The increasing complexity and maturity of defined benefit pensions has meant that independent trustees have come into their own. Finding the people with the requisite skills though can still prove challenging. People may look the part, but boards are advised to dig under the packaging to select individuals who can adroitly navigate today’s thornier landscape.

One reason is that independent trustees are not a homogenous group. There are a plethora of industry experts ready to assist but they hail from various backgrounds and possess different skills and qualifications. Some are sole operators while others work in dedicated firms, ranging from specialists including BESTrustees, Law Debenture and Cranfield Capital, to Bridge Trustees and Trustee Solutions, part of law firms Eversheds and Pinsent Masons, respectively. There are also companies from the consultancy world such as Cardano Risk Management, HR Trustees, owned by Xafinity, and PS Independent Trustees, part of Punter Southall Group.

“There are pros and cons to each type of independent trustee,” says Matt Gore, chief administration officer at Pension Corporation. “If you hire a professional independent trustee company then to a certain extent, the individuals are interchangeable and can collectively bring a wide range of experience. However, a small scheme may just need one person and an individual acting as an independent trustee may be more suitable in that circumstance. What I think is better understood today is that they are not well meaning amateurs but can add value whether it is executing a strategy or working on a corporate merger that impacts the pension plan.”

Russell Agius, a partner at Aon Hewitt, adds, that while there has been an increase in the number of independent trustees over the past five years, companies and boards that appoint an independent need to ensure they choose the right person, regardless of size.

At a glance

• Lay trustees are in short supply in the UK.
• Independent trustees now make up an estimated 60% of appointments.
• TPR guidance requires lay trustees to consider conflicts of interest.
• Independents can bring invaluable experience but boards should be wary of cronyism.

“The process of selecting them has become more rigorous over time,” he says. “It is important to note that not all pension schemes will need an independent. For example, smaller pension funds with a relatively straightforward investment strategy and supported by an incredibly strong sponsor are unlikely to go down this route unless they are looking at the sole-trusteeship option.”

Not surprisingly, it is the UK’s larger, underfunded DB schemes – which have shut their doors to new accruals and which are considering endgames – that are typically in need of the most help. The reasons have been well documented. They have had to contend with tighter regulation, funding standards and governance as well as guarantees for payment at a time of unconventional monetary policy and prolonged low interest rates. The coffers of many have shrunk and trustees, who are accountable to the Pensions Regulator, sponsor, advisers and members, do not always possess the resources or time to manage the process effectively. In the past, they would have dipped into their internal pool but there are not only fewer active and former employees but the changing nature of the game has meant a wider skillset and experience of different scenarios are needed.  

“Over the past 5-6 years, the regulatory environment has become much more demanding, which has made it difficult for lay trustees to operate,” says Richard Butcher, managing director of PTL, provider of independent governance services. “The other driver is an employer imperative. DB funds are by and large legacy schemes and in the old days they were part of HR. Now they are part of the finance function because of the need to manage the risk in the most efficient ways and finance directors like to outsource this to independent trustees. This has resulted in a significant growth in the appointments. Six years ago, the penetration of independent trustees was 15% to 20% but that has grown to around 60% today.”

Richard Dowell, head of clients at Cardano, adds that it has become difficult to find retirees, or active members, who want to be trustees. “The benefit of the independent trustee is that they have worked in different areas whether it is legal, actuary, pensions or finance, and they bring their own experience,” he says.

Aside from the technical prowess and administrative acumen, interpersonal skills and style are also pre-requisites for independent trustees. The ability to chair meetings and conduct negotiations doesn’t always require a deep knowledge of pension law or actuarial practices. It is about extracting the best of people and managing conflicts of interest that typically arise when the lay trustee around the table is also the beneficiary of the corporate pension plan. 

The Pensions Regulator (TPR) issued guidance in 2008 setting out best practice and encouraging lay trustees to think carefully about the issue as part of their overall governance procedures. However, there have been cases where finance and other senior directors have resigned from their trustee board positions to avoid having in effect to negotiate with themselves on funding scheme deficits. 

There have also been a few lawsuits – such as David Youlton v Charles Russell four years ago. The former was found by the court in breach of duty to the trustees of a pension scheme (three of whom were also directors of the employer) for failing to advise of the conflict of interest risks in entering into an agreement with the employer and how the risk could be eliminated. 

The advantage of an independent trustee is that they are not worried about job security or questioning the company’s top brass. However, they have been known to fall prey to the same conflicts when recommending only a select cadre of advisers to the scheme.

“It may not happen immediately but there have been cases where if a company chooses a particular independent trustee company, they may get a particular adviser or law firm over the fullness of time,” notes Gore. “That is sometimes the nature of the beast but the board of trustees need to be comfortable with that and they can challenge them.”

Gerry Degaute is a director of Law Debenture Pension Trust Corporation, the largest provider of independent pension trustees in the UK and former CEO of Royal Mail Pension Trustees. He agrees that you have to be wary of cronyism. 

“Following the herd is also not a good place to be,” he says. “For example, we view every single issue on a case by case basis. There is no one model because of the complexity of the defined benefit structure and the differences between covenants. It is about understanding the needs of the individual sponsors.”

Independent trustees should also focus on facilitating meetings. This may sound obvious but some have come under criticism for being too dictatorial. 

“Independent trustees are brought in to fill a gap,” says Avgi Gregory, co-owner of the pension governance and administration consultant Muse Advisory. “The independence of mind is key and if they are chair, they need to create the right relationship between the employees, employer and lay trustees. If someone is too domineering then I look at this as a failure of the chairmanship. Their job is not to act as the lawyer, actuary or investment manager but to govern the pension scheme.”

John Nestor, director at Law Debenture, says his firm gets chosen for different reasons, but that independent trustees generally have to be able to raise the difficult questions that employees do not want to ask. 

“It is also not about just turning up four times a year,” he adds. “Decisions may be clarified in the face to face meetings but by and large many things happen offline. For example, we are continually reviewing the covenant, regulatory developments as well as various aspects of the funding levels that perhaps senior managers do not want to pick up but we will.”

To make the relationship work, market participants suggest sponsors have a clear agreement in place that covers expectations of the independent’s contribution, performance management, remuneration, the period of appointment and the timing of formal reviews. Views are split though as to whether the regulatory screws should be tightened in the wake of the GP Noble case. The Nottingham-based firm was an independent trustee company that administered occupational pension schemes. It was a subsidiary of Money Portal, which went into administration in June 2009.

Graham Pitcher, ex director of the company was jailed in 2011 for conspiracy to defraud for his involvement in the misuse of pension scheme funds managed. It was reported that he removed £30m (€37m) from six of these schemes’ funds from UK investment houses and reinvested them in a British Virgin Islands company. Pitcher launched an appeal earlier this year on the grounds of new evidence that came to light during the trial of GP Noble principal Tony Morris, who was acquitted.

Most industry participants would rather not see additional rules but are in favour of continuous professional development and a formal type of accreditation. For example, TPR’s defined code of conduct has raised the bar higher for independent trustees than for their member-nominated peers. They not only have to demonstrate a higher level of knowledge, and hold a Pension Management Institute (PMI) qualification or equivalent, but have a greater duty of care. 

In the meantime, the Association of Professional Pension Trustees (APPT) has launched its own code for its members, specifying minimum standards for data protection, governance, risk management, ethics around charging and conflicts of interests, education and experience. It is joining forces with the PMI to develop a professional qualification, according to Claire Altman, a director at Capital Cranfield and a board member. It is early days and while independents may bristle, believing their years in the field should speak for itself, others feel a standardised uniform level of capability could provide comfort and act as a barrier to just anyone setting up shop.