Pensions World

Independent trustees are in great demand to help lay trustees make better decisions explains Allison Plager

No one said that being a pension scheme trustee was easy. Trustees have to understand a vast range of information and regulations, looking after the interests of the pension scheme members in a world where change seems to be the constant. It may have been less onerous when defined benefit (DB) schemes were secure and gave the impression of lasting forever. Now, as these schemes close and employers look for ways of divesting themselves of the responsibility for running them, life can be very complicated for trustees who have to balance the interests of the members with those of the company.

It is not surprising therefore that professional independent trustees are in such demand. Mercer’s trustee survey published in February 2011 shows that 40% of boards have an independent trustee, a small decrease from Mercer’s 2008 trustee survey (44%). However, the survey goes on to explain that “smaller schemes (less than £50m) and the largest schemes (more than £1bn) have increased their use of independent trustees (from 18% to 34% and 59% to 69% respectively), as opposed to the schemes in between where this practice appears to have declined”.

Graham Withers of HR Trustees has seen “a marked increase in demand for independent trustees”, adding that it is “now frequently best practice to appoint one”. Similarly, Peter Docking of Independent Trustee says the demand has risen and ascribes it in part to employers wishing “to devote less management time to trusteeship”.

Complete independence

An independent trustee potentially brings a lot of knowledge to the trustee board appointing him, but the main advantage, says BESTrustees’ Graham Wardle, “as the name suggests, is complete independence”. Pitmans Trustees’ Richard Butcher agrees, saying that “by definition, the primary advantage we bring is mitigation of conflicts of interest”, and finds that this is often the reason that he is called in.

Mr Butcher says an independent trustee should “bring experience of a large number of other schemes, have a sensitivity to what is acceptable as a result of dealing with lots of other pension schemes and efficiency through knowledge and continuity of governance”.

Another advantage, says the Law Debenture Trust Corporation’s Rodney Jagelman, is “a sense of confidence for the trustee body as a whole”. An independent trustee can also help with cost effectiveness, he adds “particularly in the monitoring and evaluation of advisers”.

Capita Fiduciary’s Michael Clark warns that appointing an independent trustee “is not a reason for the lay trustees to give up responsibility”. He points out that the independent trustee “can facilitate a solution and help the lay trustees make a decision more speedily”, but all the trustees are important.

Broad experience

Trustees have a reasonable choice if they decide to appoint an independent trustee, as Table 1 shows. Many are related to legal firms and consultancies, for example Open Trustees is a subsidiary of Osborne Clarke and Temple Trustees are associated with Burges Salmon. Then there are specialists, such as BESTrustees, and sole practitioners.

The decision about who to appoint should be taken carefully. As Mr Butcher points out “the role of independent trustee is not regulated and as a result, over the last few years, a huge number of companies and individuals have set themselves up as one. Despite this there is no objective measure of quality or ability”. In Table 2, the respondents have the opportunity to say what background independent trustees should have and most agree that they should normally have plentiful experience in the pensions industry and possess a recognised relevant professional qualification. Mr Butcher adds that they should also be “involved with a large number of pension schemes” so they can assess the suitability of a wide range of measures based on broad current experience and be able to “develop and execute a strategic direction for the pension scheme”. Having adequate professional indemnity insurance is a given. The potential danger of appointing an unsuitable independent trustee could even cause the board of trustees “to increase their long term exposure to this significant risk”.

Similarly, PAN’s Steve Delo says: “Just because somebody presents themselves as an independent trustee doesn’t make them up to the job. It is no longer a job to be treated as a pension income top up in retirement. It is a professional, executive function requiring quality staff with the professional training, up to date knowledge, industry experience, negotiation, leadership and meeting skills – and work ethic – to make a difference. Companies pay big money for advisory support and investment services yet can feel disinclined to pay for a professional trustee (which is invariably much cheaper but arguably essential). They should firstly make sure they have a trustee board – which is a scheme’s executive management – which is as good as it can be and capable of properly marshalling their governance budget. A good independent trustee should, frankly, more than save their fees in terms of better allocation of the governance budget alone.”

Is regulation desirable for independent trustees? Mark Homer of PS Independent Trustees believes not, saying that “it would lead to greater expense and management time”. He would support “the Pensions Regulator in providing further guidance to help better the define the role and set out a minimum level of standards required”.

Constant change

Aside from helping the lay trustees find their way through the mire of regulation that guards pension schemes, independent trustees might be needed for a variety of reasons. As Mr Clark says “change happens constantly with pensions so having someone on the trustee board for whom pensions is his day job must add value”. But he cites other reasons for appointing an independent trustee, for example with closed schemes. Here succession problems can arise – where will the next trustees come from? Also such schemes, especially if closed to future accrual, “can lose importance in the eyes of the sponsor, particularly when senior employees do not have a financial interest in the scheme”. An independent trustee can fill this void and “ensure that the beneficiaries are not forgotten”. Richard Bryant of Atkin Trustees agrees that this can be a good reason to have an independent trustee, saying that the DB scheme “can become something of an afterthought once a new scheme is set up”. In any event, some defined contribution (DC) schemes are trustee based, so an independent trustee still has a role to play.

Few DB pension schemes still exist and many of those are looking at derisking by means, for example, of a buyout, buyin or longevity hedging. Mr Clark mentions that the use of special purpose vehicles in this area has grown over the past couple of years. All this “adds an extra layer of complexity that cries out for the expertise of an independent trustee”.

A leading role

Independent trustees may be widely in demand now, as DB schemes close or employers try to divest themselves of the scheme, but are they so important for DC?

Clive Pugh of Temple Trustees says the need “is not so high with DC arrangements”, but suggests “this may change with the Pensions Regulator increasing the governance requests for this type of arrangement”. On the other hand, Independent Trustee Services’ Richard Boniface believes that “trust based DC requires very similar disciplines of the trustees and an independent trustee has a leading role to play in protecting members and employers”. He cites the need for “accurate administration and data, clear and regular communications, investment selections putting benefits into payment and exercising death cover discretions”.

Win-win situation

Clearly, independent trustees have an important role to play in pension schemes, not only to ensure that all regulations are followed, but to help trustees make informed decisions when it comes to investment, changes in the scheme and wind ups. Given that most lay trustees will not have a financial background let alone a pensions one, it is surprising that so many pension schemes do not have an independent trustee. As Mr Bryant says “the arguments for appointing an independent trustee are numerous and difficult to refute but there are still many schemes without one”. He suggests the reasons will be down to “cost, loss of control, confrontation or simply because the messages given out by the pensions industry do not reach the intended audience”. Appointing an independent trustee can result in a “win-win situation for the company and the scheme members”.

Far from being a threat to lay trustees, an independent trustee should enhance the board. Mr Clark says that “independent trusteeship is not the death knell for the trustee community – rather it strengthens it. It does not mean that lay people are not fit to be a trustee, it helps them make better decisions.”