Running a defined benefit (DB) pension scheme is a complex and time-consuming process with new rules and regulations being introduced. From GMP equalisation to GDPR, just keeping compliant is becoming a full-time job in itself.
Then there’s climate change. The Pensions Regulator (TPR) has stated that all pension schemes have a fiduciary duty to address risks posed by climate change and action will be taken if they do not comply.
This is likely to make trusteeship become even more onerous as environmental, social and governance (ESG) investing moves higher up the regulatory agenda. Indeed, TPR has promised “regulatory interventions” to challenge those trustees it believes are not stepping up to the plate.
A study by PwC released earlier this year concluded that, despite growing responsibilities and increased regulation, trustees are among the lowest paid roles in pension scheme management. This makes the role even more unattractive and is helping to drive a potential trustee shortage.
PwC found that schemes typically pay less for professional trustees than for their actuarial and legal advisers and, in some cases, less than their secretarial support. The majority of lay trustees receive no pay at all for the role. This is despite having responsibility for managing the challenges, risks and complexities associated with the £2 trillion of DB pension liabilities in the UK. It also noted that trustee time commitment has also steadily increased over the last decade, from an average of 17 days a year in 2010 to 26 days in 2020.
There are two routes a DB pension can take to deal with extreme trustee shortages. A scheme can move towards sole trusteeship or adopt a consolidation model.
The Pension Act 2004 places a specific trustee training and knowledge (TKU) requirement on all trustees, be they independent, member or employer nominated. With complexity and regulatory requirements increasing, this is costly. But the most important advantage of a sole trusteeship is nimble-footed decision making.
A trustee board meeting can often be the only opportunity to make decisions for a trustee board. A sole trustee can and will be managing the scheme and making decisions outside of the normal meetings cycle, with formal sponsor meetings determining long-term strategic direction. It is essential that a sole trustee is demonstrably independent.
However, such a route may not be desirable for all as the number of decisions – and the consequences of these decisions – are likely to be more significant for large schemes. However, this could also make any perceived “expertise gap” wider if there is just one trustee directing a scheme.
There are arguably many advantages to consolidation for DB schemes. Pooling of smaller schemes into a larger fund can allow more sophisticated risk and investment management techniques, many of which may not be available to individual schemes. But schemes do not need to adopt complex legal consolidation of assets and liabilities – they can enjoy many of the benefits of scale by appointing specialist service providers. Appointing a fiduciary manager helps to share the cost of asset allocation, fund research and portfolio construction as well as reducing fees on underlying investments.
TPR wants better outcomes for savers
Whether consolidation or sole trusteeship are attractive routes is a matter for individual schemes and their trustees. However, if pension schemes are struggling to keep up with industry best practice because of a strengthened regulatory regime designed to protect savers, then moving into a professionally-managed scheme can be a sensible option.
Source: Charles Stanley / Censuswide. Research was carried by Censuswide among 55 professional trustees of UK DB pension funds. The survey was completed between 21/07/2021 – 04/08/2021.
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