With the increased focus on governance of trustee boards and the Pensions Regulator (the “Regulator“)'s expectation of skilled, engaged and diverse trustee boards being led by an effective chair, the selection of the “right” trustees is becoming even more important. As employers will often be responsible for appointing trustees to trustee boards, you will find below four factors employers may want to take into account before appointing any new trustees.
A trustee has six months from his/her appointment to acquire the appropriate knowledge and understanding, referred to as “TKU”, in relation to pensions, trusts and related areas. The expectation is not that all trustees have to be experts in every area but that the trustee board as a whole has sufficient knowledge and understanding to allow them to understand fully any advice they are given, to challenge that advice if it seems sensible to do so and to enter fully into all decision-making processes so they can make informed decisions.
Following its consultation on trustee standards (21st Century Trusteeship), the Regulator has said that it will be updating its guidance on TKU in 2021 as well as reviewing the trustee toolkit. In addition, while there is to be no legal requirement for minimum trustee qualifications, guidance will articulate methods for demonstrating TKU, which will include expected hours of training, currently expected to be 15 hours per year for lay trustees and 25 hours per year for professional trustees.
The Regulator has stated that trustee boards should be diverse and well-balanced as this drives better decisions.
Diversity relates to social demographics (such as age, gender, ethnicity, etc.), as well as the experience and skills of each individual trustee. It is important that a trustee board is composed of trustees from a broad cross section of society, who will each bring to the table different viewpoints and life experiences. Employers should also give consideration to ensuring that there is a balance of different types of trustees on a trustee board (employer-nominated, member-nominated, etc.), and that the each trustee is bringing with him/her different skills and specialist knowledge, in order to make the board as a whole stronger. For example, there is little use in having eight investment experts and no trustees with any knowledge of other specialist areas.
It is anticipated that a working group will produce guidance on achieving diversity on trustee boards to assist with this expectation.
As well as having a diverse trustee board with the relevant TKU, it is important that all voices can be heard and a trustee board can work effectively together. In order to ensure the effective running of a trustee board, all trustees should be able to demonstrate proficiency in numerous soft skills, including communication and teamwork.
To put this into context, if there is a trustee board where one or two trustees are very dominant at trustee meetings and supress other viewpoints, this will make decision-making difficult and less effective, which is not in the interest of members. This demonstrates that soft skills are just as important as technical skills.
Fitness and propriety
Prospective trustees should be fit and proper persons who are suitable for the important role that they are aiming to undertake. The Regulator states, for example, that it expects trustees to be able to demonstrate honesty and integrity as well as competence and capability.
The Regulator has the power to prohibit individuals from becoming/remaining as trustees if they are not fit and proper for such a role, which it has been known to exercise in extreme circumstances (it holds a list of all the individuals against whom it has exercised this power).
The above sets out just some of the considerations to take into account when appointing any new trustee. The important take away is that, when appointing new trustees, employers (and fellow trustees) should ensure that they conduct thorough due diligence on any potential new trustees, having regard to the Regulator's expectations and the needs of the trustee board/pension scheme members.
Originally published by Mayer Brown, August 2020
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