IPE Views: DC trustee boards should think professional


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A professional trustee can change the focus of a pension fund from being adviser-led to trustee-led, says Dalriada’s Chris Roberts

Among the raft of pension changes introduced in April in the UK was the requirement that multi-employer defined contribution (DC) schemes, which include ‘master trusts’, must comply with new governance standards. These schemes now require at least three trustees to be serving on their boards, with a majority of these individuals being unaffiliated with any company (including the chair) that provides advisory, administrative, investment or other services to the scheme.

This is a sensible piece of legislation that should help ensure greater levels of governance across pensions scheme boards, and, for those DC schemes that do not currently benefit from the input of a professional trustee (PT), it provides the ideal platform to re-evaluate that situation.

You would fully well expect me, being part of an independent trustee firm, to campaign in their favour, but the arguments go far beyond commercial interests and are much more focused on the benefits and efficiencies that can be accrued by having on-going access to professional advice. 

First, a professional trustee will help manage conflicts of interest. Trustees are compelled to act independently and be able to negotiate with the scheme sponsor on behalf of the members. There are major challenges in demonstrating this independence to their fellow employees and the Pensions Regulator (TPR). These hurdles – combined with the Companies Act 2006, which requires directors to avoid conflict of interest within their company – make it very difficult for senior management members to act as lay trustees to their scheme, underlining the need for a professional.

Another key factor is the knowledge and understanding that professionals bring to a trustee board. Significant time and resources are now needed to comply with Trustee Knowledge and Understanding (TKU) requirements introduced by TPR. This will only become more onerous under the forthcoming EU legislation for IORP II. This can represent a significant challenge for lay trustees who also have the ‘day job’ of running their business. While the appointment of a competent and experienced professional trustee will not exempt other trustees from the TKU requirements, it will make it easier for them to comply.

The day-to-day responsibilities of running a business can result in lay trustees delaying key decisions required in respect of their company pension scheme. The appointment of a professional trustee will, therefore, put a far greater focus on the level of pro-activity needed in terms of scheme management and decision making, particularly with regard to investment decisions in response to market movements.

The reduction in management time spent in the running of the scheme increases availability of senior staff. Lay trustees would normally hold senior roles within an employer business – it would not be unusual to find finance directors, company secretaries, chief executives and MDs forming part of a trustee board. It is difficult to put a value on the time of these individuals. However, the sponsoring business is highly unlikely to benefit greatly from any increased capacity from such senior individuals.

There are, of course, costs involved in appointing a professional trustee. As with the appointment of any company adviser, whether this outlay delivers value for money will be dependent on the quality of the individual. However, if you get this right, this cost can be mitigated, if not eliminated, as an experienced professional trustee should be more effective at managing other required scheme provider costs.

A professional trustee can change the focus of the scheme from being adviser-led to trustee-led. The understanding of the key issues and regulatory requirements will also come to the fore, enabling negotiations to be settled more quickly and efficiently, all of which can save on adviser fees and deliver other opportunity cost savings to a company.

Another concern of appointing a professional is that the company may feel it is losing control and important historical scheme knowledge by reducing or, in some cases, eliminating its representation on the trustee board.  This can, however, be addressed through regular communication, backed up with the accurate and current management information combined with a properly planned and executed handover.

These and other concerns highlighted above are manageable and significantly outweighed by the benefits a professional trustee can deliver. These benefits extend not only to the pension scheme but, by freeing up the burden on lay trustee directors and allowing them to put greater focus on day-to-day business management, they can also help enhance a company’s overall success.

Chris Roberts is trustee representative at Dalriada Trustees  

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