Sackers senior counsel Naomi Brown explores the differences and similarities between running a pension fund and running a business – and what can be learned from each role.
Running a pension scheme seems to be getting more like running a business every day.
Most trustees have had “annual business plans” for years. But as we talk about the new requirements for operating effective systems of governance, undertaking own risk assessments, and implementing risk management functions – all set out in TPR's General Code – much of the language we are using is essentially business-speak.
In many ways, this is a good thing.
Running a pension scheme is serious stuff and some schemes are far bigger and more complex than many businesses.
We should have high expectations around governance and efficiency. There are also lots of tried and tested ways of doing things that we can borrow from how businesses are run.
Some obvious examples include formal trustee selection processes, with application forms and a skills- and attributes-based interview process, effectiveness assessments and succession plans. These are all things that human resources departments have been doing, day in, day out, for years.
But we should not forget that pension schemes are not the same as businesses, and being a trustee of a pension scheme is a very special type of role.
Important differences
Because trustees are looking after assets for the benefit of others, a trustee is a fiduciary – a guardian, trusted with the important job of safeguarding valuable retirement benefits that others worked hard to earn, and on which they depend.
This means trustees are subject to a whole suite of responsibilities, restrictions, expectations, and limitations that do not apply to businesspeople - at least not in the same way.
Trustees can only act in accordance with the powers given to them and can only exercise them for the purpose for which they were granted.
Trustees must exercise their powers in accordance with their trustee and fiduciary duties. This means acting impartially and in the best financial interests of beneficiaries. In some contexts, it means having appropriate regard to their sponsoring employer's legitimate business interests. It also means taking advice where appropriate.
Trustees must take such skill and care as an ordinary prudent businessperson would take in managing their own affairs if they were under a moral obligation to provide for others.
Trustees must make decisions following a proper process, considering all relevant factors.
This overarching trust law framework means that a trustee and a businessperson would not necessarily make the same decision given the same question and the same set of facts.
Striking the right balance
It is clearly in pension scheme beneficiaries’ interests to have the best of both the trustee and business worlds and for schemes to be run with the efficiency, structure and professionalism of a business, together with the special duties of care that apply to trustees.
But it is not an easy balance to strike. This is one of the reasons we see professional trustees playing an increasing role in the running of pension schemes.
It is also part of the reason it can be tricky for trustees with senior company roles to juggle wearing both hats – they go with a completely different mindset.
It’s also why it is so important for trustees to get the right support from their advisers.
One way to help us all get the balance right is to think of ourselves as “taking care of trustee business”. With the emphasis firmly on “trustee”.
Naomi Brown is senior counsel at Sackers.
