Sole trustee code of practice will improve schemes’ risk management

It also provides a benchmark for sponsors and advisers of schemes when selecting a professional corporate sole trustee, should that model be an appropriate option for them.

Many in the industry may be questioning why the code is needed now and how it will be enforced. Others may be wondering whether it will have any authority as it is not mandatory or legally enforceable.

There may be some who feel a sole trustee is a perfidious way for an employer to further its own interests. These are fair challenges and can be tackled head on.

Although the professional corporate sole trustee model is not always perfect, it does promote efficiencies as well as neutralising sensitivities

Review was long overdue

So why is the professional corporate sole trustee model needed now? There are a multitude of reasons: financial volatility and the spectre of negative interest rates; the continuous governance a pension scheme now demands; regulatory scrutiny and tightening of legislation; and sponsor stress and, in some cases, distress due to Covid-19, as well as the uncertainty of Brexit.

Individually, these factors could derail a well-managed scheme, combined they will magnify the issues faced unless managed professionally and with alacrity.

The code, and the professional trustee standards released in 2019, have both been long overdue from a risk management perspective.

There is no barrier to entry for an individual to call themselves an independent or professional trustee in an industry holding £1.7tn of assets, which are still managed predominately by lay individuals.

It is widely accepted that not every scheme needs, or indeed will ever have, a professional trustee on its board let alone appoint a professional corporate sole trustee.

However, is it in the best financial interests of beneficiaries to use a model that may not be fit for purpose when an alternative risk management structure is available?

It is also accepted that, although the professional corporate sole trustee model is not always perfect, it does promote efficiencies, as well as neutralising sensitivities that may veil some of the thinking and clarity of thought needed when tough decisions are required.

The model allows mitigation of risk through speed of decision making, acting impartially and implementing best practice. Cutting-edge innovation is also adopted without lengthy discussions and training sessions.

We have seen many scenarios where a professional corporate sole trustee has delivered better outcomes, be it capturing market opportunities during periods of volatility, reviewing advisers, or enhancing relationships with employer and overseas sponsors and their advisers too.

It has been noted that it is not only sponsors who are viewing professional corporate sole trustees with a keen interest, but trustee boards too in terms of managing continuity, longevity and succession planning.

How will the model be enforced and will it have some teeth?

The answers lie through both promoting and policing the standards and through the professional corporate sole trustee companies holding themselves accountable through a transparent reporting mechanism.

Embedding the code in the audit and assurance frameworks of professional corporate sole trustees is a must-have and an easy way to measure compliance.

The pensions community may well develop a framework whereby these professionals are reviewed, much like the Competition and Markets Authority order where investment consultants are set objectives and reviewed.

The Pensions Regulator also has a part to play, and it was encouraging to see the positive comments made in relation to the code of practice.

Perhaps this could be taken a step further in the future with a “comply or explain” regime monitored through the scheme return showing whether a scheme has a professional trustee and/or the sole trustee model.

The code is a welcome development. However, it is the first step into further refining and improving the governance of those ultimately accountable for ensuring the benefits from a scheme are paid while acknowledging their responsibility to sponsors too.

Shehzad Ahmad is a trustee director at Ross Trustees