The trm Report - November 2006

Trustee Risk Management
A Review of Pension Scheme Trusteeship

As reported in the previous opdu Report Brian Holden MBE was commissioned by Professional Pensions to undertake a review of trustees and trusteeship.

His report “Putting Structure into the System – A Review of Pension Scheme Trusteeship” was published on 9 November and the topic of a special session at The Professional Pensions Show on 16 November.

The following is a summary of the Review.

Terms of reference

“To review the current system and structure of trusteeship, with particular reference to the relevance and role of lay trustees; to examine the range of support available to trustees; and to consider the prospect of a workable and sustainable trustee system in the future.”

Main findings

• Lay trustees are performing their duties in a negative environment.
• There is insufficient structure to the existing trustee system.
• There is a serious mismatch of understanding and expectation about pension scheme governance and delivery.
• The present system requires individual trustees to demonstrate their knowledge and understanding. The emphasis should be on the competence of the entire trustee board.
• A formal governance process is essential for any scheme, whatever the design.

Executive summary

• Trustees need – and pension schemes – a regulatory and operational climate that is sensibly attuned to their needs and not an endless list of ever increasing demands driven by fears that they are always about to do something wrong.
• The basic obligation of the trustees to exercise a reasonable standard of care on behalf of the beneficiaries continues, but the application of the principles of trusteeship which flow from this obligation is no longer straight forward.
• The 2004 Act has already been referred to as “the law of unintended consequences”.
• Lay trustees are often referred to as “well-meaning amateurs”. Therein lies the problem in developing a workable and sustainable trustee system for the majority of occupational pension schemes.
• There is a serious mismatch of understanding and expectation about pension scheme governance responsibility and delivery.
• For many trustees – and others involved in the process – the overriding feeling is one of confusion.
• Codes of Practice are specifically related to events that may or will occur in the day-to-day running of the scheme. What is missing is a corresponding code that will help trustees to realise and understand all the issues involved in actually being a trustee.
• The structure of trustee boards continues to come under scrutiny as a result of the new legislation and the prospect, via future regulations, of an increase in the minimum number of MNTs.
• It is of paramount importance that the overall effectiveness of the trustee board is of greater significance than the composition of the trustee board itself.
• Remuneration for being a trustee does not reduce responsibility or relinquish liability.
• Trustee education holds the key for the future of occupational pension schemes.
• There should be a formal link between trustees and the Pensions Regulator by the establishment of a Register of Scheme Trustee Appointments (ROSTA).
• Establishing the ROSTA will involve the Pensions Regulator in some additional work, but it will provide trustees with the degree of recognition that is associated with their professional counterparts in many other activities.
• It is unclear where the responsibility lies for ensuring that a high standard of support and training is provided. Unless a more authoritative structure is recognised, it will be difficult to make lasting progress.
• The present system requires individual trustees to demonstrate their knowledge and understanding. The emphasis should be on the competence of the entire trustee board.
• It is inappropriate for the Pensions Regulator to be involved in the commercially competitive world of trustee training. Respondents to the review agreed that the Pensions Regulator must set minimum standards and supervise a procedure that ensures all trustees have reached competency in these minimum requirements.
• Acquiring the necessary knowledge to fulfil the minimum regulatory requirements for trustees cannot be a lottery determined by choice of provider, cost, location etc.
• The interactive online programme (the “trustee toolkit”) developed by the Pensions Regulator should become mandatory for all trustees.
• The e-learning programme should be sufficient for trustees to meet the basic legal requirements. This is a very important consideration bearing in mind the many other work commitments undertaken by the vast majority of trustees.
• Trustees who want to gain a formal qualification – which is optional – can sit the Pension Management Institute’s Award in Trusteeship, which replaces the previous Trustee Certificate.
• There is a continuing trend to close final salary schemes to new and/or existing employees.
• An “industry standard” governance model has not materialised, but even if this happens, governance will still take many forms. The Government and the Pensions Regulator have yet to declare their intentions about any statutory/regulatory requirements that will apply to the formal governance of contract-based schemes.
• There is a governance vacuum in contract-based DC workplace schemes.
• A formal governance process is essential for any scheme, whatever the design.
• The Pensions Acts of 1995 and 2004 have helped to clarify some of the requirements for occupational pension schemes, but also highlighted some of the issues which have yet to be considered in greater detail and which will have a profound effect on the future development of and operation of these schemes.
• For the future regulation of pension schemes – whatever their size or dimension – simplicity is the key.
• Lay trustees are performing their duties in a negative environment.
• There is insufficient structure to the existing trustee system. There should be an identifiable and practical approach to underline the system in a transparent and user friendly manner.
• There is an increased risk of good quality schemes closing if subjected to increased levels of regulation.
• The Pensions Regulator must improve the governance of occupational pension schemes in a way that avoids unintended consequences, such as the loss of trustees with actual experience of their scheme and the employer and potential new trustees.
• Lay trustees add a valuable dimension to the trustee board. No one understands their company and the industry within which it operates better than those who work there. Lay trustees are needed whether they act alone or together with an independent professional trustee.

Recommendations

• The Pensions Regulator should give urgent consideration to updating the 2002 Trustee Code of Practice
  (actually produced by trustees themselves). This would produce an authoritative trustee code that would be readily available to prospective, new and existing trustees.
• To accompany a range of high level principles in a trustee code of practice, guidance should be provided in a series of “trustee guidance notes” which would develop the code’s principles in a more detailed and practical way.
• If sponsoring employers and schemes continue to experience difficulties in attracting sufficient members to be trustees, then provision should be made for the constitution of the trustee board to include one or more pensioner trustees.
• The Government should review the practical issues involved in the nomination and election of MNTs to establish the likely consequences if it proceeds with the intention to increase the minimum number of MNTs from one-third to one-half.
• If the Government confirms its intention to proceed and increase the minimum number of MNTs from one-third to one-half, then it should also require that the minimum number of MNTs include at least one pensioner trustee.
• In order to assess and continually improve standards, every scheme should have a sufficient budget for education and training, with time and resources always available to trustees.
• If, in addition to a realistic education and training budget, there are funds available for trustee purposes, this should be considered for independent trusteeship where the employer and the trustees can consider the appointment of an independent professional trustee to provide a high level of expertise on the trustee board.
• The Pensions Regulator should make insurance mandatory to a certain level. This would create a rise in demand, but a reduction in premiums should also be a reasonable expectation.
• There should be a formal link between trustees and the Pensions Regulator by the establishment of a Register of Scheme Trustee Appointments (ROSTA).
• The interactive online programme (the “trustee toolkit”) developed by the Pensions Regulator should
  become mandatory for all trustees.
• The trustee board should undertake a regular education or training assessment of their overall effectiveness, having regard to the experience, qualifications etc of the entire board, and implement an ongoing schedule to fill the gaps in the board’s overall level of effectiveness.
• The Pensions Regulator should require DC schemes to identify a body responsible for the ongoing governance of the scheme.
• The Pensions Regulator should produce additional material – to accompany a trustee code of practice – to apply to other “quasi” trustee bodies responsible for contract based schemes, together with the requirement that those responsible for the governance of these schemes should be subject to some form of regulatory supervision.
• The Government’s decision to pilot a Pension Law Rewrite Project and a re-examination of the existing regulatory landscape should include the role of trustees and involve trustees in the process.
• The Pensions Regulator must play a major role in the regulation and supervision of trustees, including the provision of authoritative primary education and guidance on an ongoing basis.

Commenting on the report, Brian Holden said:

“The final paragraph summarises an important conclusion to the Review:-

“Lay trustees add a valuable dimension to the trustee board. No-one understands their company and the industry within which it operates better than those who work there. Lay trustees are needed whether they act alone or together with an independent trustee.”