Are the days of the lay trustee numbered?

Angela Sharma, a professional support lawyer at Taylor Wessing, recalls a situation when a member-nominated trustee’s decades of experience with their scheme meant they were able to solve a dispute over a member’s benefits that had left professional advisers stumped.

“They can bring that sort of cultural understanding [of the business],” she says. “That’s very valuable even if it’s just in terms of how a communications strategy should be undertaken.”

Trustees administered the very first pension schemes in this country, and the trust-based model has weathered countless financial cycles since. But the outlook is starting to look less certain for the lay, and particularly member-nominated, trustees who have sustained it thus far.

We’re dealing with a large amount of trustees, not all of them by any means, who are not meeting basic standards

Fiona Frobisher, the Pensions Regulator

First, there is the growing use of mastertrusts and contract-based providers to deliver defined contribution pensions, which account for a minority of UK pension assets but a majority of active members.

Total active membership for trust-based DC schemes was slightly larger than that of contract-based schemes at the end of 2016, standing at 5.15m according to the Pensions Regulator’s presentation of scheme return data. However, some 4.4m of those members were enrolled in mastertrusts.

Some of these schemes appoint trustees from outside the pensions sphere and even involve member panels in the appointment process. But the large number of participants make it impossible for a board to have intimate knowledge of each employer in the way that was so useful to Sharma’s scheme.

Source: The Pensions Regulator

In workplace defined benefit, the continuing presence of valuable lay trustees seems far more assured. However, recruiting suitable people to the role is proving tricky.

“Getting good [employer-nominated trustees] and MNTs, lay trustees generally, is getting increasingly difficult for a number of reasons,” says Simon Kew, assistant director in Deloitte’s restructuring practice.

Kew cites the pressure, responsibility, and outside scrutiny associated with the role, including the “possibility of being called up to the Work and Pensions Select Committee” among the factors which can deter prospective trustees from applying.

Professionalism by the back door

Against the background of an increasing public focus on DB schemes and the plight of their members, the Pensions Regulator is looking to shore up gaps in basic trustee capability.

The watchdog has launched a new campaign on the back of its 21st Century Trusteeship and Governance programme, aiming for better trustee education and tougher penalties for those who fail to meet its standards.

Plenty of schemes were failing those governance standards; less than 25 per cent of small and micro schemes met two or more of the regulator’s key requirements.

With the Financial Conduct Authority also taking aim at the buyside of advice, a picture starts to emerge of lay trustees under pressure to adopt professional standards.

“We are beginning to see more of a focus on professionalising trustees,” says Peter Sparshott, head of PwC’s pensions management consulting practice in the UK.

He says he hopes that lay trustees are not a thing of the past, but admits that “the degree of professionalism and focus and capability does need in certain aspects to be improved”.

Commensurate with what are increased demands on trustees in terms of both capability and hours, more trustees are being paid for their time, although Sparshott warns against letting pay become the overriding factor when attracting new trustees.

Schemes not meeting standards

With requirements for trustees getting tougher, there is a fear that prospective trustees will be put off from taking up vacancies on boards.

For its part, the Pensions Regulator is sensitive to the possibility that some existing trustees will be deterred by a tougher line on trustee standards, but that this is a price that will have to be paid.

“We’re dealing with a large amount of trustees, not all of them by any means, who are not meeting basic standards,” says Fiona Frobisher, head of policy. “All members deserve to be properly protected and properly governed.”

Source: The Pensions Regulator

The regulator expects trustee boards that are unable to meet requirements to consolidate.

Consolidated schemes of any significant scale would not allow for trustees representing a particular membership. But Frobisher doubts that this would affect the board’s ability to act in members’ interests.

“All trustees have the same role,” she says.

The regulator has not chosen to introduce any new requirements for trustees in its latest campaign, much to the relief of some in the industry.

“There was this idea that [the regulator] might put a ‘fit and proper’ requirement on it,” says Janine Wood, a director at Independent Trustee Services. “That really does start to drive it towards professionalism, and people will be put off.”

Trustees are vital to pensions success

If industry commentators seem to agree that finding lay trustees is getting progressively harder, they are also in consensus that lay trustees are a useful feature of the system.

The key reason for this is that lay trustees bring cognitive diversity to a financial services industry which is prone to following its own perceived wisdoms.

Source: PwC

“There’s an advantage to not having all the facts… you can ask the question that nobody else would ask,” says Iain Clacher, an associate professor in accounting and finance at Leeds University Business School who has published extensively on the role of trustees.

Trustees “bring a different perspective so they’re there to represent the members’ interests, and that’s a key point in the good governance of the scheme”.

However, Clacher’s work confirms what the industry has suspected for some time; that trustee boards lack diversity.

The search for diversity

One in five trustees is female, while age ranges are heavily concentrated towards the 50-69 range.

While Clacher says that factors such as socio-economic background and gender are not particularly suitable proxies for cognitive diversity, he does have some concerns about the lack of age diversity.

“Middle-aged white men in suits will bring a very much similar perspective to the role,” agrees Tim Middleton, technical consultant at the Pensions Management Institute.

Many boards will struggle to improve the age diversity of their member-nominated trustees; after all, defined benefits are largely a legacy form of pension provision.

But Middleton recommends looking to the board’s other appointments as a source of diversity.

“It might be beneficial for boards in that position to consider bringing in someone from outside,” he says.