Does proposed professional trustee rule spell the end for lay trustees?

Huge variations in trustee standards and concerns over scheme governance has prompted the watchdog to step up its scrutiny of how pension plans are run.

During 2017 and 2018, TPR launched its wide-reaching 21st Century Trusteeship campaign to make clear what its expectations are on those responsible for running a scheme effectively. 

Is this the beginning of the end of lay trustees? Maybe, but the good lay trustees will be around quite a long time still

Vassos Vassou, Dalriada Trustees

But in spite of this, the regulator has warned there remains a subset of disengaged trustees that are either unwilling or unable to take steps to ameliorate pensions governance. This is particularly prevalent among small and micro pension plans. 

In its recently published consultation on the Future of Trusteeship and Governance, the watchdog revealed that it is considering whether an accredited professional trustee should sit on every board. 

It said that having a professional trustee on every board may help to improve standards of governance and administration.

David Fairs, executive director of regulatory policy, analysis and advice at TPR, says: “It’s a way of getting those trustees that are currently disengaged to be engaged by putting among them somebody who understands the requirements that we have and the guidance that we put out.” 

The beginning of the end?

But with an increasing regulatory focus on professionalisation, in addition to heavy workloads and increased scrutiny of trustee knowledge and understanding, this could spell uncertainty for the future of lay trustees. 

Earlier this year, audit, tax and consulting firm RSM found that 70 per cent of pensions professionals believe lay trustees will no longer have a place on scheme boards in 10 years’ time.

The findings from its survey of around 200 trustees and industry experts across the UK appeared to relate to the rising professionalisation and pressures of the job.

Professionals do already have a large presence in the industry. The regulator’s 2017 professional trustee survey found that 50 per cent of defined benefit, 78 per cent of defined contribution, and 64 per cent of small self-administered schemes had a professional trustee.

David Weeks, co-chair of the Association of Member Nominated Trustees, says a well-run trustee board should be three sides of a triangle in balance – with the sponsoring employer on one side, professionals and specialist consultants on the other side, and the members on the third.

“It would be a mistake in our view… to go heavy on the professional trustee side at the expense of the others,” he argues. 

“Yes, by all means let there be a professional trustee, but don’t use that as a device to exclude the member-nominated [trustees].”

Members have a right to a well-run scheme

Mr Fairs says: “I greatly value the contribution that lay trustees bring.”

The watchdog’s 2019 DC schemes survey found that just under a quarter of small plans and less than a fifth of micro schemes reported meeting trustee knowledge and understanding requirements.

Its recent consultation asks whether there should be legislative change for lay trustees to demonstrate how they have acquired a minimum level of knowledge and understanding; for example, through training or qualifications.

“It’s probably important to recognise that for the members of those pension schemes, they are putting their savings in for later life, they’re absolutely going to depend on that money to pay all their bills and to live on throughout their retirement,” Mr Fairs says. 

They have a right to expect that their scheme and money is managed well, he argues, noting that this is a huge responsibility for trustees. 

It is therefore “worth asking the question of whether there should be a minimum standard for lay trustees”, Mr Fairs says – though he acknowledges that some schemes struggle to get members to put themselves forward as trustees.

“It’s a case of trying to get the right balance, recognising the onerous responsibility that they have, but also trying to encourage people to come forward because the right people with the right understanding can add a lot of value to trustee boards,” he adds.

Under pressure

Richard Butcher, managing director at professional trustee company PTL, says that requiring every board to have a professional trustee might take the pressure off their non-professional counterparts. 

“If they were to proceed with this, it may actually liberate lay trustees… it may make their life a little bit easier in the sense that lay trustees are obviously doing something that isn’t their day job – they are out of their comfort zone,” he says.

Mr Butcher argues that lay trustees may feel less pressure to understand technicalities and instead can focus on reaching strategic objectives and delivering the best possible outcome for members. 

“I would hope that we don’t lose lay trustees, because lay trustees bring a lot to the table that a professional trustee can never bring,” he adds. 

This includes a close relationship with the membership, and an intimate understanding of the employer covenant. 

Vassos Vassou, a professional trustee at Dalriada Trustees, agrees. Lay trustees’ knowledge of the company and direct relationships with members, for example, mean they “will always be very valuable”, Mr Vassou says.

However, he is concerned about the lack of good lay trustees – exacerbated by the fact that most DB schemes are now legacy arrangements with shrinking memberships.

“That’s part of the issue the regulator has had with making sure that all of these schemes are being run properly, because the people that are stepping into the role perhaps aren’t as good as the previous generation,” he notes.

Mr Vassou agrees that professionalisation “seems to be the direction of travel, even if it doesn't all happen in one step”.

“Is this the beginning of the end of lay trustees? Maybe, but the good lay trustees will be around quite a long time still, but bad lay trustees I think will be weeded out quite quickly,” he adds.

Supply and demand

If the proposal for a professional trustee goes ahead, this could be problematic in terms of increased scheme demand and not enough professional trustees.

Mr Vassou says: “If a lot more schemes suddenly wanted to use them, then… the size of the [professional] trusteeship market would have to grow to reflect that. And I think that would take time to get professional trustees properly trained up to do the work.”

However, the pensions industry is broad and there is a pool of available talent – it just needs to be redirected towards the trusteeship space, he adds.

Mr Fairs says: “Let’s see what comes back from the consultation, but for example you could phase it in schemes by size.”

TPR has highlighted in its consultation that it will seek to actively encourage consolidation in pension plans where trustees are persistently unable or unwilling to meet the standards it expects.

Mr Fairs notes that there is already consolidation taking place, with the number of schemes coming down and master trusts taking up a big chunk of the DC market, for example.

Fewer schemes, paired with work to encourage a diverse range of people to become professional trustees, could help to meet new levels of demand.

“We think diversity is a really important characteristic to have within a trustee board, but what we’re also looking for ideas on is how can we get young people – how can we get different people from different backgrounds – to be engaged in trusteeship, and ultimately to want to be a professional trustee and increase the supply side of the equation,” Mr Fairs explains.