Analysis: With consolidation now the name of the game in the small world of pensions, trustee conflicts of interest could harm millions of pension scheme members’ prospects, as schemes eye superfunds and master trusts with vast sums at stake in fees.
A charmed circle of a few hundred professional trustees sit on schemes controlling more than £1tn of assets. Yet their companies can be on both sides of the negotiating table in some new arrangements, and some governance experts have criticised the codes of practice holding sway as toothless.
A key question facing the evolving professional trustee market is “quis custodiet ipsos custodes?”, queries Neil McPherson, managing director at Capital Cranfield.
He notes: “This goes to the heart of the key conflict of interest faced by the professional trustee sector. It is directly analogous to the investment consulting/fiduciary management conflict of interest the Competition and Markets Authority review tried to address and the evident mission creep in the professional trustee market.”
One of my fears is that we now have an institutionalised approach to conflict of interests
Alan Pickering, Bestrustees
Wayne Phelan, chief executive of Punter Southall Governance Services, agrees: “The code of conduct and training for professional trustees is, for us, too narrowly focused.
“There’s nothing to address systemic risks like reciprocation or, quite frankly, independent trustees making threats to change advisers unless they get more from them. This is a massive conflict and all professional trustee firms should sign a pledge not to do this,” he adds.
Companies have own policies
All the corporate companies of trustees Pensions Expert contacted — namely Law Debenture, Punter Southall Governance Services, Bestrustees, Dalriada Trustees and Capital Cranfield — say they have strong conflict policies in place.
Michael Chatterton, managing director of Law Debenture, which acts for 200 defined benefit schemes, stresses: “As a matter of course, in every meeting that we attend we would try to take a lead in making sure we do declare conflicts of interest at the start of every meeting, and also encouraging others to think about that themselves.”
Like Mr Chatterton, Alan Pickering, president of Bestrustees, recommends asking at the start of meetings: “Are there issues on today’s agenda where I should declare a conflict with my fellow trustees, and to decide what steps to ensure that conflict doesn’t contaminate the credibility of the board.”
He adds: “One of my fears is that we now have an institutionalised approach to conflict of interests in that every trustee board agenda has as one of the opening items conflicts of interests when people are expected to declare any new conflicts that haven’t been recorded on the conflicts register. While that is in many ways a good thing, there is a danger that it just becomes like wallpaper in that it is there and you ignore it.”
Mr Pickering adds: “Conflicts are there to be identified to be managed and to be avoided where avoidance is appropriate, recognising if you avoid every potential conflict of interest you could end up with sub-optimal trustee board composition.”
Superfunds in spotlight
Law Debenture acts as one of three professional trustees for Clara-Pensions, one of the new DB commercial consolidators undergoing authorisation from the Pensions Regulator.
For every appointment, Law Debenture has a lead and a peer. Mr Chatterton, gives a scenario of how this might work in practice: “If one of my clients or a peer colleague was considering Clara, we would make sure we had a separate team who took over the work of the team that was considering Clara.”
He says that digital Chinese walls would ensure that he was unable to access any records pertaining to the peer colleague’s scheme.
“Even if I was looking, I would not be able to see what the trustees were considering. I would continue my work as trustee of Clara, thinking about whether to accept this scheme,” he says.
“Law Debenture would continue to act as professional trustee in conjunction with the other trustees but with different representation, so we could ensure that the conflict was kept separate.”
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Bestrustees, which acts for 150 DB schemes, is also a trustee of Clara. Mr Pickering tells Pensions Expert: “I don’t think you can be on both sides of what should be a negotiated process. It may well be if you are a trustee of a ceding scheme that you absent yourself from the process.
“Many of us are going through this in the context of master trustees where a sponsor of a single employer defined contribution scheme might be thinking about moving to a master trust.”
Conflict can work both ways. Stephen Scholefield, partner at Pinsent Masons, points out: “A scheme’s trustees and advisers may already have relationships with consolidators or their advisers and it is important that these are disclosed and understood at the outset. Equally, their own interests could favour continuing with the current scheme, rather than consolidating.”
Where trustees, including professional trustees, act for both transferring and receiving schemes on a scheme merger or a transfer to a superfund, Jeremy Harris, pensions lawyer at Fieldfisher, advises: “Some of the risk from conflicts of interest can be addressed by having separate legal, actuarial and covenant advisers for the transferring and receiving schemes.”
