Independent Trustee Services' Janine Wood looks at whether your consultant has too much say in your scheme and how that could change.
During my early years in the pensions industry one might well argue that was the case.
Set against a background of defined benefit schemes which were still open to new entrants, with positive funding positions and employer contribution holidays, the governance of DB schemes was generally less complex and therefore arguably less onerous.
Advisers often welcome the increased trustee engagement and the collaborative approach this can bring. A good adviser should be happy for their advice to be challenged
Defined contribution schemes were largely in their infancy and therefore merited little attention. The knowledge and understanding required of (largely lay) trustees was lower, and it was therefore usually left to the advisers to drive the agenda for schemes.
The expert advisers' recommendations were generally accepted and followed without question.
So knowledge was indeed power, or, at the very least, control.
Stricter requirements
But the pensions landscape has changed significantly over the past 10 to 15 years. For DB schemes, increased legislation, significant deficits and closure to accrual are just the tip of the iceberg.
The Pensions Regulator, recognising the increased complexities of DB schemes, introduced requirements for higher levels of internal governance, including increased trustee knowledge and understanding.
Trustees were reminded that they are accountable for their schemes and for the decisions that are taken.
They must continue to take professional advice, but need to ensure that they understand and question that advice.
Trustees are expected to take charge of their own agenda, telling their advisers what issues they want addressed and managing that process.
By doing so, trustees can have increased confidence in their decision-making processes.
Similarly, the latest DC consultation has stressed the accountability of DC trustees for their decision-making processes, given the increased challenges of the growth in size of DC schemes and introduction of the new pension flexibilities.
Shift in power balance
For the bigger DB schemes, the balance of power has largely shifted. Lay trustees have increased their knowledge and understanding, and the growth of the professional independent trustee market has brought to many trustee boards individuals who can give their full attention to expertly governing pension schemes and 'managing' advisers.
For such schemes, trustee boards are generally now more knowledgeable, better equipped to challenge advice, and are taking control.
However, this does not necessarily mean that there is a power struggle. Advisers often welcome the increased trustee engagement and collaborative approach this can bring. A good adviser should be happy for their advice to be challenged.
While an engaged set of trustees might reduce advisers' ability to 'oversell' to trustee boards, this is offset by having trustees who understand the advice provided.
This in turn protects the adviser from future trustee or member complaints, or the possibility of having to explain an issue more than once, with the associated increase in costs they may have to absorb.
For other schemes, however, the jury is still out. While many have adopted a more engaged approach, the regulator's recently published research still shows a lack of effectiveness for smaller schemes, DC boards and schemes predominantly made up of lay trustees.
Could regulator findings spell the end of lay trustees?
Schemes with only professional trustees are better run, research from the Pensions Regulator has suggested, but the value of lay trustees should not be overlooked.
Recent legislation and guidance continues to increase trustees' accountability for their decisions, and the importance of trustees taking control of their schemes cannot be understated.
If you fall into this category of scheme, consider what changes you should make to make that happen – a change in the board, increased trustee training, appointment of an independent trustee? You might be pleasantly surprised at your adviser's reaction!
If we reconsider that old adage 'knowledge is power', does it hold in the pensions world? My answer is: it depends.
Janine Wood is client director at Independent Trustee Services
