A client recently joked to me that he thought anyone who was willing to act as a pension trustee without getting paid for it should immediately be ruled out, as they obviously did not understand what they were signing up for.
And who would want to entrust the running of a multimillion-pound financial institution to someone like that?
There are increasing challenges facing those altruistic enough to volunteer their time and energy to become a trustee.
The ‘to-do’ list continues to get longer with increasing regulation, including new requirements on governance, funding, investment strategy, data quality and more options to consider, such as pension superfunds.
It is always a good idea for trustees to set out an annual budget to capture likely costs for the coming year, identifying areas where costs can be mitigated or where trustees can discuss the prioritisation of potential activities
Additional activity inevitably means additional costs, which tend to filter through to the sponsor to pick up. But, with more businesses under pressure because of the pandemic, sponsors are likely to bristle at an increase to pension spending.
Trustee effectiveness
Good trustee boards work collectively, focus on the most important issues and delegate well. The best trustees are not afraid or embarrassed to speak up if they need clarification.
One of my favourite member-nominated trustees — an engineer — would always start his interjections with: “This may be a stupid question, but…” The questions never were.
Trustees like him take their role seriously and are passionate about ensuring their decision-making is robust so they fulfil their duties to a high standard, rather than just satisfactorily.
They do not need the Competition and Markets Authority to tell them they should be nervous about having the same company acting as their investment consultant and fiduciary manager.
The cost of governance
For schemes with limited governance budgets, it is common to see cost minimisation being prioritised over good strategic risk management.
Putting off what seems like an expensive investment strategy review or consolidated set of scheme rules can reduce costs in the short term, but is rarely good value when you understand the risks associated with such ‘can kicking’.
This lack of cost/benefit analysis combined with a disposition to reduce or defer costs, can lead to significant inertia.
Trustees may feel like they are a convenient ‘magic money tree’ for their advisers and service providers, when every trustee meeting includes discussions that require additional work to be carried out.
Equally, a passive trustee board that is over-reliant on its advisers can easily rack up significant running costs, paying for unnecessary work, which although positive in themselves, are probably not optimal from a strategic perspective.
This would be the case with superfluous layers of detailed analysis or going with the cheapest administration quote.
The ‘cost’ of saving money
Given the challenges above, it is not surprising to see trustee boards getting smaller and the number of independent trustees, including more sole trustee appointments, increasing.
Introducing an independent trustee is usually the cheapest way to make a significant strategic improvement to a scheme. However, the non-zero cost of doing so can deter many sponsors from taking this step.
Perhaps seen more clearly in the defined contribution space recently, the increasing demands on trustees are driving greater consolidation of defined benefit schemes, from the Pension Protection Fund and full buyout at either end, to operational (eg DB master trusts) and financial (eg superfunds) consolidators in the middle.
As with personal finances, it is always a good idea for trustees to set out an annual budget to capture likely costs for the coming year, identifying areas where costs can be mitigated or where trustees can discuss the prioritisation of potential activities.
Engaging suppliers in this process helps understand priorities and available options to adjust scope of work.
Equally, when incumbent advisers have been in place for decades, reviewing the market can be beneficial in understanding changing operating models and testing value for money.
When it comes to balancing increasing requirements and reducing affordability, an open conversation with the sponsor is usually beneficial in terms of both their input on the budget and agreeing how costs are best shared.
For example, for many of my well-funded clients, the trustees have moved to pick up running costs. Also, for those with affordability constraints, a fixed expense allowance has been agreed with the sponsor, allowing the trustees to self-finance priority areas if needed.
In summary, things are getting tougher for trustees, but investing — in the widest sense — in your trustee board is definitely good value for money.
If your scheme is not in a decent funding position, I suspect you have not been spending enough or you have been spending it on the wrong things.
Iain McLellan is a director at Isio
