BA trustees disembark as destination comes into view

APS, the older of the airline’s two DB pension schemes, is to cut the number of trustee directors on its board by one third, a move expected to take effect from July this year.

The move comes as regulatory burdens and the wider trustee community adapts to a more streamlined, professional model. In its 2018 biennial survey of trustees, consultancy PwC found that 89 per cent of boards pay at least one member, and that the proportion of large trustee boards (with 12 or more members) has slumped from nearly 40 per cent to less than 10 per cent.

A letter to APS members from the scheme secretary late last month reveals that the decision to shrink the board from 12 members to eight was justified with reference to its £4.4bn buy-in with Legal & General in September 2018, which is expected to reduce its workload.

The letter states: “With the funding level in APS showing a surplus, BA is not currently required to make contributions to APS, so we need to operate more cost-efficiently with the assets we hold.”

Speaking to Pensions Expert, Fraser Smart, chief executive of British Airways Pensions, says the decision was taken in light of APS’s sound financial position, and in order to increase the efficiency of the board’s operations while reducing its cost to members.

“The funding position of the APS has been very stable, even during this difficult period,” he says.

“We are extremely well hedged, and it should provide great comfort and reassurance to our members that our situation is as stable as it is.”

He adds: “The trustees decided this is the right thing for our members, and we hope the benefits of that will become clear in the coming years as we continue on our journey to being fully insured.”

Trustee boards downsizing

Laura Andrikopoulos, head of governance consulting at Hymans Robertson, says the APS reduction reflects a general trend towards smaller trustee boards.  

“We can anticipate that trend increasing,” she says. “For really large schemes in particular, historically some have had really big board sizes. That is definitely reducing... corporate governance theory would say that any board of more than eight to 10 people is generally unwieldy.”

The need for efficiency is commonly cited as a reason for downsizing trustee boards.

“In theory, there can be more efficiency in decision-making [with smaller trustee boards],” Ms Andrikopoulos says.

“As schemes get closer to winding up, that might be a situation where you reduce the board, because the complexity of the risk transfer and investment decisions means you need quicker, more professional input – a different sort of model than the traditional quarterly meeting structure.”

Another reason, especially among older DB schemes in the process of winding up, is that there are often not enough members willing or able to take on trusteeship.

Charles Ward, professional trustee at Dalriada Trustees, tells Pensions Expert: “We’re still seeing employers struggling to find member-nominated trustees and directors to put themselves forward.

“BA themselves have struggled with that. Before these changes they had one slot for an active representative and nobody came forward," he said. The scheme's rules provided that position became a joint role representing active and pensioner members, allowing an election to take place.*

Regulation plays a part in reducing the pool of members from which nominated trustees might be sourced. While finance departments once served as a “natural home, we’ve seen in recent years people in the finance team having to step back from trusteeship because of the potential conflict of interest”, Mr Ward says.

Employers who exclude from consideration those with deferred pensions, while they may have sound commercial reasons to do so, further restrict the number of prospective trustees.

All of this combines to make reduced board sizes more palatable, itself of a piece with a more general trend towards a stripped-back, professionalised model of trusteeship, both Ms Andrikopoulos and Mr Ward agree.

Professionalism has drawbacks

Richard Butcher, managing director of PTL, says: “As more and more DB schemes become legacy schemes, the priority of the employer is efficiency, to control and optimise the costs. And they found that a professional trustee, or board of the same, was more able to deliver. They were better value for money.”

While few doubt the gains in efficiency that can be made under these new arrangements, professionalisation is not without its potential pitfalls and drawbacks.

Regulators are increasingly keen to see higher standards, but the creation of two competing accreditation programmes run by the Association of Professional Pension Trustees and the Pensions Management Institute (although both follow the APPT’s framework and include PMI exams) risks harming consumer confidence, according to Mr Butcher.

“It’s a dog’s dinner. It leaves us as the trustees trying to avoid the Betamax version,” he says. 

While accreditation remains voluntary, the expectation is that professional trustees should have it; and if the trustee picks one that becomes obsolete, they will then have to go through the process of obtaining it from the other provider.

“From our perspective it’s frustrating and imposes additional costs, but from a consumer perspective it’s confusing as well,” Mr Butcher continues.

“If I were buying a professional trustee as the sponsor of a DB scheme, and two people turn up with different accreditations, how am I supposed to know which of those – if either – is better? So it risks doing consumer harm.”

There are other, less tangible considerations any board should make when it comes to transitioning to professional trusteeship, according to Mr Butcher.

“You can lose certain things from professionalisation,” he says. “There are some qualities a professional trustee doesn’t bring. For example, the naivety you sometimes get from lay trustees, which can lead to some very revealing questions being asked that we as professional trustees might not think to ask.”

Lay trustees tend to have more insight into the strength of the employer covenant and, by virtue of their connection to the scheme and the workplace, they offer more insight into members than a professional trustee could obtain on their own, he notes.

While professional trustees might speed up committee meetings by lapsing into jargon, “lay trustees and members often prefer plain English”, he adds.

*This article has been updated to correct an inaccurate quote suggesting that a trustee had to be appointed to the APS board.