How pension schemes are turning pro

Pen­sion scheme trustees have nev­er had it tougher. As the reg­u­la­to­ry envi­ron­ment inten­si­fies, the vol­ume and com­plex­i­ty of work that trustees are expect­ed to han­dle is becom­ing increas­ing­ly chal­leng­ing. From rules around envi­ron­men­tal, social and gov­er­nance report­ing to issues stem­ming from under­fund­ed defined ben­e­fit pen­sion schemes, the skills need­ed are broad­er than trustees have required in the past. At the same time, height­ened scruti­ny on trustee board deci­sions is plac­ing even more bur­den on lay trustees that might not have the nec­es­sary tech­ni­cal knowl­edge or exper­tise.

Against that back­drop, trustees have an increas­ing num­ber of options to achieve greater pro­fes­sion­al­ism on their boards. One is to hire pro­fes­sion­al trustees – sea­soned indus­try pro­fes­sion­als who usu­al­ly have a spe­cial­ist area of exper­tise. Sim­i­lar­ly, more schemes are adopt­ing fidu­cia­ry man­age­ment, which involves work­ing with invest­ment spe­cial­ists to sup­port trustees in achiev­ing their objec­tives. Cardano’s Helen Pri­or (above left) and Mag­da Kennedy (above right) explain why it is essen­tial for trustee boards to adopt a pro­fes­sion­al approach to their fidu­cia­ry duties and how it is lead­ing to increas­ing appoint­ments of pro­fes­sion­al trustees and fidu­cia­ry man­agers.

What are the poten­tial risks for trustee boards that don’t embrace greater pro­fes­sion­al­ism?

HP: The first issue is a fail­ure to com­ply with the rules – legal com­pli­ance isn’t the gold stan­dard, it is a basic thresh­old. There’s no doubt if you aren’t embrac­ing greater pro­fes­sion­al­ism, it’s hard­er and hard­er to be con­fi­dent that you are demon­strat­ing legal com­pli­ance. Anoth­er poten­tial risk is miss­ing some­thing that could have safe­guard­ed or improved your scheme’s abil­i­ty to pay pen­sions as they fall due. It could be relat­ed to the sponsor’s health, it could be an invest­ment oppor­tu­ni­ty or risk, but often those things occur togeth­er, so it’s very dif­fi­cult if you’re not embrac­ing greater pro­fes­sion­al­ism to be con­fi­dent that you are future proof­ing your scheme.

MK: As the major­i­ty of defined ben­e­fit schemes are now closed to accru­al and many mem­bers are no longer asso­ci­at­ed with the spon­sor due to acqui­si­tions or dis­pos­als, it’s much more dif­fi­cult to find suit­able and will­ing tal­ent to ful­fil the role of trustees, and so trustee boards are becom­ing small­er and less diverse. Although lay trustees pro­vide a very impor­tant role, there are few­er and few­er of them, and as the pool of will­ing par­tic­i­pants shrinks, it’s hard­er to have a diverse and well-func­tion­ing board.

Why should schemes con­sid­er using fidu­cia­ry man­agers or pro­fes­sion­al trustees, and what are the main ben­e­fits of doing so?

MK: For starters, it can help with the time bur­den. Man­ag­ing increased com­plex­i­ty, prepar­ing for new reg­u­la­to­ry require­ments and keep­ing up with the lat­est guid­ance relat­ed to defined ben­e­fit pen­sion schemes is time con­sum­ing. Also, fidu­cia­ry man­agers and pro­fes­sion­al trustees are like­ly to have access to a wider range of exper­tise beyond your own capac­i­ty, which can help pro­vide more round­ed advice and sup­port to trustee boards.

HP: One of the ben­e­fits that exter­nal pro­fes­sion­als can bring is the abil­i­ty to man­age some often quite dif­fi­cult con­flicts of inter­est. For exam­ple, if you’re a trustee in a heat­ed fund­ing nego­ti­a­tion with the spon­sor but you are also employed by the spon­sor, that can put you in a very dif­fi­cult posi­tion. An inde­pen­dent per­spec­tive can be a real­ly help­ful way for a trustee board to be con­fi­dent they’ve got the bal­ance right because they’ve got some­body with a slight­ly dif­fer­ent per­spec­tive to help man­age those types of dis­cus­sions.

How else can schemes address these chal­lenges?

HP: It isn’t a one-size-fits-all approach. In our expe­ri­ence, pro­fes­sion­al trustees have been a great asset to the schemes they sup­port, and this sec­tor is grow­ing rapid­ly. To com­ple­ment this trend, the past decade has also seen the rise of fidu­cia­ry man­age­ment as a way to help trustees get up the pro­fes­sion­al­ism curve. Using a fidu­cia­ry man­ag­er – in oth­er words, del­e­gat­ing some of the day-to-day invest­ment deci­sions to a spe­cial­ist invest­ment man­ag­er – means trustees can spend more time on the big pic­ture issues.
You can draw a par­al­lel here to the way com­pa­nies are gov­erned where you have a non-exec­u­tive board that gives inde­pen­dent over­sight and then you have a sep­a­rate exec­u­tive that focus­es on actu­al­ly run­ning the busi­ness day-to-day. Hav­ing one group doing both things, which is the tra­di­tion­al trustee mod­el, can be chal­leng­ing, so engag­ing a fidu­cia­ry man­age­ment provider is
anoth­er way of help­ing trustees demon­strate pro­fes­sion­al­ism.

To what extent are schemes look­ing to adopt a sole trustee mod­el?

HP: We are start­ing to see more use of sole trustees. Pre­vi­ous­ly, it was more com­mon when a scheme was per­haps already wind­ing up and the strate­gic deci­sions had been made, but there was a lot of admin­is­tra­tion that need­ed to hap­pen and so a pro­fes­sion­al sole trustee was a use­ful gov­er­nance mod­el for that. How­ev­er, more recent­ly we’ve seen a lot of schemes strug­gle to get new trustees, par­tic­u­lar­ly if they have been closed to new entrants for a long time, and so a sole trustee mod­el is one way to solve that prob­lem.

What impact has the growth of pro­fes­sion­al cor­po­rate trustee firms and fidu­cia­ry man­agers had on the pen­sions indus­try?

MK: Pro­fes­sion­al trustees and fidu­cia­ry man­agers can pro­vide guid­ance and a stronger voice — and they are also bet­ter equipped to chal­lenge exist­ing process­es. Trustees don’t know what they don’t know, so help­ing trustee boards artic­u­late ques­tions and con­cerns, and hav­ing that expe­ri­ence of the broad­er pen­sions indus­try is very help­ful.

The poten­tial impli­ca­tions for pen­sion schemes are clear, with increased reg­u­la­to­ry scruti­ny comes greater legal bur­den. Appoint­ing pro­fes­sion­al trustees and part­ner­ing with a fidu­cia­ry man­ag­er are some of the ways schemes can demon­strate to reg­u­la­tors that the deci­sions they have tak­en are fair and rea­son­able. And with the reg­u­la­to­ry bur­den unlike­ly to ease, this trend is going to con­tin­ue.

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