opdu - The value of appointing an independent trustee

Independent trustees (by which I mean professional independent trustees) are appointed to trustee boards for different reasons. It may be that the board is struggling for volunteers for trustee positions, perhaps deterred by the onerous responsibilities and risks. Company directors may be deeply concerned by the issues of conflict to which they may be exposed, and may see such an appointment as a good way to demonstrate to the membership that the company is not using its position as an employer to influence the trustees’ decisions. Or it could just be that the trustee board understands what an independent trustee can add to the board in terms of knowledge and experience.

Independent trustees come in all shapes and sizes. They may be individuals, or directors of a trustee company. They may be appointed as the sole trustee, or alongside existing trustees. And they could be a statutory appointment (more on this later) or simply appointed where there is a need, perhaps for one of the reasons set out above. Whatever the type of arrangement, there are two key features common to all:

It is these two features which sum up the value of appointing an independent trustee.

Independence
Independence is defined in legislation for statutory independent trustees. For non statutory appoint-ments, IPTG the Independent Pension Trustee Group (see end box) uses the following definition: is “An individual or corporate body with no direct or indirect involvement with the pension scheme, employer, or members, other than performing the duties of the trustees”.

The obvious benefit of appointing an independent trustee is in dealing with conflicts of interest (either actual or potential). If an independent trustee is appointed as sole trustee, this is a complete answer to any conflict issues. It is also a strong solution where an independent trustee is appointed to replace a conflicted director, and would ensure that any loss of expertise following the departure of that director is made good.

Even in situations where the independent trustee sits alongside co-trustees, their appointment is likely to assist. IPTG’s Code of Guidance (see box) states that independent trustees should ensure that all the trustees are aware of any conflicts of interest, and that procedures exist to manage such conflicts. The Pensions Regulator (“the Regulator”) suggests in its consultation document on conflicts of interest that “There is much to be said (if the resources of the scheme permit it) for the practice of employing independent trustees. Independent trustees will (almost by definition) ordinarily have no conflicts of interest, and yet will still bring knowledge and expertise to bear on the issues to be decided by the trustees”. Thus, the independent trustee’s role in guiding the other trustees where an actual or potential conflict arises is likely to be invaluable.

Expertise
All trustees, whether independent or otherwise, need to comply with the Regulator’s Code of Practice on “Trustee Knowledge and Under-standing”. However, for independent trustees, the requirements are more stringent. The Code states that “experience will clearly be required and it is likely that a formal qualification will be expected”. Independent trustees “will be expected to be fully conversant with scheme documents from the date when the appointment becomes effective”.

The Code of Guidance produced by IPTG (see box) also states that independent trustees should ensure that they have “sufficient knowledge, experience and expertise to act as a trustee of the scheme in question and have the time available”.

Although appointing an independent trustee does not remove the responsibility of co-trustees (if any) to have the appropriate knowledge and understanding, their expertise can be invaluable in assisting the other trustees to gain that knowledge and to make the right decisions. Even with an independent trustee on board, unless appointed as a sole trustee, the requirement to have at least one third member nominated trustees or directors on the board remains. It is likely therefore that at least some of the other trustees would benefit greatly from the appointment, especially perhaps in relation to investment and risk management issues (although this does not, of course, remove the need to obtain specialist advice where appropriate).

Prospective independent trustees should be questioned closely on their expertise. If they are on the Regulator’s register (see below) they will already have had to prove their expertise to the Regulator.

The Regulator - statutory appointments
The Regulator has statutory powers to appoint an independent trustee in certain circumstances. Section 7 Pensions Act 1995 allows the Regulator to appoint a trustee where it is satisfied that it is necessary to do so in order to secure:

The Regulator will shortly (when the Pensions Act 2008 comes into force) have the power to appoint a trustee where satisfied it is reasonable to do so. The circumstances will also be extended to include “where it would protect the interests of the generality of the members of the scheme”. The Regulator has not been slow in the past to use its powers where it sees fit (it did so without warning in respect of the Telent pension scheme in 2007). However, we may see increased appointments in future given these wider powers.

The Regulator also has the power (pursuant to s23 Pensions Act 1995) to appoint an independent trustee where the employer is insolvent. In addition to assisting the trustees with winding up the scheme, the independent trustee can also consider whether the scheme has been administered properly, and if not, can take action. In a recent Ombudsman’s decision involving the Greenup and Thompson Pension Scheme, the statutorily appointed independent trustee managed to successfully pursue the former trustees for breach of trust, thus recovering the loss to the scheme (which the former trustees were required to meet personally).

The Regulator must maintain a register of independent trustees, from which s23 appointments must be made (s7 appointments are also usually made from this register). There are stringent conditions for registration as an independent trustee and applicants need to prove that they have “sufficient relevant experience” and that they are a “fit and proper person to act as a trustee”. The register currently lists more than 50 independent trustees (including individuals) who have met the Regulator’s requirements.

It is clear from both the registration requirements and IPTG’s Code of Guidance (see box) that independent trustees are expected to have a depth of knowledge and experience which would rival some professional advisers. Where they do not come up to the mark, they can be removed from the register, and in extreme cases (such as the recent case involving G N Noble) removed from the scheme completely.

Possible other benefits
The attributes of impartiality, knowledge and experience which apply (or at least ought to apply) to all independent trustees are of benefit to both co-trustees and scheme members. But there are other circumstances which may make the appointment of an independent trustee a valuable one, particularly for members. The scheme document-ation may contain increased liability provisions in respect of independent trustees. For example, they may be liable where they have acted negligently, as opposed to where there is ‘wilful default’, the usual exoneration in place for lay trustees. It is also generally recognised that independent trustees owe a higher duty of care than lay trustees (this is specifically set out in legislation in the area of investment). If trustees make a decision which ultimately turns out to be wrong, there is a greater possibility of aggrieved members being able to successfully claim against an independent trustee. It is also helpful in this context that independent trustees are required by law to have adequate indemnity insurance in place.

Scheme documentation may also provide independent trustees with different powers to lay trustees in order to safeguard the members’ interests. One example is where an independent trustee has the power to veto any proposal that it considers would prejudicially affect the accrued rights of beneficiaries.

Costs
Independent trustees are not really going to be of value to anyone if their fees are exorbitant. The issue of costs has traditionally been the main reason why schemes (particularly smaller schemes) have not entertained the possibility of appointing an independent trustee.
A statutory appointed trustee is required to disclose the scale of fees that will be chargeable by the trustee and payable by the scheme, and details of the amounts charged in the past 12 months, to members on request. It is also a condition of registration that the applicant agrees to have “his fees and costs scrutinised by an independent adjudicator”.

Whilst these requirements do not apply to non statutory appointments, the Code of Guidance issued by IPTG (see box) makes clear that independent trustees should ensure there is a letter of appointment setting out the basis upon which fees and expenses will be charged, and who is responsible for meeting them. The issue of costs is, of course, crucial in any appointment of an independent trustee. Prospective candidates should, amongst other things, be asked whether they would consider fixed or capped fees for some or all of the work, and whether they would charge for time spent travelling to and from meetings.

Where the independent trustee is a trustee company, it may be possible for the independent trustee to provide different people for different tasks so that the right people perform the right tasks at the right cost. Bridge Trustees Limited (wholly owned by Eversheds LLP) can offer such a service and has considerable project management expertise. As one of the trustees appointed by the Regulator to the Telent scheme, Bridge has a proven track record in dealing with the most challenging issues.

Independent Pension Trustee Group (IPTG) was established in 2003 to raise professional standards amongst indepen-dent trustees. It produced a Code of Guidance, revised as at January 2007, setting out best practice standards of behaviour for independent trustees. The Code contains high level principles relating to the appointment procedure, dealing with co-trustees and third parties, investment, risk management, compliance and insolvency. Some examples of the specific principles are that independent trustees should:

exhibit an appropriate knowledge and understanding of available asset classes
ensure the trustee body has procedures in place for the selection, appointment and monitoring of professional advisers and other service providers; and
ensure that a proper mechanism is put in place for the exercise of trustees’discretions and for recording decisions.

IPTG has almost 150 members, all of whom have agreed to abide by the Code of Guidance.