Canada: Pensions Regulator Opens The Discussion On What "21st Century Trusteeship" Should Look Like

The Pensions Regulator has recently published a discussion paper inviting views on 21st century pension trusteeship.

The paper invites views on what drives effective trusteeship and governance, and sets out what the Regulator has learned from its recent surveys of occupational pension schemes, and what it is considering doing to help schemes improve their governance.

For trustees and sponsors of occupational pension schemes, it makes interesting reading, and many may wish to consider responding - the deadline for responses is 9 September 2016.

It is also timely, given that the European Union is close to agreeing the text of a revised directive (IORP II) regarding "Institutions for Occupational Retirement Provision" in which the requirements for fit and proper management and governance of a scheme are considered.

No doubt the outcome of this process will lead to the next instalments of regulatory guidance and possibly also statutory governance requirements, to complement the structure previously introduced for defined contribution schemes in 2015.

In this analysis we do not summarise or repeat the entire paper, but we draw out some of the key themes which emerge from it, together with our comments.


Historically, being a trustee has been a lay occupation - an extension of the British tradition of the "gentleman amateur". That may have been appropriate at the time for the Victorian family trusts from which much of trust law derives, but modern occupational pension schemes are very different - in general, they are large and complex savings vehicles, which exist in a more sophisticated financial services world, and on which their many members rely almost entirely for an income in old age. As with their corporate counterparts, evidence suggests that they benefit from an increased diversity of skills.

Until about 20 years ago, however, occupational pension schemes were, by modern standards, largely unregulated. That has changed, with the creation of regulatory bodies (first OPRA, now the Pensions Regulator) and an ever-increasing volume of statute, regulation and guidance. However, one area in which it has not changed is that there are still no formal requirements to be a trustee (although there are statutory rules which prohibit individuals from acting as trustees in certain circumstances).

That gap has been filled by an increasing market for professional trustees, and the Regulator's paper clearly marks a trend towards greater professionalisation of trusteeship. The Regulator's evidence suggests that there is a correlation between schemes that have a professional trustee and the likelihood of a scheme being well-governed, as a result of the knowledge, experience and independence which a professional trustee brings to the board.

Should trustees be professionals?

The test for what makes a suitable trustee has historically been character or position, not qualifications. To the extent that professional skills are required, trustees rely on advisers, rather than seeking to gain those skills themselves.

The gap in the market which professional trustees are well-placed to fill is a broad knowledge and experience of occupational pension schemes and, in some circumstances, specific experience of what a scheme is actually going through, e.g. a company takeover or restructuring, or complex investment decisions.  It is not the role of a professional trustee to be a substitute for advisers, and so legal or actuarial training is not essential to being a professional trustee (though it may well be an asset). What is required is knowledge of pensions- so if an issue arises, it may be similar to something they have seen before on other schemes, meaning they are not learning on the job but instead helping to educate the lay trustees on the board.

Also, they have the advantage of independence, which is always a benefit, and especially so during difficult times (e.g. where the sponsoring employer is in a distressed condition).

Consider for example a board that contains the following hypothetical trustees:

  • a professional trustee who brings independent and specialist knowledge of pensions and experience of working on other schemes;
  • engaged member-nominated lay trustees who have a sound working knowledge of the needs of the membership, many of whom they know personally, and;
  • company-nominated trustees with a knowledge of the employer's business at a senior, strategic level.

It can be seen that this is a balanced, diverse board and in our experience it is a structure which is most likely to be well-governed and successful.

Incidentally, it also is one of the best safeguards against conflicts of interest affecting decision-making. Everyone involved in a pension scheme will have some conflicts of interest, so one way to manage them is to ensure that there is a sufficient diversity of interests that the conflicts cancel each other out.

The above example demonstrates that the professional trustees and lay trustees can be complementary to one another. While having a sole professional trustee has its advantages, in particular, speed of action, there remain benefits for many schemes in having the mix described above.

However, all schemes have different needs and it is impossible to design the perfect trust board - there should be flexibility to adapt the structure to the needs of the scheme and the employer's business. We see many schemes that do not have professional trustees and are well-governed, although we endorse the Regulator's observation that the appointment of a suitable professional trustee almost always has a positive effect.

What qualifications should a professional trustee have?

The paper also raises the concern that anybody can hold himself out as a "professional trustee" - there are no formal requirements to be satisfied to enable the title to be used.

It follows from the thoughts above that there are two possible entry routes into professional trusteeship that appear attractive:

  • an experience-based qualification (a certain number of years of working in pensions, even without formal qualifications), or;
  • formal qualifications which relate specifically to pensions, such as those offered by the Association of Professional Pension Trustees and the Pensions Management Institute.

Clearly professional trustees who can offer both will have an advantage in the market.

Firms of professional trustees (or their respective professional associations) will no doubt wish to respond to the Regulator with their thoughts on these issues.

We think that the requirements need to be carefully thought through so that they do not stop professional trustees with different backgrounds (e.g. investment, finance, governance) being able to qualify. That said, those with a non-pensions background should need to demonstrate learning in the specifics of pension schemes before they can act.

Chairman's role

Most defined contribution schemes are already required by law to have a chairman of trustees, although his statutory role is limited to being the one who signs the annual governance statement - but the entire trustee board is responsible for what that statement actually says.

The Regulator is looking at extending similar principles to defined benefit schemes, and also asks what if anything should be done to raise the standards of chairmanship, for example by requiring chairmen to have particular qualifications, experience or membership of a professional body.

In our experience, where the role of chairman is most valuable is in ensuring good governance - i.e. ensuring all trustees are given the opportunity to express their views whilst also ensuring that business is dealt with efficiently, managing conflicts of interest, being the face of the scheme in dealings with the employer, etc.

That ability to manage the scheme efficiently but with good governance seems to us to be the most important quality for a chairman, at least as important as any specialist knowledge he may bring to the table.  On trustee boards that have a professional trustee, it follows that the professional trustee does not need to be the chairman (and if he is, he will need to be careful not to be seen to be assuming too dominant a role).

In our experience, it is difficult to have good governance without an effective chairman, but this should not detract from the fact that good governance comes from a well-balanced trust board acting collectively - concentrating too much importance on the chairman is not always constructive to good decision-making.

However, different compositions work for different schemes and individuals and the Regulator would no doubt be grateful for views and experience on this. Our view is that it would be wrong to be too prescriptive about the requirements for the chairman.

Training and development

The Regulator already has guidance on initial training for new trustees, with the trustee toolkit and the Trustee Knowledge and Understanding (TKU) framework, although it expresses concerns that not all trustees adhere to this.

More interestingly, the Regulator raises the possibility of more formal continuing professional development (CPD) requirements for trustees once they are in post, as is common in the professions. Views on the extent to which this will raise standards, or make the burden of trusteeship unbearable, will be interesting.

Certainly in our experience most trustees do voluntarily seek out continued training opportunities to keep their knowledge up-to-date - not to do so puts them at serious risk of breaching their trustee duties given the pace of change in the wider pensions world.

While we do not favour excessively prescriptive requirements for training, we see the benefits of an obligation to submit training logs to the Regulator on an annual basis and/or a requirement for a minimum number of hours of learning per year.

Small schemes

The Regulator expresses concern about the governance of smaller pension schemes, and this has been a consistent theme from the Regulator for some time now.

Whilst it is certainly not true to say that all small schemes have poor governance (many have excellent governance), the Regulator's research indicates that of the schemes exhibiting poor governance, many are, in fact, the smaller schemes. This is perhaps understandable in that the trustees of such schemes are less likely to have the time or resources to devote to them.

The Regulator therefore asks what it can usefully do to enforce its standards in respect of such schemes.

One solution is to merge small schemes into larger schemes and then wind up the small scheme. For defined contribution schemes, that can be done relatively easily by transferring the benefits into master trusts or similar vehicles. For defined benefit schemes that cannot be done, although if an employer has a small defined benefit scheme and a larger defined benefit or hybrid scheme, there is the prospect of greater efficiency, and often significant cost savings, to be derived from merger, quite apart from the governance benefits.

Another solution is to encourage small schemes to make greater use of professional trustees and advisers - whilst being mindful of the fact that they will be more cost-sensitive than larger schemes.

What happens next?

We will be submitting a response to the Regulator's discussion questions, with a view to aiding their understanding of the role of a trustee from our observations in practice, and would be interested in the thoughts of our clients and fellow professionals on the issues raised.

Trustees (including firms of professional trustees) and employers may also wish to respond directly. The deadline for responses is 9 September 2016 - take a look at the discussion paper, which includes details for responding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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