Are pension scheme trustees being overlooked in policy discussions?

A new report, published this week by consultancy group LCP, focused on the views and expertise of trustees to ascertain their attitudes to risk and regulation. 

The report found that many trustees – whether professional, independent or member-nominated – felt they were not listened to by policymakers. LCP said this was a “worrying omission” given the influence and responsibility held by these “pensions powerbrokers”. 

Interviewees told LCP that senior policymakers did not engage with them sufficiently before formulating policy. 

“It is worrying that many feel that their voice is not being heard in the corridors of power and this omission must be addressed as a matter of urgency if we are to get the best out of the money invested in the UK pension system,” said LCP partner Nathalie Sims. 

“There is no doubt that effective government intervention in this area will not be possible unless the mindset of trustees is better understood by policymakers,” LCP’s report said.  

The government should “ensure that future policy on defined benefit (DB) pension arrangements is far better informed by an understanding of the priorities and views of trustees”. 

Trustees are ‘naturally cautious’

LCP conducted 16 interviews with leading figures from the pension trustee world, including the chairs of the Association of Member Nominated Trustees and the Association of Professional Pension Trustees. 

The report follows the Pensions Regulator’s (TPR) recent announcement that it will increase its scrutiny of professional trustees. 

Attitudes to risk “can vary considerably” across pension trustees, according to the LCP study.  

Reasons to expect trustees to be cautious include concerns over legal challenges should pensions fail to be paid in full, as well as possible criminal sanctions over actions that knowingly undermine member benefits. 

The requirement for prudence, as set out by regulators under the Pension Schemes Act 2004, also emphasises the need for caution. 

“I think trustees can be naturally a cautious bunch,” said Shehzad Ahmed, senior professional trustee at Dalriada Trustees, in the report. 

“Every single trustee, I suspect, has that thought about what they would say if someone came knocking in six years’ time… ‘am I going to jail for seven years’? I do think that plays on the mind of trustees when making decisions.” 

Trustees said TPR and the Department for Work and Pensions needed to “move away from away from a compliance culture” and adapt to the fact that many more DB pension schemes are in surplus. 

“It is important not to overburden every board with increasing regulation,” said Simone Lavelle, chief executive officer at professional trustee provider Pi Partnership.  

“The feedback from all our trustees is that regulation has taken over the ‘governance budget’ and therefore there’s less time to deal with strategic issues.  

“If we are driven by regulatory compliance that does not always allow for getting the best out of your trustees.” 

Surplus release and the trustee view

Understanding attitudes to risk and how and why they differ will be key to the success of policies such as surplus release, LCP’s report said. 

Lavelle said that “you need to have very clear agreements with your corporate [sponsor] about who carries the risk if things don’t go to plan”. 

“It’s quite a mindset change for policymakers to now convince the sponsor and trustees to stay in the game,” she continued. “I think for the majority of trustees that’s not going to happen, especially not for the smaller schemes, since the cost of running a scheme will be disproportionate to the potential gains and risks.” 

Other trustees, however, are more open to embracing risk in the context of surplus release.  

“I’m hugely positive about relaxing the restrictions on use of surplus and making it easier to change scheme rules,” said BESTrustees director Huw Evans. “But I need to be sure I’m not undermining the security of member benefits.”