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Impact Investing

IPE special report May 2018

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Defining the trustee chair

The rise of LDI, market turbulence and regulatory challenges have all helped to change the role of the trustee chair, according to Gail Moss

Pension scheme trustees should act as a check on the scheme’s management. Ultimately, they are responsible for the scheme’s monetary inflows, ensuring that the right contributions are collected at the right time, and outflows – making sure that the right amount of money is paid to the right people at the right time.

They are also responsible for managing the scheme’s funds, and in particular, deciding and carrying out its investment strategy.

They are legally bound to act in the best interests of beneficiaries, administer the scheme according to its rules, and assess and monitor the sponsor covenant.

While this is also the responsibility of the entire board, the chair of trustees has a pivotal role in ensuring that this is carried out.

“Once, the chair’s main purpose was to chair meetings,” says Rachel Croft, principal and senior governance consultant at Mercer. “Now, it has changed to chairing the scheme. Pension schemes have the long-term objective of delivering members’ benefits, and the chair should be leading the charge to ensure that any deficit is reduced and there is funding to deliver the pension promise.”

It is essentially a leadership role, providing strategic direction for the scheme, and taking overall responsibility for governance and ensuring controls for supervision and monitoring are in place.

He or she should also lead the meetings, ensuring the board has the necessary knowledge and skills to create quality debate and effective decision making.

They should also manage relationships with other parties, including the sponsor, advisers and providers.

Qualities needed
The trustee chair should have the time available to carry out the job properly. They should also be accessible and available: key matters where their input is needed can arise at any time, so it’s not helpful if they spend too much time travelling.

Ideally, they should have previous experience of chairing groups, such as sitting on a company board. This should mean they can get to the nub of an issue quickly, understanding the key elements and what is needed to make a decision.

The trustee chair must also be fully conversant with the scheme rules and regulatory requirements.

Likewise, they should ensure that board members are aware of any gaps in their knowledge and are given the relevant training – and ensure it actually takes place. New board members should go through an induction programme.

“A good chair has interpersonal skills, especially the ability to ‘read the room’ when with the trustee board,” says Croft. “This means getting a feel for the reactions of individual trustees, working out who is in favour, or against, a course of action, and what sort of doubts there are.”

Given the varied abilities of the other trustees, the chair should be able to lead the board, without specifically directing it. They should aim to develop other board members as individuals and as a group, bringing out their strengths, and fortifying areas of weakness.

How to select a chair
In most cases, the chair is selected by the sponsoring employer. Occasionally, however, the chair may be chosen by the board itself.

The new chair could be brought in from outside, or emerge from the trustee board. Many boards now carry out succession planning and they should look to identify candidates from among the board.

Liaising with the sponsor helps to determine how the next chair is chosen and what specific qualities are needed.

For instance, if a defined benefit scheme is closed to new entrants or to future accrual, the sponsors may feel it appropriate to appoint an independent chair, rather than an existing trustee.

Dos and don’ts
During trustee board meetings, the chair should recognise any disagreements, rather than move on.

“It is a good thing to have a healthy difference of opinion, and a range of viewpoints,” says Croft. “A good chair is able to develop that and bring it to a conclusion that everyone is comfortable with.”  

A chair should create a culture where people are expected to voice opinions and will be
listened to. They should summarise the discussion and set out the decision that has been reached, going round the table to make sure everyone understands the decisions and is in agreement.

Voting is rare on many trustee boards: it is more common, and usually more effective, to reach a consensus. However, with some key decisions, a vote may be unavoidable.

One potential pitfall for the chair is to carry too much of an executive role between meetings, which can ultimately threaten the scheme’s governance.

Some chairs, particularly in small pension schemes, may work very closely with the pension scheme manager. But, this means they cannot step back with their trustee chair hat on, and oversee the work they carry out with the scheme manager.

This is particularly true where a large number of the board are lay trustees, with less specific knowledge of the scheme. More of the burden of oversight may then be carried by the chair, making it even more difficult for them to assess the running of the scheme from an independent standpoint.

“Ideally, there should be appropriate mechanisms for the other trustees to oversee what the scheme is doing, such as being given the right information, and enough time to develop the understanding and knowledge to ask the appropriate questions, or ask for clarification,” says Croft.

Challenging the chair
“A chairman is not there to be a one-man-band decision-maker,” says Andrew Cheeseman, chairman, PAN Trustees.  “Decisions should be based on a general consensus, preferably unanimous, so no influence is exerted by the chair.”

However, situations can arise where an independent trustee, who is also chair, can sway a board if he is too strong-minded.  

“There is nothing wrong with having an independent chair, but it is not necessary for him to have in-depth pensions expertise,” says Cheeseman. “So in this case, it might be better for the board to appoint to the board a professional independent trustee who does have technical experience.”  

Trustee chair’s role in corporate activities
By far the most important corporate activities for trustees are those that involve the sponsor company, because they may affect funding, as well as the employment of scheme members.

If the company is the subject of a takeover bid, the chair of trustees has the opportunity
to influence the outcome, because they represent an important group of stakeholders: they should therefore play an active role in any consultations.

Recent changes in the UK’s Takeover Code (for listed companies) also give trustees of DB schemes the right to publish an opinion as to the likely effect of the takeover on the scheme.

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