Trusteeship is under scrutiny – how should it evolve? 

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The government is seeking views on how to improve trustee skills and capabilities. What future requirements could there be for trustee boards, and what do industry representatives think? 
Last year, the Department for Work and Pensions said it would make 2023 the ‘year of the trustee’, but that quietly shelved ambition seems to be morphing into a ‘year of trustee regulation’.
The government’s recent raft of consultation papers included a call for evidence on the skills and capabilities of pension trustees, which aims to improve governance but also increase investment in unlisted equities. 

Private equity is an asset class the government is particularly keen to channel pensions money towards, despite globally high levels of undrawn capital earmarked for it. On 10 July, chancellor Jeremy Hunt announced that a ‘compact’ of pension providers have pledged to allocate 5% of member money in their defined contribution default strategies to private equity by 2030.  

The next day, consultations were issued to encourage more investment in illiquid assets by pension funds, including by defined benefit schemes and the Pension Protection Fund – and through potentially changing how pension funds are governed.  

The fresh call for evidence by the DWP and Treasury says that “there is evidence to suggest that improving trustee capability and skills, particularly in DC schemes, would improve trustees’ ability to consider investment in a full range of assets, including unlisted equities”.  
This might be the case, but the “evidence” presented is sparse. The consultation points to a paper by the OECD, which itself only suggests the possibility of a correlation between trustee skills and investment in alternatives. 

The government asks whether trustees have sufficient knowledge to discharge their duties and proposes to create a register of pension trustees similar to that for charity trustees. 

Expanding accreditation to more trustees is also being floated, and rules on how many such trustees must sit on a board: “We are considering proposals, including whether every trustee board should be required to have a certain proportion of accredited trustees, whether that is one trustee, more than 50% of trustees on a board, or if all trustees should be accredited.” 

Professional trustees could be mandated to have accreditation, the government also suggests. It adds that ultimately, “our long-term vision is to have a smaller number of schemes, each with a professional trustee”. 

Governance has long been a concern for the Pensions Regulator. The latest consultation cites some worrying figures by TPR, which found that more than a third of DC trustees and nearly a fifth of DB trustees had never used or were not aware of its codes of practice. In 2019, one in five trustees surveyed by TPR felt their board either did not have or did not have access to the knowledge needed to run the scheme. 

What are the risks in the proposed approach? 

As tends to be the case after capital market events, trustee knowledge and understanding came under particular scrutiny again during the liability-driven investment panic last autumn. 
While most in the industry acknowledge governance could be improved, some fear that concentrating decision power over UK pension assets in the hands of a few professional trustees carries its own risks. 
Maggie Rodger, co-chair of the Association of Member Nominated Trustees, says some trustees may be appointed for particular skills with equivalent but different qualifications, and calls for a process to show equivalence. 
Rodger adds that these differences in backgrounds are crucial: “Trustee boards need a variety of skillsets to be successful. We must always be on our guard against ‘groupthink’.” 
For that reason, having a “career trustee” on every board is not necessary, she adds, if this were the definition of professional trustee the government would adopt. 
The variety of experience of lay trustees challenges established thought patterns, which also helps in adviser meetings, she argues. 
“In conversation with professional trustees and advisers I hear that often the unexpected and healthy challenges come from lay trustees. Partly this is a result of the thought diversity but also because they are less concerned about asking questions on the basis of not understanding a proposal than those whose livelihoods depend on appearing to understand,” Rodger points out. 
What is more, she says that “requiring every single trustee board to employ a professional trustee would add enormously to the fees extracted collectively from pension schemes”. 
Rodger also warns political thinking could be used to shape fiduciary duty, which the government is also including in its list of questions. She says she would be “concerned if a re-evaluation was used to enable government direction of trustees in investment decisions”. 
When it comes to pension funds investing in unlisted equities, “the government's focus seems to be a significant shift from the risk management approach that has previously been emphasised”, she observes. 
“Making it clear what is acceptable within the range of options is helpful. Any hint of mandation is not. Trustees make their decisions against a duty to work for the best outcome for members and need to judge their investment decisions against this framework with the advice of their investment consultants,” she says. 
While TPR and government appear to be pointing the finger at trustees, Rodger sees gaps in regulation. The trustee of the Church of England Pensions Board says there is a lack of monitoring and sanctions for TKU requirements, noting that the AMNT has previously suggested toolkit certificates should be submitted with scheme annual returns to evidence that all trustees had completed their basic training. “A registration process would make all of this possible,” she says. 
She also highlights a continued problem with training, as member-nominated trustees can struggle to get time off from their day job to undertake this. 
“When employed, some report not receiving appropriate time even for meeting preparation, and even more say they have no allowed time for training. Also there may be no funds available for training courses,” she says.  

Current requirements ‘seriously inadequate’ 

The existing TKU requirements are "seriously inadequate”, says Tim Middleton, director of policy and external affairs at the Pensions Management Institute. 
While the AMNT wants TPR to play a greater role in the protection of lay trustees, he believes greater quality control of trusteeship is needed.  
“There is a growing consensus that the formal authorisation of professional trustees is inevitable,” he says. “This will improve governance standards but will have the short-term consequence of shrinking the professional trustee sector as current participants who are unwilling or unable to comply with its requirements are forced to exit the market.” 
Middleton adds that accreditation for both lay and professional trustees should be encouraged but notes that appointing a professional trustee to each board is not currently possible because of the mismatch between the number of pension funds and professional trustees. 
Focus on unlisted equities could create distraction 
Barry Mack, director at governance specialists Muse Advisory, also sees boosting TKU as a positive step. The challenge is how to make TKU “targeted and effective” he says, noting that this requires general understanding but must at the same time be relevant to a scheme and its circumstances to get the best outcome for members.  
He is in favour of trustee registration, which he says should be uncontroversial since it already exists for charity trustees. While he believes having a professional trustee on each board is likely to improve TKU, as well as improving diversity, he says it comes with additional cost – and a risk that other trustees defer to the professional. 
Mack is more ambivalent about the government mandating that funds have a proportion of accredited trustees on a board. This “doesn’t necessarily mean a well governed scheme”, he says. It could even deter lay trustees from standing for the role. 
Mack says there is a danger that the government’s focus on unlisted equities distracts and complicates matters for trustees, saying it comes with challenges, including how to reconcile it with the scheme’s endgame, the funding regime, the sponsor’s views and how to message it to members. 
What is your view on registration, accreditation and requiring a professional trustee on each board? 

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