Sitting on the panel at the Scottish Association of Pensions Lawyers’ debate on the Professional Pensions Trustee Standards (the ‘Standards’), I was asked if the expectations of trustee chairs were too high.

My response was to refer to The Pensions Regulator’s (TPR) comments that trustee chairs “should be prepared to assume similar governance responsibilities to those expected of a chair of any corporate board”.

This reminded me of a presentation at a recent conference that referred to the Corporate Code and how this could/ should apply to pension scheme governance. Reflecting on this response, I thought I’d look a little closer at how the Standards for Professional Pensions Trustee Chairs and the Corporate Code compare.

Now, the easy place to start is with the corporate need for a chair to be independent on appointment; this really shouldn’t need to be mentioned in the Standards as a professional trustee chair should almost, by definition, be independent. However, the Standards are quite clear on professional trustee conflict management.

The Standards require a professional chair to lead the board ensuring appropriate decisions are made and taking all key factors into account.

This is not very different from the corporate chair’s responsibility for its board’s overall effectiveness in directing the company whilst demonstrating objective judgement throughout their tenure. Similarly, the corporate requirement for promoting a culture of openness and debate is quite analogous to the expectation of the trustee chair to encourage full participation and open board discussions, using skills available on the trustee board to good effect.

Implied responsibility

One slightly controversial area is the implied responsibility of the trustee chair for the performance of other trustees. There is an expectation in the Standards for a professional trustee chair to manage the performance and effectiveness of the board to good effect, and operate effective succession planning.

Furthermore, they are expected to ensure that the knowledge and understanding of the trustee board is assessed and take steps if it does not meet the needs of the scheme. Of course, all trustees have this obligation under statute and the Standards give the nonchair professional trustee an obligation to support and assist the chair in their duties. The obligation being placed on trustee chairs is slightly weaker than the corporate chair who has a responsibility to ensure that the effectiveness of the board is evaluated annually, that the evaluation is acted on, that strengths are recognised, and weaknesses addressed. The Corporate Code requires that all directors engage and act on weaknesses.

This can be the biggest struggle on pensions boards with often long-standing lay trustees who are too busy with the day job and don’t/won’t recognise their trustee weaknesses.

The expectation of the trustee chair to manage succession effectively and the requirement to “take reasonable steps with the appointing party to review the length of their own appointment” is also straight out of the Corporate Code. Although nine years was chosen in that case for the maximum tenure rather than a maximum aggregate term of ten years in most cases for trustees. This, of course, relates to individuals; a professional trustee company with a true team-based approach can provide an automatic solution to chair succession planning without a loss of scheme knowledge.

Similarly, the Standards oblige the professional trustee to have clear terms of business that set out the basis of the relationship and expect the chair to organise appropriate committee structures to ensure efficient operation. Quite in keeping with the corporate need to have responsibilities clear and set out in writing. 

Sponsor engagement

Last but not least is the corporate requirement to have regular engagement with shareholders on significant matters, ensuring a clear understanding of the views of shareholders by the board as a whole. The pension scheme does not have shareholders and arguably the nearest equivalent is the beneficiaries i.e. those with a beneficial interest in the funds under trust.

However, especially in the case of a defined benefit scheme, the interests of the beneficiaries are clearly defined and whilst the trustees have a fiduciary obligation to protect those interests, the views of the beneficiaries are not key to the overall governance and management of the scheme at large. In this case the corporate sponsor takes the place of the shareholder.

It is the sponsor who holds the purse strings, who benefits directly from good performance and who has to fund any shortfalls caused by poor performance. Understanding the sponsor, its views, its business, its corporate governance, its performance, its attitude and ability to underwrite risk is essential to protecting the interests of the beneficiaries and the security of their benefits. This is, therefore, the analogous expectation under the Standards, a key responsibility of the board and possibly the most onerous duty of the professional chair. It is the professional chair who is expected to be the key interface with the sponsor, managing that relationship on behalf of the trustee board or ensuring that it is otherwise done to best effect. It is, furthermore, up to the chair to ensure that appropriate steps are taken to assess the covenant of the sponsor, now and in the future, and that this is taken into account on all funding and investment decisions.

In law all trustees are created equally, all have the same fiduciary obligations, and all have personal responsibility to ensure they comply with rules and regulations.

The Regulator quite understandably holds those of us charging fees and setting ourselves out as experts to a higher level, and the Standard separates professional chairs out for additional special treatment. However, this doesn’t differ much from the corporate world and, since pension schemes are generally a considerable cost centre of their supporting corporate, with proportionately a relatively large asset holding, this has to be right. 

Greg McGuiness

Trustee Representative – Dalriada Trustees

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