Analysis: Defined benefit trustee boards are finding it increasingly difficult to source a full complement of member-nominated trustees, as final salary becomes a legacy benefit system. Is the rise of the sole corporate trustee inevitable?
Up until now, sole corporate trustees, where one professional takes the place of a board, have often been statutory appointments, for example at so-called ‘zombie schemes’ without a sponsor.
I can’t imagine an individual has enough time in a day to cope with all these demands
Dinesh Visavadia, Independent Trustee Services
But anecdotal evidence suggests they are increasingly being appointed in less drastic circumstances.
“We are seeing an increase in the number of smaller-sized schemes moving to sole trusteeship,” said Phil Farrell, a partner at Quantum Advisory.
He said a key driver of the change is “the lack of volunteers or individuals willing to put themselves forward for the role”, either because younger members have no interest in a legacy benefit, or because they fear the impact arguing with their bosses will have on their career.
The move could also be a function of the maturity and increasing complexity of running a DB scheme.
“The world just gets more and more complex and the decision-making needs to become more and more fast-paced,” said Calum Cooper, head of trustee DB at consultancy Hymans Robertson.
Sole trustees “are able to bring leadership to stakeholder negotiations with sponsors who are becoming increasingly disinterested”.
Sole trustees have a case to prove
The logic for this approach states that pension schemes should be run, like a business, by professionals. A full-time trustee is more agile, they can be expected to act quickly and do not have to undertake training before making a decision.
But there are serious concerns that sole corporate trusteeship must find the answers to if it is to become a successful and widespread model of pensions governance.
First among those concerns is the loss of cognitive diversity. At a time when corporate boards are increasingly attempting to throw off their ‘pale, male and stale’ labels, does it make sense to move pensions in the opposite direction?
“We have a big problem with diversity among trustees anyway,” countered Naomi L’Estrange, director at professional trustee company 2020 Trustees. “If you go to a conference it’s normally 95 per cent 65-year-old white men, which you might say is a bigger problem.”
Concentration risks are concerning
Reducing the number of trustees responsible for a scheme down to one, however, is by its very definition a reduction in cognitive diversity, and one which Iain Clacher, associate professor in accounting and finance at Leeds University Business School, thinks could be problematic.
“It’s probably where things will end up, but whether now is the right time is questionable,” he said, imagining the outcry that would greet a pensions scandal presided over by just one professional.
“If we look at the past couple of years, the governance of DB pensions is something that has come into sharp relief,” he added. Sole trusteeship could therefore be “stoking up problems in the future”.
Much of these concerns stem from the rather unhelpful label ‘sole trustee’, according to Dinesh Visavadia, a director at Independent Trustee Services.
“It means ‘individual’ in people’s minds, and that I think is very much starting from the wrong place,” he said. Sole trustees should be a firm of professionals collaborating, and using mechanisms like member panels to ensure appropriate representation.
“I can’t imagine an individual has enough time in a day to cope with all these demands,” Visavadia added.
Professional standards are developing
The draft accreditation regime drawn up by the Professional Trustee Standards Working Group in December recommended that sole traders should not take on these roles.
But until a robust accreditation framework is in place, questions around conflicts of interest will continue to dog sole trusteeship.
Trustee firms with an existing appointment to the board are in a privileged position when the sponsor considers a move to sole trusteeship, drawing parallels with the crackdown on fiduciary management tenders.
Professional trustees told to ‘comply or explain’ in draft standards
The industry-led Professional Trustee Standards Working Group has drawn up a set of draft standards for professional trustees imposing a “comply or explain” regime, but some say it is lacking in clarity.
“Trustees have been very vocal in saying we shouldn’t roll over an investment consultancy appointment into a fiduciary management appointment, and I don’t hear many trustee firms saying the same about sole trusteeship,” said Paul McGlone, partner at consultancy firm Aon Hewitt.
Every scheme is different
McGlone said sole trusteeship is a valuable option, but has hurdles to pass before it becomes viable.
Professional trustees, for their part, say converting to sole trusteeship is potentially less lucrative for their firms, and that the key person risk of mismanagement or corruption should be mitigated by good professional standards and the other advisers working with the scheme.
For schemes considering the move, the best course of action might be to assess their needs properly. Those with a set of willing and competent trustees do not need to consider sole trusteeship, but might need to think about other steps to improve governance, said Cooper.
“It would be a great success if, as an industry, every scheme thought about the future and how they would evolve their governance,” he added.
