Pension trustee role needs to be re-evaluated, argues industry

The pensions industry has been responding to the DWP/HMT on trustee skills, capability and culture, a call for evidence unveiled during Chancellor Jeremy Hunt's Mansion House reforms.

In its response Trustee skills and options for DB schemes, the APPT called for updates to the trustee toolkit and supported the mandatory accreditation of professional trustees, and cautioned against what it claimed were "further onerous requirements being placed on lay trustees that could backfire". 

It added that for DB schemes cautious and careful consideration of reforms to amend surplus rules was needed and agree with planned major overhaul by The Pensions Regulator(TPR) of the trustee toolkit, or its replacement, as being the "recognised source of minimum required trustee knowledge and understanding".

Pension trustee CPD

Harus Rai, chair of the APPT, said: “Amongst accredited professional trustees we believe that trustee requirements are well understood, and professional trustees recognise that they are held to a higher standard of care."

"Knowledge and understanding of lay trustees could be monitored more closely by the Pensions Regulator, for example with an addition to the annual scheme return requiring confirmation by the chair of trustees that all trustees have met their trustee knowledge and understanding (TKU) requirements.”

"For professional trustees who follow the accreditation regimes there are already checks on knowledge, understanding and standards made ahead of accreditation being achieved and annual checks made including submission of the previous year’s continuous professional development record."

Last month the APPT brought forward publication of its review of accreditation of professional trustees to time with the closure of the government consultation. The APPT's report also included a number of refinements the APPT council proposed to introduce to its accreditation process. 

The accreditation regime was launched in 2020 following the definition of standards for professional trustees of occupational pensions in 2019; around 400 professional trustees have now gained APPT accreditation.

Pension schemes and unlisted equities

The APPT also responded to trustee's role in the Mansion House plans to extend the remit of pension funds to include more unlisted equities.

It said investment consultants were already supporting trustees in their investment decision making by putting forward strategies which meet the goals of each scheme, and that for trustees to invest in unlisted equities suitable investable products were needed; ones that meet the needs of all schemes.

Rai, added: “It is likely that there would need to be further amendments made to the DB Funding Regulations allowing TPR to adapt its DB funding guidance to enable trustees to be confident in accepting the additional/different risks involved."

"For DC schemes, subject to the availability of suitable funds and structures, an option to invest in unlisted equities may be in members’ long-term interests but would need to be balanced against the additional risks involved, such as increased cost and illiquidity.  These risks may exclude smaller DC schemes.”

APPT said trustees were the legal owners of scheme assets, investing on behalf of the scheme beneficiaries, which meant their fiduciary duties under trust law and legislation and regulation tend to result in "investing in asset classes which are commonly perceived to involve lower risk and therefore lower return".

DB schemes and surpluses

The APPT also addressed the use of surpluses in its response and Rai said: “Importantly, it must be remembered that a surplus only really materialises on scheme wind up when the scheme benefits have been bought out in full. 

"Whilst in its broadest context we understand and support consideration being given to wider uses of surplus, we would highlight that, as it stands, use of any surplus is determined by individual scheme rules and would need to be with reference to the full range of circumstances, including - but not limited to - the scheme funding position, long-term objective and strength of the sponsor covenant.”

The APPT said levels of surplus would need to be significant and sustainable before trustees would be confident in retaining investment risk but reducing funding levels, by paying out surplus given the risk that funding levels may deteriorate again in future.  

Trustee representation needs to be clarified

Georgia Stewart, CEO of Tumelo, said a re-appraisal of trustees' fiduciary duty was needed if changes were to be introduced.

“We all know that fiduciary duty is the obligation where one party has to act in the best interests of another. But pension funds have a diverse set of members so the same set of decisions cannot be in the best interests of everyone. Trustees do an invaluable job of looking after their members, however clarification is needed on who trustees are representing and over what timeframe."

“Stewardship must be on the agenda if trustees are to meet the long-term needs of younger scheme members over a timeframe of 20 to 40 years.

"They should be taking strong action on engagement and voting, which won’t happen without explicit long-term framing of scheme investment strategies. Today, stewardship decisions are often watered down to guarantee short-term returns.”

Tumelo said it had pointed out to the Department for Work and Pension the lack of "airtime" given to long term issues such as stewardship. 

Stewart added: “Research in Europe has shown a positive correlation between the age of trustees and their level of conservativism in investment strategies. No such research exists for the UK market, but it strikes me that trustees should have an explicit obligation to ensure the composition of their board is structured to take account of younger scheme members with very different investment needs.

"Given the well-known cognitive biases to think first about ‘people like me’, the more experienced members of a trustee boards may not naturally consider the best interests of the youngest members.  

“A collaboration between experience and youth would be very powerful. Regulation should also be more explicit in ensuring trustees look after the long-term interests of members. Linked to this is the need for trustees to define their own approach to stewardship, rather than those of asset managers.”