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Report - November 2004 The following are extracts from the speech that Brian Holden is giving at The Pension Show on 18 November 2004. In recent times, the role of the trustee has been widely scrutinised: so what's gone wrong? If trustees are indeed responsible for the stewardship and protection of modern day pension schemes, why are the Government and the pensions industry in such a turmoil? Has any progress been made since these issues were identified debated and legislated on nearly 10 years ago to give us the 1995 Pensions Act? During this year particularly I have consulted widely on an informal basis with hundreds of trustees As well as scheme specific Issues that continually require the attention of trustees, the issues that appear lime and time again include:
Europe is in a situation where most employers are quite disgruntled with their responsibility to shore up pension schemes, and regulators are in the unpopular position of toughening the laws governing those responsibilities. The EU Pensions Directive is only the start in the process of creating a pan-European pensions system. One aspect of the Directive that does not seem to have received much attention is a requirement that a pension scheme is effectively run by persons of 'good repute' who must have appropriate professional qualifications or must employ advisers. This seems to impose a higher standard on trustees and their EU counterparts, and again brings the governance of occupational pension schemes into sharp focus. In the UK, employers are deliberating on some major problem areas, including the desirability of flexible approaches to the DB/DC decision and the ongoing challenge of delivering pension arrangements cost effectively to both employers and employees alike. The Pensions Bill has again turned the focus on the security of members' benefits in occupational pension schemes; One of the Bill's main aims is to establish the Pension Protection Fund (PPF), which seeks to ensure that, in future, pension scheme members will not suffer the same fate as some of their counterparts who lost virtually all their savings when their companies collapsed. There is little doubt that the PPF will have a fundamental effect on the future shape and structure of pension provision in the UK. Trustees and trusteeship have succeeded in becoming a new 'pensions football both politically and within the industry, to the extent that it is now a system under pressure and without any universal acceptance of the way forward. What is a trustee? This is a very important question to ask hearing In mind how Important pension schemes are to millions of working people and pensioners in short, trustees are, of course, responsible for managing a pension scheme and safeguarding members' Interests and their duties and responsibilities are set out in statute, trust law and their scheme's governing documentation But, in recent times; some pension industry professionals have chosen to demonstrate the increasing complexities of trusteeship by continually referring to lunacy and insanity, as the most compelling attributes for the job coupled with the opinion that lay trustees can no longer be expected to cope with the increasing demands If those making such comments believe that they properly report the current trustee scene, then these so-called experts do the important function of trusteeship no favours whatsoever. Indeed, I consider it to be an act of betrayal that such industry experts continue to be critical of trustees, but still consider it to be 'fit and proper' to advise trustees on many of the Issues for which they are being openly criticised. Over the years, I have been greatly impressed by the dedication of these individuals (trustees) who demonstrate common sense, integrity, a willingness to learn and take guidance when appropriate. The Pensions Bill also focuses on the future governance and administration of occupational pension schemes and includes proposals for a new regulator to concentrate its efforts on schemes where it assesses that there is a high risk of fraud, bad governance or poor administration. These are issues that are of essential importance to trustees The Bill imposes a requirement on trustees to have knowledge and understanding of specific issues relating to the operation of their duties and responsibilities. As a result, the spotlight is shining on trustees and probably more brightly than ever before. Fundamental questions are being asked about the role and responsibilities of trustees. Where do trustees stand in all this focus on an activity that has assumed greater significance over the years? Over a long period of time the majority of trustees have demonstrated their business-like ability and common sense approach to high standards of care. However, trustees' competency is again being tested. There is a tendency by most of us to seek to compare past and present in an attempt to achieve solutions for the future The current trend Is to compare the 1995 Pensions Act. and its many over-prescriptive regulations, with the current Pensions Bill, which originally sought to simplify matters, and its proposals that are expected to be introduced in 2005 and 2006. What has happened in the last decade? Has progress been achieved in developing a workable and sustainable trustee system to meet the Increasing demands of legislation regulation and changing practices? The Government is now proposing another major shake up of the legislative and regulatory framework for occupational pension schemes. This includes changes affecting the appointment of member-nominated trustees and the establishment of identifiable levels of Knowledge and awareness that trustees will have to demonstrate. Having member-nominated trustees is more than the 'good idea' suggested by Government. Throughout my 35 years' employment in the Co-operative sector I have been well used to equal representation on trustee boards. These boards are a prime example of co-operation between the principal parties and it makes sense to have a genuine partnership in an area as important as pensions. But at this crucial stage with the public focus on the downside of pensions, what members want is greater transparency of governance and evidence that their scheme is well run and in safe hands. It is not too long ago that occupational pension schemes were acclaimed as a success story of the 20th century providing retirement benefits to millions of the working population Indeed a workplace success This success is also evidenced by the way In which most schemes are governed, by a genuine co-operation between the sponsoring employer and the workforce coming together as a trustee board to run the scheme in the best interests of the beneficiaries. In my opinion, many of the Issues currently affecting the running and supervision of occupational pension schemes can best be resolved in the workplace, at the broadly-based trustee board level, with expert advice being drawn In when appropriate. At individual scheme level, this is how a good scheme is run. But at industry level the competence and experience of the majority of trustee boards is kept in the background and this approach must cease. Trustee competence is being put to the test, and with a vengeance. It is now universally accepted that trustee training, knowledge, understanding - call it what you will - is an essential ingredient to good effective trusteeship. But what that training should consist of, and how it should be provided, is a subject of considerable debate Indeed; with the prospect of greater responsibilities arising from the new Pensions Bill; the provision of trustee education and training Is a vital issue In a recent survey, Opra found that there is nothing like enough training provision currently available. Does that mean that more training providers will be required? At present the range and quality of providers differs enormously. At one end of the scale we have those who provide a range of excellent training facilities, whilst at the other end we have providers whose training is woefully inadequate and, quite frankly, should be drummed out of business. I have always expressed the view that all those who provide professional services should be subject to some kind of regulation. With the expectation of codes of practice including a code of practice requiring a level of trustee knowledge and understanding - it can be expected that many training providers will want to revise their products to ensure that they encompass the requirements of the legislation and code of practice. I recommend that any training provider whether corporate or individual; who provides training to meet the published statutory and regulatory standards, should be required to be registered with The Pensions Regulator (TPR), such registration being subject to an appropriate annual fee. As a minimum, TPR should have evidence that the provider's training syllabus meets the statutory criteria. As trustees' responsibilities increase, we look for improved ways of learning in order to satisfy the needs of a diverse range of trustee individuals. Whilst it is necessary to keep the traditional classroom approach for those who are suited to this style of learning, it is encouraging to see that new methods, including distance learning and on-line facilities, are being Introduced. However, I am concerned that some are taking the whole issue out of context and are showing a lack of understanding of the practical aspects of lay trusteeship. I have long been convinced that, for many schemes, more can be made of the scheduled trustee meetings held throughout the scheme year. The trustee meeting is an excellent environment to get to grips with the practical aspects of the diverse range of issues for which trustees are responsible. I would like to see more trustee boards identifying relevant issues for inclusion on the meeting agenda as a training item. This is a very good way to learn about what is required and to apply it to the circumstances of your own scheme. But as I have intimated, traditional and more modern methods are excellent ways for trustees to learn about the diverse range of duties and responsibilities imposed on them by statute and regulation, hopefully drawing comfort from the fact that they are receiving this training from an 'accredited' provider. There has been much debate about the testing of trustee competence and whether trustees should be required to demonstrate their knowledge and understanding by qualification I am pleased that the Government and TPR are not going down this unnecessary route The emphasis should be on continual 'learning', not 'training'. I am concerned that. In the industry, we have seen the recent Introduction of a Certificate in Pension Trustee Competence. Irrespective of any educational standards that academics attach to such learning methods, competence is not measured by a piece of paper that merely acknowledges that a trustee has undertaken a course of study and remembered sufficient to answer enough questions correctly. Competence is achieved by putting the learning to practical use by being a trustee, around the trustee board table dealing with advisers, as a member of a sub-committee dealing with specific issues, representing the scheme at industry conferences, meetings etc. But all this requires ongoing support and assistance and the necessary time to undertake the job on a proper business like basis. Gone are the days when even a personnel or finance director could simply pick up trustee meeting papers and waltz straight into a trustee meeting without having done any homework. If It isn't a contradiction, I think trusteeship should be seen as a 'full time part time job'! Good trustees must be aware of their legal rights and duties and also have knowledge of the broader framework within which pension schemes operate. Trustees are not however specialists in any areas of pensions management - the effective trustee will have a broad general knowledge and will be able to ask the right questions of the professionals engaged in the efficient running of their scheme. However it is acknowledged that many trustees may wish to boost their own confidence by testing their ability to learn and understand a range of basic knowledge about their responsibilities and pensions generally. After all, isn't that what the new Pensions Act should be about? But don't we have a long-standing facility already available, with a Trustee Certificate of Essential Pensions Knowledge, for those who wish to go down that route. Where is the co-operation in the pensions industry to achieve a workable and sustainable system of education and learning to ensure that we build on the positive aspects of the current trustee system? What trustees need - and pension funds in general for that matter - is a regulatory and operating climate that is sensibly attuned to their needs and not an endless shopping list of ever increasing demands driven by fears that they are always about to do something wrong. That s not the way to foster a thriving trustee culture motivated by the commitment to achieve and maintain a sustainable and workable custodianship of our pension schemes. In many ways, being a trustee is rather like driving a car. You need to know your destination and the route you will be required to take, but you do not need to know about everything under the bonnet. Problems may develop from time to time that may require you to repair a puncture or replace a tyre, but that Is not a reason to change the vehicle for a newer model. Instead of piling on the regulatory agony year by year on those employers and trustees 'rash' enough to provide, govern and supervise occupational schemes, the move needs to be in the other direction - to make it simpler and thus more appealing. The Pensions Bill imposes obligations on trustees and requires TPR to issue a code of practice on the obligations imposed by the legislation on the requirements for 'knowledge and understanding'. This involves a range of matters concerned with the good trustee governance of a scheme. Hopefully, this and other codes of practice will substantially clarify the rather vague, and in some cases potentially onerous, obligations under the Bill. It is anticipated that these codes of practice will be introduced during the period April 2005 to April 2006. But these codes of practice will deal with a range of separate issues and not the issue of trusteeship 'in the round'. For example, most of the codes of practice will specifically relate to the implementation of various clauses in the new Pensions Act and will introduce a more flexible approach to some of the over-prescriptive regulations that currently exist. In addition to a code of practice on trustee knowledge and understanding, there will be codes dealing with Issues such as internal dispute resolution, scheme funding, reporting to the regulator and notifiable events, MNTs and others. The codes are intended to offer guidance rather than imposing requirements, and are not hard and fast rules but allow some degree of flexibility in how they are applied. Some codes of practice will be mandatory, but on the part of TPR to publish, and not on schemes to comply. Therefore how can trustees adopt a transparent approach and demonstrate their effective governance of their scheme? What should be the overall objective? Clearly this should be to ensure that trustees are complying with their statutory responsibilities and have a working knowledge and understanding of a broad range of Issues necessary to successfully undertake their role. It is to be hoped that, with a combination of primary legislation, regulations and codes of practice, the future will have greater regard to the needs of the end-user than the past. But in the same way that employers need incentives to provide retirement schemes for their workforce and the nation's workforce needs incentives to save so do trustees need an incentive to be able to demonstrate their sound stewardship of their scheme. At this point let me deal with an issue that Is certainly not seen by many trustees as an incentive. During one of the House of Lords debates on the Pensions Bill, reference was again made to the recommendation - originally one of Paul Myners' - that trustees should be paid. I have opposed this proposal since its introduction. How can payment make trustees any better? So far as non-professional trustees are concerned, paying them sends out all the wrong messages and leaves conscientious and committed trustee boards open to the accusation that they are only in it for the money. Scheme members know that their trustees are there because they want to be and because they care about the scheme and are not there to make a fast buck. In my opinion, there are 2 broad issues. Firstly, there should be - in a code of practice - a set of principles dealing with trusteeship 'In the round' and with all trustees being able to demonstrate their compliance. The code of practice should adopt a fairly high level approach. Secondly, the objective should be to ensure that we can be satisfied that trustees are operating in compliance with the code of practice They should be able to demonstrate and certify that they comply with the trustee code of practice. In reality, this will be difficult if the code of practice is too voluminous and containing information that is more appropriate to general guidance. What is required is a relatively short code of principles that trustees can satisfy. This can be supplemented with a range of general guidance on how trustees can usefully comply with the code of practice. It is at this second tier level that differences between schemes can be identified. Codes of Practice are not, of course, an innovation of the Pensions Bill. In Autumn 2001, a group of lay trustees, assisted by a small number of pension professionals, came together to produce a code of practice for trustees. This trustee code followed the principles I have just outlined and I make no apology for referring to this initiative. The DWP expressed interest in the code and the, then, Pensions Minister Ian McCartney helped to launch the code in June 2002. In a relatively short period, over 12,000 copies of the trustee code had been requested. The code is still available and deals with the principles I have mentioned. Indeed, it covers life throughout, and even before, a trustee's appointment with chapters on:
The code was acknowledged by trustees and employers as a Job well done and long overdue. Indeed, it has been referred to as a trustee's job description and it was awarded the Crystal Mark by the Plain English Campaign. By comparison, the pensions Industry gave the code a very lukewarm and broadly disinterested reception stating that it was unlikely to be of much help to trustees. If only they could now see the testimonials received from trustees and employers. Perhaps some Industry bodies were rather embarrassed that lay trustees could undertake such an important task when previously a number of attempts to produce similar best practice guidance ended in failure. Subject to my later comments, I recommend that the Code of Practice for Pension Scheme Trustees be used to address the trustee's job 'in the round' and used as the basic trustee job description. In my opinion, all those who provide professional services to trustees should be subject to some form of regulation. After all, actuaries, auditors, investment managers, lawyers etc are regulated professions. Similarly, I recommend that independent trustees should be subject to some form of regulation or registration by TPR. Whether professional trustees should be registered, for a fee, with TPR or their scale of fees approved by TPR, or both, can be for Parliament or TPR to determine. However, in line with my views on training providers, a move of this nature would give confidence to the users of these services. Even before Royal Assent and the new Pensions Act begins to take effect, there is already talk about the trustee model for pension scheme governance being outdated and no longer suited to modem day pension schemes. The Pension Law Review Committee under Professor Roy Goode examined this a decade ago and found the trustee system broadly satisfactory. In any event, nobody could come up with a satisfactory alternative. In some ways Professor Goode set the scene for a more formal business-like approach. But the trustee model is now being criticised even before it is clarified, simplified and perfected. In my opinion, the system has worked in the past - through good times and bad - and can continue to work in the future. Some critics argue that the need for professional rather than lay governance makes the trust model irrelevant to modern day requirements. With the prospect of fundamental changes arising from a new Pensions Act, some of which will have far reaching Implications on scheme management and governance, I am sure that employers and pension schemes will not relish the prospect of further, and possible more fundamental changes to deliver a different governance structure for their schemes. But we do need a different approach - and in reality we have needed it for years. We need to review the requirements of modern day lay trusteeship - but from the trustee's perspective. Let trustees themselves consider what is right or wrong with the current situation and whether the legislation and the industry are delivering in an appropriate manner. To do this I recommend that we have a streamlined review of today's lay trusteeship requirements, but not undertaken by sections of the industry, but on an independent basis, with one or a small number of people appointed to consider evidence from trustees, employers. Government, regulator and the industry. Who should make this appointment? Having regard to vested interest groups in the industry, perhaps this appointment should be made by the Minister with a remit to report back on a speedy basis. I do not see this initiative obstructing the provisions In the Pensions Bill, but I do see it as one practical way to acknowledge the focal role of the trustee and to publicly admit trustees to the 'inner circle' of decision makers. However, a principal involvement in the 'Inner circle' of the industry's arbitrators and decision makers will not be successful if such participation is restricted to a one-off basis. Trustees have proved, time and time again, that they have the where-with-all to commit to the bigger picture. Lay trustee involvement is as crucial as ever and broadly based trustee boards have a vital role to play. Indeed, managed on a proper basis, it is a demonstration of a value-for-money system of governance, but at the supervisory level and not at the level of the specialists appointed, and paid, to undertake the supervisors' decisions. For the future, I recommend that there should be established a Standing Committee on Lay Trusteeship. The important thing is, of course, for such a body to be accepted and recognised as a forum to identify and discuss issues particularly relevant to trustees and the implementation of their role and responsibilities. This committee could meet, as required, on a formal basis. The question then arises how, and by whom, should such a body be established? The Government and TPR could use it as a sounding board to consider possible future changes in trustee-related legislation and regulation, and the industry could use it to develop practical solutions. This committee could also identify particular issues itself for examination and report. It will need to draw on specialist knowledge, but should be constituted in such a manner that lay trustees are the constituency that is principally represented. It should adopt an independently minded approach and not be seen as a vehicle promoting sales pitches or products. This is another practical no nonsense way in which lay trustees can be admitted to the 'inner circle'. The existing Trustee Code of Practice Group is a good working example to consider as a model for such a committee. Indeed, one of the first tasks of such a committee could be to re-visit the trustee code, update its contents where appropriate and to develop any trustee guidance notes alongside the code's principles, In a world where pensions, and trustees themselves, are in the public eye, I recommend that a 'trustee ambassador or ambassadors' - a person or people who can identify with, and demonstrate; the principles of lay trusteeship be appointed to 'fly the flag' for trustees and in so doing to assist employers and pension schemes - particularly the smaller and medium-sized ones - in understanding and acknowledging that the system - with clarification and simplification - does and can work. Perhaps this is a matter that the Pensions Minister may wish to consider. My last three recommendations - a trustee review, an ongoing committee and a trustee ambassador(s) - highlighted the need to level the playing field for lay trustees and to bring them into, what I called, the inner circle. There will be those who may argue that three bites of the cherry' are rather over the top. Therefore, in true boardroom fashion when a motion is being discussed, I will propose an amendment to my own proposition. The Government has previously established the Employer Task Force on Pensions. One of its remits is to develop and promote the employer's role in pension provision. The trustee's role - which embraces both employer and employee involvement - needs developing, and if we are to believe the positive messages from Government it also needs promoting. I have referred to the need for caution about how a review and committee are established and constituted. I would, therefore, modify how my last three recommendations - a trustee review, a standing committee and a trustee ambassador - might be developed. In order to progress these issues, I recommend that there should be a Trustee Task Force that, in reality, can consolidate the first two of those recommendations. Properly and sensibly constituted, this task force can also be an 'ambassador' in developing and promoting lay trusteeship. If matters moved in this direction, I would strongly recommend that a Trustee Task Force be established by Government. It would certainly seem to be in tune with the Secretary of State's declared aims and objectives. However, if this amendment to the proposition proves to be unacceptable, then I would strongly argue that action must be taken to move the original three recommendations forward. Doing nothing is definitely not an option. Ways have to be found to create a more level playing field between the vast majority of the trustee community and the pensions industry, TPR and Government. There is a tendency, in any activity, to compare past and present when considering the future, and this is certainly true in pensions when a proposed Pensions Act 2004 is being compared with its 1995 predecessor. Will the new Pensions Act's proposals improve the system of regulation and governance of modem day pension schemes? Only time will tell. What about the future? There are many issues that impact on the future of workplace pension provision, which is the reason why occupational pension schemes are established and why trustees have responsibilities and an important role to play. I would like to mention two of them. Firstly, we are where we are and we have what we have. Of course, it may well be that in the future alternative governance models may be proposed and, indeed, an alternative system of scheme governance may be adopted. But in considering the possibilities for tomorrow (and if the trust model is changed, I think it will be later rather than sooner), we have to deal with today, and we currently have the trustee model and legislation to back it. So we need to get on with it. Secondly, there are other issues that will have a major impact on the pensions scene. Last month, the Pensions Commission presented its first report, with a second report promised in the autumn of 2005. The report gave the press plenty to write about with headlines about a pensions black hole of gigantic proportions. There will undoubtedly be major implications for future pension provision, both state and private. Companies and individuals alike will be affected by any changes, even if those changes are still seen as somewhat distant. So we need to get on with what we have got, to ensure that the key features of the trust based system of occupational scheme governance, including the role of trustees, are clearly identified, with all concerned Co-operating to achieve a workable and sustainable trustee system of pension scheme governance.
Brian Holden MBE brianholden@trmltd.fsbusiness.co.uk
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