake Report. We wrote to the trustee board on 28 November 2018 to explain that we had opened an investigation. We also stated that if the trustee board wished to make a proposal to resolve the issues raised, this would be considered provided it addressed the findings of the Drake Report, was deliverable and set out a clear timetable for delivery.

Regulatory action

We did not receive suitable proposals for the resolution of the MNRPF’s governance issues, so we issued a Warning Notice on 1 May 2019 setting out our case for the appointment of an independent trustee to the MNRPF with exclusive powers. The key governance failures highlighted in our Warning Notice, which reflected the findings of both the reports commissioned by the trustee board, included the following.

The trustee’s board had refused as a whole to acknowledge the criticisms made in the Drake Report or put in place any of the recommendations made. Additionally, the reforms of the governance of the MNRPF initiated following the Muse Report had stopped and there was a refusal as a collective to acknowledge that any immediate significant action was required.
The trustee’s board did not properly consider conflicts of interest or adhere to the trustee’s conflict of interest policy.
There was a lack of trust, openness and mutual respect within the trustee’s board.
The trustee’s board breached its duty to act in a prudent manner by not taking into account advice of independent professional advisers.
The trustee’s board failed to reach consensual decisions, act as one board and accept collective responsibility. This was related to the MNRPF’s dual majority voting system which would require a majority of beneficiary directors and a majority of employer directors for certain decisions to be made.
The trustee’s board had breached its duty of confidence.
There was general poor behaviour amongst the trustee’s directors resulting in the failure of the trustee board to act in a professional manner towards each other and their professional advisers.

Our Warning Notice acknowledged that, on a day-to-day basis, the MNRPF was able to operate through the work of its administrators, sub-committees and its trustee executive. However, the trustee’s governance issues presented more serious issues in relation to the overall strategic running of the MNRPF and had resulted in estimated additional costs to the MNRPF of over £1 million. In addition, we had concerns around the likely inability of the trustee board to make potentially difficult strategic decisions if required, and that this would put members’ pensions at risk in the long-run.

We received all representations to our Warning Notice by directly affected parties by 12 July 2019. The trustee did not provide representations.

The RMT’s representations included suggestions for changes that could be made to the MNRPF and to the trustee to address the governance issues. However, we did not consider the suggestions would adequately address and mitigate the risks set out in our Warning Notice. We set out in a letter dated 31 July 2019 the changes we required for us to suspend our enforcement action.

Our requirements, which built on the Muse Report recommendations (as endorsed by the Drake Report), to address the governance issues, were as follows:

the resignation or removal of all incumbent trustee directors, who would not be allowed to act again as directors of the trustee
maximum terms of office for a trustee director of two five-year terms
a nine-member board split of three independent directors, three employer directors and three beneficiary directors (one of which should be the pensioner director)
removal of the dual majority voting system, replaced by a 75% majority system for certain key decisions
nominating bodies to have the power to remove their respective directors
the trustee board to select the trustee chair from the independent directors
additional specific requirements in relation to trustee director’s knowledge and skill, compliance with the code of conduct and implementation of a performance review framework

Following a trustee meeting on 20 September 2019, the RMT wrote to us on 26 September 2019, stating that it agreed to all of these requirements in principle apart from the requirement to remove its beneficiary directors. MNP EG Limited indicated that they were willing to agree to our requirements. As all our requirements were not being met, we continued with our enforcement action and issued our response to the representations on 15 November 2019. We received all replies by 4 December 2019 and referred the matter to the Determinations Panel on 18 December 2019.

Between the referral and the Determinations Panel oral hearing, which took place on 27 February 2020, a significant number of changes were made to the trustee, including the resignation and/or removal of all but one of the incumbent trustee directors^[2]. This satisfied all but one of our requirements: to ensure that the governance issues could not arise again, we still required a guarantee that all removed or resigned trustee directors would not be allowed to act as directors of the trustee again. The employer directors confirmed that they would not act as trustee directors again. However, no such assurances were given by the beneficiary directors or the RMT.

Outcome

Following the oral hearing, the Determinations Panel had to decide whether it was necessary to appoint an independent trustee to the MNRPF to secure that the trustee as a whole had, or exercised, the necessary knowledge and skills for the proper administration of the MNRPF or to protect the members’ interests.

Due to the significant structural changes that had been made to the trustee shortly before the Determinations Panel hearing and, in particular, because the trustee board personnel had changed almost entirely just a few weeks before the hearing (including the appointment of a new independent chair), the Determinations Panel found it was no longer reasonable to appoint an independent trustee with exclusive powers. This was because the Determinations Panel considered the risk of former beneficiary directors being re-appointed to the trustee and then conducting themselves in a way that risked the statutory objectives to be too speculative for it to be reasonable to appoint an independent trustee with exclusive powers.

While, ultimately, we did not use any powers in this case, our intervention resulted in the trustee and the nominating bodies making material and effective changes to restructure its board and to improve its governance as a whole – thereby reducing the long-term risks to the scheme and, ultimately, the savers.

Follow-up engagement

After the removal and resignation of the trustee directors shortly before the Determinations Panel hearing in February 2020, an interim trustee board was appointed. It consisted of two employer directors, two beneficiary directors and the independent chair. After our regulatory action and following the Determination Panel’s decision, the MNRPF continued to be governed by the interim trustee board until the nomination and election processes could take place. These processes would enable the appointments of the nine permanent trustee directors: three employer directors; three beneficiary directors and three independent directors. It was intended for a new permanent board to be in place by 1 April 2021. While the interim trustee board had a number of vacancies, it continued to successfully govern the MNRPF.

In late 2020, the trustee board ran a nomination process to identify candidates to fill the two beneficiary director vacancies^[3], which ended in October 2020 with three nominations for those two vacancies. All nominees were previous beneficiary directors who had either resigned or been removed before the Determinations Panel oral hearing. The RMT subsequently selected two of the three nominees to be appointed to the trustee board on 1 April 2021. The MNP EG Limited intended to run its own process to select its employer director candidates.

During our regulatory action, MNP EG Limited had agreed that it would not reappoint anyone who had been on the trustee board during the period covered by the Warning Notice. MNP EG Ltd believed that the RMT should act in a similar manner to ensure a fresh start for the new permanent trustee board, so it objected to the RMT’s nominations of previously appointed beneficiary directors. MNP EG Limited made it clear that, should the RMT reappoint previous beneficiary directors to the permanent trustee board on 1 April 2021, they would remove their own interim appointments and would not make their own allocated appointments of trustee directors. This would render the trustee board inquorate.

The trustee board was carrying out multiple critical time-sensitive projects throughout 2021, particularly in the period leading up to April 2021 and beyond. In order to protect members’ interests, the trustee board needed to remain quorate so it could continue to make key decisions and issue instructions to its advisers. In light of the clear risk of the trustee board becoming inquorate on 1 April 2021, and the impact that would have on the scheme, we re-engaged to resolve the deadlock. We met with both nominating bodies separately and together to find a resolution but made it clear that if this failed, we would use our emergency powers to appoint an independent trustee.

The RMT and MNP EG Limited were clear that they would not move from their position. The RMT maintained that their due process had been followed for the selection and nomination of the beneficiary directors, and that they would appoint the individuals nominated at the end of that process. This process included consideration by the National Executive Committee of whether the individuals they nominated were “fit and proper” to take up the post. MNP EG Limited were resolute that, in light of the governance issues of the past and their agreement not to re-appoint previously appointed trustee directors, they would not put forward candidates to sit on a trustee board with the RMT’s nominees.

Outcome of follow-up engagement

Given the time constraints and the risk of an inquorate board by 1 April, we persuaded the RMT to push back the date when the new trustee director appointments were due to take up post from 1 April 2021 to 1 August 2021. This allowed the parties time to reach an agreed outcome without the need for the use of our powers to appoint an independent trustee at short notice.

In our subsequent meetings with the trustee board, the RMT and MNP EG Limited, our priority was to reach an outcome agreed by all parties to allow the trustee to remain in place to govern the MNRPF to maintain the long-term stability of the scheme.

However, as the RMT and MNP EG Limited could not agree a compromised way forward, we proposed restructuring the trustee board to only have three fully independent trustee directors. This was a practical solution that moved away from the previous structure, which had caused the governance issues in the past.

The independent trustee directors would be appointed by the Maritime Pensions Forum, the joint working group between the RMT and MNP EG Limited. This working group was set up as a result of our previous regulatory action as an independent forum to discuss issues relating to the scheme, away from the actual governance and running of the scheme. Although the Maritime Pensions Forum are unable to make binding recommendations to the trustee board, its involvement ensures that the RMT and MNP EG Limited can still provide valuable input.

Our proposal was accepted in principle by the trustee board, the RMT and MNP EG Limited at a meeting on 30 April 2021 and was formally agreed in May 2021. All parties worked together to successfully implement the proposal and transition to a trustee board of three fully independent trustee directors in the following months. We worked with all the necessary stakeholders to reach a practical and innovative solution, which avoided further regulatory action and the use of our powers and importantly, maintained the long-term stability of the scheme and protecting savers.

Our approach

We expect trustees to adhere to high standards of governance. Where we identify poor governance, we expect trustees to take steps to remedy these governance issues. We will consider appointing an independent trustee to pension schemes in circumstances where trustee governance does not meet our required standards and trustees are not able or willing to remedy the governance issues. We will work with trustees to reach practical and innovative solutions to governance issues and not hesitate to use our powers if the parties involved fail to reach a suitable solution within a reasonable timeframe.

Timeline

19 May 2016 – Muse Governance Review Report published.
14 August 2018 – Independent Governance Review Report of Baroness Drake published.
28 November 2018 – The Pensions Regulator (TPR) writes to trustee informing that it is opening an investigation into the trustee’s governance.
1 May 2019 – TPR issues Warning Notice recommending the appointment of an independent trustee with exclusive powers.
31 July 2019 – Representations and submissions to Warning Notice received.
15 November 2019 – TPR issues its response.
4 December 2019 – Replies to response received.
18 December 2019 – Matter referred to the Determinations Panel.
27 February 2020 – Determinations Panel hearing takes place.
16 March 2020 – Determination Notice issued with decision to not appoint an independent trustee to the Merchant Navy Ratings Pension Fund.
2 March 2021 – TPR re-engages with trustee and nominating bodies due to concerns that the trustee will become inquorate.
30 April 2021 – TPR’s proposal to restructure the trustee board to be three fully independent trustee directors is accepted by the trustee and nominating bodies.
29 November 2021 – TPR closes engagement following implementation of the proposal.

Footnotes

[1] Collectively MNP EG Limited and the RMT are referred to as the nominating bodies.
[2] An exception was made for the trustee director, who was appointed to the board on 11 October 2019.
[3] It was intended that one of the interim beneficiary directors would remain on the permanent trustee board, leaving only two vacancies to be filled.