How pension schemes are turning pro

The pace of regulatory change in the pensions industry is making it harder for pension scheme trustees to keep up, prompting more and more trustee boards to seek professional support


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Pension scheme trustees have never had it tougher. As the regulatory environment intensifies, the volume and complexity of work that trustees are expected to handle is becoming increasingly challenging. From rules around environmental, social and governance reporting to issues stemming from underfunded defined benefit pension schemes, the skills needed are broader than trustees have required in the past. At the same time, heightened scrutiny on trustee board decisions is placing even more burden on lay trustees that might not have the necessary technical knowledge or expertise.

Trustees have an increasing number of options to achieve greater professionalism on their boards

Against that backdrop, trustees have an increasing number of options to achieve greater professionalism on their boards. One is to hire professional trustees – seasoned industry professionals who usually have a specialist area of expertise. Similarly, more schemes are adopting fiduciary management, which involves working with investment specialists to support trustees in achieving their objectives. Cardano’s Helen Prior (above left) and Magda Kennedy (above right) explain why it is essential for trustee boards to adopt a professional approach to their fiduciary duties and how it is leading to increasing appointments of professional trustees and fiduciary managers.

What are the potential risks for trustee boards that don’t embrace greater professionalism?

HP: The first issue is a failure to comply with the rules – legal compliance isn’t the gold standard, it is a basic threshold. There’s no doubt if you aren’t embracing greater professionalism, it’s harder and harder to be confident that you are demonstrating legal compliance. Another potential risk is missing something that could have safeguarded or improved your scheme’s ability to pay pensions as they fall due. It could be related to the sponsor’s health, it could be an investment opportunity or risk, but often those things occur together, so it’s very difficult if you’re not embracing greater professionalism to be confident that you are future proofing your scheme.

MK: As the majority of defined benefit schemes are now closed to accrual and many members are no longer associated with the sponsor due to acquisitions or disposals, it’s much more difficult to find suitable and willing talent to fulfil the role of trustees, and so trustee boards are becoming smaller and less diverse. Although lay trustees provide a very important role, there are fewer and fewer of them, and as the pool of willing participants shrinks, it’s harder to have a diverse and well-functioning board.

Why should schemes consider using fiduciary managers or professional trustees, and what are the main benefits of doing so?

MK: For starters, it can help with the time burden. Managing increased complexity, preparing for new regulatory requirements and keeping up with the latest guidance related to defined benefit pension schemes is time consuming. Also, fiduciary managers and professional trustees are likely to have access to a wider range of expertise beyond your own capacity, which can help provide more rounded advice and support to trustee boards.

HP: One of the benefits that external professionals can bring is the ability to manage some often quite difficult conflicts of interest. For example, if you’re a trustee in a heated funding negotiation with the sponsor but you are also employed by the sponsor, that can put you in a very difficult position. An independent perspective can be a really helpful way for a trustee board to be confident they’ve got the balance right because they’ve got somebody with a slightly different perspective to help manage those types of discussions.

Using a fiduciary manager means trustees can spend more time on the big picture issues

How else can schemes address these challenges?

HP: It isn’t a one-size-fits-all approach. In our experience, professional trustees have been a great asset to the schemes they support, and this sector is growing rapidly. To complement this trend, the past decade has also seen the rise of fiduciary management as a way to help trustees get up the professionalism curve. Using a fiduciary manager – in other words, delegating some of the day-to-day investment decisions to a specialist investment manager – means trustees can spend more time on the big picture issues.
You can draw a parallel here to the way companies are governed where you have a non-executive board that gives independent oversight and then you have a separate executive that focuses on actually running the business day-to-day. Having one group doing both things, which is the traditional trustee model, can be challenging, so engaging a fiduciary management provider is
another way of helping trustees demonstrate professionalism.

To what extent are schemes looking to adopt a sole trustee model?

HP: We are starting to see more use of sole trustees. Previously, it was more common when a scheme was perhaps already winding up and the strategic decisions had been made, but there was a lot of administration that needed to happen and so a professional sole trustee was a useful governance model for that. However, more recently we’ve seen a lot of schemes struggle to get new trustees, particularly if they have been closed to new entrants for a long time, and so a sole trustee model is one way to solve that problem.

What impact has the growth of professional corporate trustee firms and fiduciary managers had on the pensions industry?

MK: Professional trustees and fiduciary managers can provide guidance and a stronger voice - and they are also better equipped to challenge existing processes. Trustees don’t know what they don’t know, so helping trustee boards articulate questions and concerns, and having that experience of the broader pensions industry is very helpful.

The potential implications for pension schemes are clear, with increased regulatory scrutiny comes greater legal burden. Appointing professional trustees and partnering with a fiduciary manager are some of the ways schemes can demonstrate to regulators that the decisions they have taken are fair and reasonable. And with the regulatory burden unlikely to ease, this trend is going to continue.

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