Pension trusteeship is subject to a range of increasing challenges, not least around managing the regulatory burden. For a corporate treasurer entrusted with a UK defined benefit pension scheme – especially one from a multinational sitting overseas – the time may have come for a big change.
As any treasurer, or corporate finance professional, who acts as trustee for their company’s defined benefit (DB) pension scheme will know, there are a number of issues with the traditional model. These include conflicts of interest and opinion, the increasing complexity of the role, the threat of personal liability, and even just finding the time to fulfil the role properly.
The bad news is that these issues are becoming more difficult to tackle, not least as regulation and personal liability increase. However, as a Director of HS Sole Trustees, the industry’s first dedicated sole trustee firm, Kevin O’Boyle believes he has some good news. He believes all of the old-model issues can be resolved relatively easily and quickly.
As a role that carries with it a broad sweep of challenges, finding the right people to take on pension trusteeship, either member- or employer-nominated, is becoming increasingly difficult, says O’Boyle.
With a traditional trustee board, at least one third of the trusteeship must be appointed by the scheme’s membership. With few DB schemes now open to new members, the pool of candidates is naturally diminishing.
Within the company itself, making up the balance of the trustee board is also not easy, leading to some executives being co-opted without fully realising how “onerous” the role can be, notes O’Boyle.
Furthermore, where the management of pension schemes had previously been an HR responsibility, Ray Martin, Founder and Director of HS Sole Trustees, notes that as most DB schemes have closed, they cease to be an employee benefit and thus the responsibility has switched to the finance and treasury function to manage this significant liability.
The result is often conflict of interest, typically arising from the need to secure the best payout for scheme members but at the lowest cost to the company. In funding a scheme, such a conflict would bar most treasurers’ full participation.
Regulation and legislation affecting the pensions industry has been piling on in recent decades and shows no signs of slowing, notes O’Boyle. The pressure this applies means trusteeship can no longer be sustained through casual and occasional meetings. With an attentive regulator that demands good governance and risk management, new rules and regulations must be adhered to.
“Most trustees are effectively lay practitioners, and whether member- or company-appointed, they still must absorb this massive and growing amount of regulation to make sure they are meeting expectations,” he says.
As an example, there is a current prevalence of pensions scams where scheme members are tricked into transferring their often highly valuable DB contributions into another often far less fruitful scheme. It is now a responsibility of the trustees of the transferring scheme to ensure the receiving provider can deliver the required benefits upon the transferring member’s retirement. Without full awareness of the rules – and the subsequent due diligence – the scope for making mistakes under such circumstances is clear.
The problem is exacerbated by planned UK Government rules that make individual trustees liable for infringement, notes Martin. The possibility of a criminal record for trustees taking action that jeopardises member benefits makes many undertakings considerably more serious (the law being implemented in the wake of the BHS retail store pension fund scandal).
While some boards are very well resourced, the challenges for the rest in asking the right questions of their advisers in this respect must be tackled fully. The threat of unlimited personal liability under trust law for breach of trust is a serious matter.
As a treasurer/trustee, the main conflict of interest is the responsibility to shareholders, as treasurer, to minimise the expenditure and maximise profit; and the opposing angle, as a trustee, to secure the greatest benefits for scheme members by extracting the greatest financial input from the company.
“It’s a basic conflict,” states O’Boyle. “Most treasurers who are trustees, when involved in negotiations around the funding of the scheme, have to declare the conflict and stand back. This is, though, one of the most important discussions the trustees will have.” It’s a difficulty, then, that under these circumstances, treasury expertise often cannot be called upon by the other trustees.
Of course, whenever a conflict such as this arises and an individual must step out of the discussion, it is not possible to have all trustees engaged at the same time. This could somewhat diminish the power of having diverse voices, especially where specialised input could be beneficial.
The issues don’t end there for finance professionals. With many DB plans currently in deficit, Martin says trustees have to negotiate how long it will take to pay off any shortfall. It is not unreasonable for trustees, therefore, to make an assessment as to the future financial health of the company.
Some of the information held by treasurers is strictly confidential to the company and not to be shared with trustees. But in the treasurer’s role as a trustee, this information would have to be taken into account for a full understanding of the company’s projected wellbeing. Such conflicts, he comments, “make it a difficult task to perform”.
From internal tensions of this nature, down to practical matters such as availability for meetings, decision-making can suffer, notes Martin. “Most trustees are notoriously slow in decision-making simply because they can meet only a few times a year,” he says. “If the company needs to take a quick decision and needs to explain a matter to or make a request of trustees, it can often take far longer than expected.”
Indeed, he explains, for complex matters there may need to be a meeting to educate and train trustees, a follow-on meeting to discuss the requirements, and then a further session to implement them. “By the time something of mutual benefit has been agreed, 12 months may have passed.”
A company that acts alone as a professional trustee can overcome many of these issues. It is known as a Professional Corporate Sole Trustee (PCST), for which a code of practice has been recently released by the Association of Professional Pension Trustees. However, O’Boyle notes that trustees, perhaps justifiably given their huge responsibility to scheme members, often retain a level of scepticism about the motives of the sponsor and PCSTs. This, he says, can sometimes lead all parties into detailed and time-consuming discussions so as to ensure full understanding and acceptance of any action before trustees can agree to hand off to the PCST.
There is another way. As a dedicated sole trustee, O’Boyle says HS Sole Trustees’ reputation is built on independence and being able to quickly review the options from all corporate, trustee and sponsor angles. Where necessary, he says, “we may be as resistive or more so to wrong turns in terms of protecting member rights as any traditional trustee board”.
The cumulative industry experience of more than 100 years of HS Sole Trustees’ three partners (all UK-accredited professional trustees with a corporate background) helps in the formulation of an approach that, he says, can meet the needs of all parties. This includes offering transitionary services to companies looking to move to sole trusteeship.
For treasurers, this can mean eliminating ongoing trustee challenges. Indeed, where a foreign national sits as trustee of a UK-based DB pension scheme – perhaps because they are group treasurer of an international corporate headquartered outside the UK – it is likely that they will not be well-versed in UK trust law. “For such individuals, it can be difficult to understand how trustees have such power and responsibility over vast sums of what looks like company money,” says Martin.
With trustee boards increasingly concerned as pensions legislation and regulation mounts, professional support to help understand the changes, and ultimately transfer the responsibility and liability for securing pension benefits to a fully indemnified “safe pair of hands”, is, he believes, a step in the right direction.