Watching you, watching me

Blog 29 Sep 2009 By

A non-executive directorship used to be the icing on the cake to many a long and distinguished political, financial or commercial career. Leaving the white heat of competition behind them, these positions afforded leading figures the chance to put their experience and knowledge to use, earn a handsome fee for doing so and seemingly carried few personal liabilities or responsibilities – certainly none that were taken too seriously. In the wake of numerous corporate mismanagement scandals that has all changed and the role of a non-executive director is not the hands-off, care free money maker it was once taken for. But what has all this got to do with pensions? Well,

the simple answer is that occupational pension scheme trustees are going through the same sort of transformation. There used to be a joke that said it was ok for a trustee to be incompetent so long as he or she was honest. I always took this as emphasising the honesty and integrity that were required for the role rather than the much riskier interpretation that I was insulting valuable clients. However the Pensions Regulator has made it pretty clear that the competency of trustees is no laughing matter.. In recent years trustees have been forced to up their game when it comes to the knowledge and understanding they bring to the table and the responsibilities they bear are more clearly outlined along with the personal liabilities they have to accept. The Pensions Act of 2004 crystalised the burden that trustees have to shoulder, although many have argued that the legislation was only a formal proclamation of what they were basically responsible for previously. Either way, the truth of the matter is that there is now a much sharper focus on trustees and there is little place for them to hide any gaps in their knowledge or understanding in today’s heavily regulated and supervised environment. Given that it is the welfare of scheme members that is at stake it is absolutely correct that those running pension schemes should be both competent and accountable. They also need to take their duties seriously and to perform them transparently and independently. Senior staff within organisations have traditionally doubled as pension trustees by periodically donning their trustee hats and holding a trustee meeting. Trustees are bound to act in the best interests of the members of a pension scheme, and directors must act in the best interests of shareholders. Clearly there are occasions when the interests of members and shareholders will not be aligned and any individual performing both roles has an invidious task to balance the requirements of both. Changes to company law due to come in to force from 1 October 2008 implementing new provisions of the Companies Act 2006 will also now require non-conflicted directors to formally authorise those who find themselves in a conflicted situation. Acting as both a director and a pension scheme trustee is without doubt one of these situations. A consequence of this and the requirement of trustees to significantly up their own knowledge in recent years and the associated time commitment and financial burden are causing companies to look for alternative solutions to the trusteeship question. The increased involvement required and the higher associated costs has resulted in an increasing number of pension schemes employing the services of an independent, professional trustee who can alleviate the burden of the role from others who may have insufficient time to devote to the position or be uncomfortable with the level of responsibility they would be required to take on. So that’s the answer then: appoint a professional trustee? Well yes and no!! It’s important firstly that schemes do not lose the experience and scheme specific knowledge of existing trustees which may have been built up over many years. It’s also vitally important that the scheme goes though a well thought out due diligence process to ensure they are getting a trustee who meets the specific needs of the scheme. Many professional trustees tend to be actuaries, lawyers, accountants or highly experienced pension professionals and as such all have specialist pension knowledge and experience which has equipped them for the role of a professional trustee. However this is not always the case and companies and trustee boards need to really scrutinise not only the company the trustee represents but also the specific experience of the trustee representative, or representatives, who will be working them. So look closely. Take references. If you need someone with acquisition experience, investment experience or data management experience make sure the potential appointee has that specific experience or at least has easy access to it. These issues are all much more important than small variations in price. The pension industry is already heavily regulated and there is an understandable reticence to consider more, however, there is a justifiable degree of concern that there is a very low entry barrier for someone wanting to set himself up as an independent pension trustee. Our view is that this is an area which needs to be more closely monitored, especially given recent high profile developments with one professional trustee. Creating a clear benchmark and a consistent standard for everybody operating in this area would be extremely beneficial. Certainly this would act as an immediate guideline for schemes looking to appoint an independent trustee and they would only consider those who had met the stipulated requirements and continue to do so. We believe that reasonably simple measures could help give confidence to those considering appointing such an independent trustee to their scheme. There is little doubt over the hugely beneficial role independent trustees can play at a time when the liabilities and responsibilities in question have never been more onerous. It is now up to the industry to make sure schemes can be confident in sourcing and appointing the type of trustees that will help them deal with these challenges. For further information please contact David Davison at Spence & Partners ( on 0141 331 1004. Issued on behalf of Spence & Partners by Blueprint Media This article was featured in Jan ‘09 online edition of The Firm. Date: January 2009 ENDS

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