Large schemes tighten governance with trustee payments

More schemes are joining the likes of the Universities Superannuation Scheme (USS) and the Railways Pension Scheme and paying their lay trustees, recognising the increased complexity of trusteeship has made the role more demanding.

In its latest trustee pay survey, PricewaterhouseCoopers (PwC) noted a rise both in the percentage of schemes that pay trustees and the amount they are paid.

Mercer – which also tracks trustee remuneration – said while 37% pay some or all of their lay trustees only 5% of those receiving remuneration were active members of the scheme.

The PwC survey said the latest financial crisis and credit squeeze drove many schemes to adopt complex investment strategies, raised covenant issues and fuelled sponsor demands to accelerate scheme derisking programmes. All of which increased the complexity of the trustee’s role.

Mark Hodgkinson, director at governance specialist Muse Advisory, said payment could attract better trustees.

“If you’re paying it becomes a recruitment process,” he said. “And it is increasingly beholden on trustee boards to have some element of selection.

"If you’re going to pay member trustees you’ve got to be very clear about the attributes you’re looking for.”

Schemes’ pay structures

The £18bn Railways Pension Scheme began paying its trustee chairman in 2000 and extended this to all 16 trustee directors in 2005.

Susan Adeane, group company secretary of the Railways Pension Trustee Company, said the scheme had taken a year to make the decision.

“What swayed it was the high level of expectation we have of the trustees on time, commitment and complexity,” she said.

“There is also our specific complexity as an industry-wide multi-employer scheme and the increasing complexity of the pensions and investment markets.”

Trustees were initially paid £10,000 a year and it has since risen in line with the retail prices index to £12,000.

When questioned whether the move had worked, Adeane added: “Maybe it has enabled the trustee company to set even higher standards than before.”

The £30bn USS has been paying its trustees since its inception in 1974.

“The scheme was created from scratch and they looked at best practice, which may not have been the norm at that time,” said spokesperson Colin Busby.

An agency recommends the level of remuneration to USS, benchmarking against the going rate for non-executive directors. Trustees with no special duties are paid in the low-to-mid £20,000s, with the exact level being linked to attendance.

Andrew Evans, co-author of the PwC report, said member-nominated trustees should receive recognition for their trustee duties through their day job.

He said their contribution could be communicated by the trustee board chair to their line manager to be included in their performance appraisal.

Avoiding conflicts of interest

Mercer said the generally nominal level of payment may counter conflict of interest suggestions, with trustees undertaking the role primarily for the financial reward. But it added such restraint reinforces a perception of amateurism.

Richard Butcher, managing director of independent trustee group Pitmans Trustees, was unconcerned by the charge.

“The system has operated on a trust basis since the 1920s and it’s been an amateur role,” he said.

“The regulatory expectation is that the trustee provides a higher standard of governance, so if you pay them too much it appears they are being paid for a higher standard of governance and so the expectation steps up.”

Changing demands of trustees

The traditional view of trusteeship is it being something that was done a few afternoons a year after a decent lunch.

However, that changed with new legalisation starting with the 1995 Pensions Act and increased regulation following the introduction of a pensions regulator.

And there have been market changes. A decade ago came a realisation that an equity market crash had transformed assumed pension fund surpluses into substantial deficits.

This coincided with the adoption of new accounting rules that required companies to carry pension liabilities on their balance sheet.

This in turn led to the departure of corporate executives from trustee boards on conflict of interest grounds.

“How are you going to manage the negotiation if you’ve got senior finance people sitting on both the company and trustee side?” said Hodgkinson. They were often replaced by independent trustees, “and independent trustees don’t work for nothing”.

And the growing complexity has led to problems finding trustees. Last month Pitmans Trustees reported more than half of respondents to a survey into what discourages people from becoming lay trustees identified key barriers as a lack of training and the time required.

Schemes have turned to pensioners to fill gaps. “While trustees working for the employer tend not to get paid, there is an increasing trend to recognising that pensioner trustees who are not getting any income from the employer should get at least a nominal payment,” said Evans.