An extremely important development in the UK pensions industry over the past few years has been a significant change in the role of pension scheme trustees. For example, the Myners report, although highlighting the major issues around the institutional investment market, concluded that trustees are “at the heart of the system” and that legal structures put them firmly “centre stage”. Recently, the government has been consulting on recommendations in the Myners review, including the introduction of a new ‘standard of care’ and a requirement that trustees should be ‘familiar with the issues’.
Some observers are quick to make the comment that the research in the Myners report reinforces the notion of the pension scheme trustee as one of the last of the breed of dedicated amateurs. Under current pension legislation, trustees do not have to be professionals, but under general trust law they are bound to act in the best interests of the scheme’s beneficiaries. The 1995 Pensions Act gave out many wrong signals in relation to the true nature of the trustee’s role. Encouraging a business-like approach to trusteeship where formality rather than informality is the order of the day was beyond reproach. However, while stressing the importance of non-professional participation (through workplace partnerships between employers and employees), the 1995 act with its array of fines and penalties seemed to suggest to some that the day of the non-professional trustee was over and that the function would assume more professional characteristics. In certain circumstances, the use of ‘professional’ may be appropriate. But the appropriateness of using a professional trustee is determined not by the trusteeship role itself but by a set of circumstances specific to a particular scheme, and which may be of a temporary or permanent nature.
It is worth reiterating the view that the trustee role is non-executive, non-technical and non-specialist. It goes without saying that trustees should not make decisions in areas with which they are not familiar. However, this familiarity should be with strategic concepts rather than minute detail. Also, trusteeship is a team game rather than an individual pursuit. A broadly based trustee board will bring together those with a diverse range of skills and experience. It is the total complement that is important, rather than the individual components.
Ideally, the focus of regulation should be on those professionals who are paid to manage, and advise on, pensions – rather than on those who fulfil an important but essentially non-executive supervisory role. How can we achieve the right balance between the trustee’s supervisory function and the role of the professionals appointed to advise and manage a scheme? If we take ‘familiar with the issues’ to mean being conversant with the detail rather than being aware of the concepts, we are very close to creating a situation where the fund manager, the actuary, the consultant and the trustee are indistinguishable. This is hardly a very challenging environment. An increased awareness of the concepts should enable trustees to properly supervise the executive/professional functions by effective delegation which, if properly monitored, will lead to more accountability rather than less. However, trustees will then be accountable for that which they control rather than that which is outside their remit or beyond their competence.
Some say it is astonishing that company pension schemes are governed by boards of lay (non-professional) trustees with no significant knowledge of the pensions industry within which their position plays such a key role. But that is not really the case. During 2001, in response to these developments, an independent Trustee Code of Practice Group was established to develop and produce a code of practice to enable trustees to meet their own high standards of conduct. This group comprises 14 trustees representing a wide range of UK pension schemes. I am the chairman of the group, which is assisted by a small number of pensions industry professionals. The code of practice was launched in London last month.
There is increasing interest in the code of practice with many organisations indicating their support. The government is committed to the trust-based concept for pension schemes and the participation of ordinary scheme members, and others, in the trustee function. Initiatives like this, to produce structured guidance and best practice, will reduce the need for layer on layer of regulation and ensure that pension scheme trusts can operate more efficiently. But there is still the need for all concerned in the running of pension schemes to be able to agree on what sort of role we expect trustees to fulfil.
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