Since the introduction of ‘code of practice no 7’ in the trustee knowledge and understanding guidelines, trustees need to fully demonstrate they are looking after the interests of pension scheme members.
A trustee is not expected to be an expert, but must be able to demonstrate a broad knowledge and understanding of the issues. They should be able to test and challenge what their advisers are saying and recommending. If trustees do not establish what their level of knowledge and understanding is, and what level it should be, then they cannot justifiably claim to be acting in the best interests of members.
The risk of trustees getting it wrong is intensified during periods of economic instability, when stock markets are falling and there is more focus on the performance and governance of both defined benefit (DB) and defined contribution (DC) schemes.
With record-high DB scheme deficits and DC members becoming disillusioned with the performance of their pension funds, it is imperative trustees can demonstrate that the blame for such failings does not lie with them.
A recent survey by Aon showed 91% of DB scheme trustees were concerned by the impact the economic turmoil was having on their scheme, with 52% saying they were “very concerned”. Despite this, the vast majority of trustees remained committed to their responsibilities.
This commitment is admirable; however, trustees need to be aware that serious failings can potentially lead to litigation, disqualification and even financial loss. These failings can be broken down into bias, ignorance and weakness.
Bias relates to favouring a specific member, category of member or even the employer itself to the detriment of other members. The trustees have a duty to look after the interests of all scheme members. Ignorance of scheme rules, finances or regulation is another potential pitfall.
However, it is the third category, weakness, that tends to cause the biggest problems.
There are a number of scenarios that can fall into this category, though the principal failings are linked to corporate governance and scheme investments. Weaknesses, such as failing to manage conflicts of interests with the sponsoring employer; not ensuring best possible covenants are agreed with the employer; failing to arrange the appointment of member-nominated trustees; and not taking adequate steps to minimise the incidence of fraud, would all be included here.
However, arguably the area in which trustees need the most support – and better knowledge and understanding – is that of investment. Trustees can delegate day-to-day responsibility for the investment of the scheme assets, but they are still responsible for ensuring the investment strategy and implementation is suitable and specific to the scheme needs and requirements. Trustees could be culpable, for example, if they fail to effectively manage scheme advisers, such as investment advisers, or allow a mismatching of assets to liabilities.
Potentially the biggest area of exposure of risk lies with the trustees of smaller trust-based DC schemes. These are the schemes with arguably the least level of in-house expertise, professional support and time to execute their duties fully. Without proper governance over the investment of the scheme assets, the members could be retiring on a lower than expected pension, and who do you think they will blame for that?
There are a number of steps trustees should consider taking in order to minimise both the risks to the pension scheme and to themselves.
An increasing number of trustee boards, for example, are responding to these issues by appointing independent or professional trustees to help share or take over the responsibilities and obligations. The ‘trustee toolkit’ provided by the Pensions Regulator is an excellent facility for trustees and potential trustees to gauge their level of knowledge and, importantly, to identify the areas they need to get help with or learn more about.
Trustees should also evaluate the need for appointing competent corporate advisers to undertake a full scheme audit to ensure the trust deeds and rules are appropriate, to challenge the advice provided by investment managers and actuaries, and ensure effective engagement with scheme members.
As the recession bites, there has been an increased number of trustees looking for guidance with their corporate governance, investment management strategy, or simply to provide training for trustees so they are fully aware of their roles and responsibilities.
The role of pension trustee is one that carries a great responsibility. Trustees owe it to their scheme members to ensure they are best equipped to provide the most appropriate service to them. In doing this, they will also ensure that they protect themselves by not neglecting their legal responsibilities.
KEY points
■ Trustee failings can potentially lead to litigation, disqualification or even personal loss
■ The risk of trustees getting it wrong is intensified during periods of economic instability when stock markets are falling
■ Trustees need to get the best professional advice to minimise the risks both
to scheme members and themselves
John Richardson is head of technical planning at Towry Law
