Pension Funds Online

Independent Trustees - The Employer's Perspective

Two decades ago I don’t believe many company boards of directors would have been concerned about whether they could fulfill the pensions promises they had freely entered into for their employees. Neither would they have been contemplating the closure of their schemes to new members, let alone the ending of future accrual of benefits. Least of all would they have considered winding-up the company’s pension scheme.

Indeed, why should they have had any worries? True, the occupational pensions regime had become a bit complicated but there were always plenty of advisers on hand plus a supportive tax regime. So much so, in fact, that companies could be penalised for “over funding” their pension schemes. Now we live in a world where the size of the pensions deficit governs the share price, and where pension scheme considerations and the views of the trustees are often crucial in corporate restructures and sales.

In this world, many schemes have put in place independent trustees to help them operate in this very problematic environment. But while the lay trustees might welcome having an expert amongst them, the Finance Director may be wondering whether an independent trustee is just another pensions cost he could do without.

At Capital Cranfield Trustees, we believe that the employer has as much to gain from appointing an independent trustee as do the other trustees, and, of course, the scheme members. Here, in our view, are some of the advantages:

1        Good governance

A good independent trustee will work with the pensions administrators to ensure that the scheme is properly run. This means fewer complaints, happier pension scheme members, and less time and money spent sorting out problems. An independent trustee is also able to be pragmatic about the level of governance that is appropriate for the size of scheme, and will know what is a “must-have” for the scheme, and what is a “nice-to-have”.

2        Smooth relationship with the trustees

We believe that a well-run scheme results from a partnership between the employer and the trustees, and, in the normal course of events, their interests should be aligned. For example, both will want the scheme to be fully funded, though this may take effort on both sides to achieve, especially in current circumstances.

A good independent trustee can ease the relationship between company and trustees, having experience of dealing with the corporate issues facing the company, whilst working with co-trustees to help them achieve the best possible way forward for scheme members.

3        A sense of perspective

If your job or your pension is on the line, with the best will in the world it is sometimes hard to make decisions that you know are reasonable, which have resulted from the consideration of all relevant factors. Having an experienced and professional independent trustee as part of the team will help co-trustees to separate their personal feelings from any decision, and can make the process run much more smoothly, with far less angst.

The end result should be a decision which both the company and the trustees are comfortable with, and which will avoid any hostility and recriminations later.

4        Resolving conflicts of interests

The Pensions Regulator rightly emphasises the independent trustee’s role in dealing with conflicts. One of the problems for company directors who are also trustees is that if a conflict does arise between your shareholders’ interests and the scheme members’ interests, it is very hard to demonstrate to either group that you have acted fairly. Trustees supported by Capital Cranfield who are in this position greatly value the chance to have an offline chat with their independent trustee about their situation, and how best to manage any conflicts.

That way, scheme business doesn’t grind to a halt because of conflicts, and the director/trustee can sleep a little more easily at night!

5        Effective decision making

Professional trustees are decision-makers. They are not there to advise; but to process advice and information, to help co-trustees reach a proper decision quickly and effectively, and to be satisfied that the decision is reasonable. Trustees find it easier to reach decisions with an independent trustee alongside them, and they are more likely to feel comfortable with the decision reached.

An effective decision-making process means less time wasted on discussions that go round and round, and less risk of lost opportunities because the trustees weren’t able to reach a decision in time.

6        Wise use of advisers

An independent trustee is not a replacement for the scheme advisers, but a good independent trustee will seek to bring out the best in the advisers. For example, they can make sure instructions are clear and unambiguous, to help the adviser produce work that is focused on the trustees’ needs. A good independent trustee will also help the trustees challenge the advice where needed and will be well aware if an adviser’s costs look high..

They can also help avoid the need to trouble advisers with some of the more straightforward issues that schemes face, where it is more a question of finding out information than getting advice.

7        Industry experience

Sometimes it helps to know that other companies are going through the same pensions issues. An independent trustee who sits on several boards has a perspective on the pensions issues that lay trustees do not, and whilst it is essential that confidentiality is respected, a good trustee will use experiences gained with one scheme to help another to the advantage of all concerned.

8        Dealing with the Pensions Regulator [tPR]

An independent trustee will have dealt with tPR several times, and should be well regarded by tPR. He or she will know how tPR is likely to view the issues facing the scheme, and whether those issues will be of concern or not. The independent trustee will have some idea of the likely response of tPR to things such as company restructures and sales, where contingent assets are planned to be used as security for scheme deficits, and the scheme funding plans.

The independent trustee can therefore help the process of liaising with tPR, and tPR will often telephone the independent trustee on a case in order to get an informal, unbiased perspective on what is going on. This can make the process much smoother and easier.

So is having an independent trustee worth the cost?

As all this shows, there are significant advantages for all concerned to having an independent trustee on the board of your pension scheme. You do, however, have to pay them, which leads the Finance Director to ask: does the cost/benefit analysis stack up?

My experience is that it does. Many of the companies we work with at Capital Cranfield Trustees are looking at all kinds of measures to reduce costs in these straightened times, but getting rid of the independent trustee does not appear to be one of them. Fees tend to be seen as reasonable for the service that independent trustees provide.

So while there seems to be a noticeable trend for pension schemes to appoint independent trustees, very few schemes decide, once an independent trustee has been appointed, that they would be happy to operate without them. This appears to be the case even in this world of ever tighter budgets and cost margins.

…and lastly, what about “quality control”?

Like all individuals, some independent trustees are more effective than others, particularly if the problems faced by a particular pension scheme requires a specific set of skills. Leading firms of independent trustees can be very selective in their recruitment of individuals and will seek out, for instance, meeting and chairmanship skills in addition to relevant experience and expertise. They will also ensure that the individual’s knowledge is tested and refreshed. Independent trustees from such firms will also benefit from the larger pool of expertise held by colleagues and from their willingness to support one another. When contemplating the appointment of an independent trustee, such considerations can make all the difference.

Biography of Joanna Matthews

Joanna Matthews is a client director with Capital Cranfield Trustees.
Formerly a pensions lawyer, Joanna holds a number of independent trustee appointments with major schemes, several as Chairman of Trustees.