The role of the trustee is under unprecedented scrutiny with huge pressure and demands for change in the way schemes are run emanating from The Pensions Regulator.
Single employer trust-based schemes have seen master trusts come to the fore as the obvious alternative.
But what makes an ideal set of trustees and what should corporate advisers be looking for when they assess trust-based arrangements?
The question most pointedly concerns master trusts in the context of advisers recommending movement in the market, although those single trusts that do continue will also have to meet higher standards.
How all the various components fit together can be rather complicated, particularly where switching is concerned. For example, trustees in single employer trusts considering a switch to a master trust will need to consider the quality of the trustees on the board of the receiving entity.
Sackers partner Jacqui Reid says: “Transferring trustees will quite often look to the receiving scheme trustees and conduct due diligence on them when they are looking to transfer. The composition of that board is important because it is typically a large master trust with billion of assets.
“That board has to show it can operate that scheme and reflect its role and responsibility – whether it’s an insurance or EB scheme.”
Looking at master trusts specifically, Buck head of DC and wealth Mark Pemberthy says: “The trustees are making decisions on issues such as investment design and communication strategy which have a big impact on members’ interaction with the pension scheme and the eventual outcomes they get.
“In delivering good outcomes for members, the relationship between the trustee board and the provider is important as there will, inevitably, be times when there is some compromise between the trustees’ preferences and the practical or financial constraints of the provider. Managing this relationship is important.
“As well as risk of poor member outcomes, any significant or visible friction will be a risk to the credibility of the master trust which may in turn have an impact on performance against the business plan and long-term viability of the trust.”
Andrew Cheseldine, a professional trustee at Capital Cranfield Pension Trustees, says: “The trustees’ primary role is to represent members’ interests. However, they can also bring wider market perspective to the table. T hi s shou ld i nc lu de an understanding of how clients – employers and members – view the product and services on offer. It should also include an
appreciation of the issues TPR is focusing on, so, the trustees can add genuine value to the provider rather than be seen as some sort of compliance function.”
PTL managing director Richard Butcher says: “How important is a good trustee board to a provider? The better the trustee board, the clearer the instructions will be and therefore a better understanding of what they are supposed to do. “If the instructor doesn’t understand how to instruct, then the instructee can’t understand what to do. The other reason – though not one commonly recognised – is that an effective challenge between a provider and a trustee leads to better quality service and a better outcome for all.”
Pemberthy says a master trust trustee board should have a broad range of skills covering the key aspects of DC pensions, including investment, administration and communication, ideally with sufficient breadth of knowledge for critical thinking. The board should also have insight on the needs of members and participating employers. Effective leadership from the chair is vital to harness the skills of the group.”
From a provider point of view, Aegon head of pensions Kate Smith says: “The make-up and effectiveness of a trustee board is vital to help a master trust be successful. It provides quality governance and oversight, independent challenge, and a primary objective to achieve good member outcomes. A strong trustee board can work well in tandem with providers but with the necessary degree of independence.”
Smith adds that employers, consultants and providers should be focused on board effectiveness.
“This is measured ultimately by member outcomes but also by strong informed decision-making and how trustee boards react to challenges as well as opportunities,” she says.
“The perfect example is how trustee boards responded to the Covid-19 crisis in the early days ensuring that scheme continuity plans were quickly enacted, allowing the continuation of member services while monitoring and reporting data.
“Having affiliated trustees [i.e. trustees who are also employed by the pension provider] on a trustee board undoubtedly helped some master trusts to respond quickly to the crisis, mobilising resources and enabling real live information to be fed back quickly to the board to provide reassurance not only to trustees but also to employers and members.”
So where do all the different stakeholders fit together in terms of ensuring good governance?
Butcher says: “Consultants are an influencer in that debate and an employer is a decision maker in that. It is in everyone’s interest to consider how effective the governance is. From a provider’ perspective, and from an employer’s point of view, if they know they have good governance they will know the money is being optimised and governed in an efficient way. If they conclude it is not – there’s a risk to those parties so why not seek to mitigate that risk?
“The mitigation strategies aren’t as straight forward as ‘let’s bung it in a master trust’.
“You might make sure your board is more effective by swapping out some people, by training the chairman or appointing a professional trustee, perhaps by restructuring to a sole trustee. The starting point is do we think there is a problem and then what can we do to mitigate it?”
On the issue of prioritising the huge range of demands – investment, ESG, administration, engagement, at-retirement product development – how should trustees set about this?
Cheseldine says: “Carefully. But they shouldn’t get too tied up with the budget split. Some areas can take a lot of time but with limited expense. And whatever is the right split this year, probably won’t be next year. Just think about the impact Covid-19 has had in three months.
“We cannot afford to ignore any element and need to introduce ‘tripwires’ that trigger more detailed reporting or proactive intervention if any particular area goes off track.
“The one area I would say is key, irrespective of what the budget allocation is, is accessibility – commonly referred to as ‘management by walking about’. It is important that everyone within the provider knows who the trustees are, how to get in touch with them and that we welcome feedback and suggestions for improvements.”
Pemberthy says: “Prioritisation of budget will vary between schemes and over time depending on the functionality and performance of the various underlying elements of the pension scheme, as well as insight on the needs of their membership.”
Reid says: “If you are a trustee of a single employee scheme, your budget needs to focus on whether you are compliant, rather than having a nice to have. Investment, ESG, administration, engagement. They are all important. “The starting point is to take each and think about your legal obligations – what you have to do and what is nice to have. ESG is now a statutory requirement. But when you are doing it, you prioritise the default, but keep the self-select options within your legal constraints.
“Administration is important and it is where we see a lot of tricky issues. It is really important trustees have a handle on the admin processes and have ways of receiving appropriate management information from their admin providers and auditing what is being provided.”
Looking at the issue of value for money, a constant theme from regulators, Pemberthy adds: “The Pensions Regulator still gives a lot of latitude to trustees in how they assess VFM so there are a wide range of assessment methodologies, many of which are very subjective and do not always consider how the scheme compares to other similar pension schemes. We would question some of the conclusions of VFM assessments, but under current regulations they could still be argued to be correct.”
Considering whether trustees are assessing value for money correctly, Cheseldine says: “Unfortunately, there isn’t any such thing as ‘correctly’. We all try to get it right for our particular schemes and the mix of members we provide services for. It would be rare for two schemes to have the same priorities given differing member demographics.
“But we do need challenge from both our fellow trustees, the scheme funder, regulators, advisers and members. That is the only way we will continue to improve.” In terms of diversity, Smith says diverse boards are more likely to have stronger governance, be more effective and more representative of its members.
“Diversity, and regular changes of trustees, helps keeps boards fresh, changes mind sets by breaking up ‘group think’ and enables new ideas to keep on flowing. Having a mix of gender, race, age, sexual orientation, religion or beliefs or disability and socio-economic backgrounds, as well as a mix of professional trustees and other pension professionals brings a mix of skills and perspectives creating a more balanced and effective board.”
Cheseldine says: “Although, it is difficult to define, the evidence is the trustees work well together especially when they don’t necessarily completely agree on the minutiae of the approach.
“Cognitive diversity is very important as is the approach of the Chair in ensuring everyone gets a fair hearing. Actual diversity less so, although it both helps to enhance cognitive diversity and evidence it to the outside world. In practice, no matter how enlightened and cognitively diverse a board is, it would be reasonable to challenge an all-male board of 50-something ex-lawyers and actuaries. Group think is easy to slip into and brings with it a lot of unforeseen risks.”