The role of pension scheme trustees
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 81
By K Bunt, M Winterbotham and R Williams
This report examines the role and responsibilities of pension scheme trustees. Depth interviews were carried out in Autumn 1996 with 40 trustees from a range of different types and sizes of private sector occupational pension schemes. The study, by IFF Research Ltd, was commissioned by the Department of Social Security (DSS). It was carried out prior to the implementation of the Pensions Act 1995. The Act introduced a number of legal requirements on trustees concerning the management and funding of occupational pension schemes. The research was designed to provide baseline information from which the effects of the reforms can be evaluated. The main findings are:
- Most trustees came to the position with little or no direct relevant experience. The majority subsequently received training but a minority had received no training at all.
- Trustees overwhelmingly believed they worked within a framework of collective responsibility. In the majority of cases, decisions were reached by consensus and voting was rare.
- Most trustees mentioned spontaneously that their duties were to ensure that: the funds were safe; they got a good investment return; the scheme was properly administered and they acted in the members' interests. They were less likely to mention spontaneously that their duties were to: ensure the sponsoring employer fufilled his obligations; know and act in accordance with the scheme rules and trust deed; be aware of changes in legislation and make discretionary decisions. When prompted, all the above duties were recognised as such by the majority of trustees, although making discretionary decisions was the least likely to be recognised as a duty.
- Trustees sought advice on a range of issues including investment, legislation, interpreting the scheme rules and trust deed, and actuVerdana matters. The majority of trustees thought an important part of their role was to challenge advice received and if necessary seek a second opinion. Few felt they should unquestioningly accept the advice they received.
- Trustees were evenly divided as to whether or not their role had changed in the last five years. Those who said it had changed, who tended to be from the larger schemes, felt they took their role more seriously and that their position as a trustee had become more formal, more complicated and onerous. The Pensions Act 1995 was cited by trustees as the main reason for these changes.
- Most trustees felt their role would change in the next three years as a result of having to conform to the new legislation, in particular the member-nominated trustee requirements. They also anticipated they would need to spend more time on scheme administration. A minority of trustees thought their role would not change, mainly because their scheme already complied with legislation, in particular the requirements of the Pensions Act 1995.
Introduction
This report examines the role and responsibilities of pension scheme trustees. Depth interviews were carried out in Autumn 1996 with 40 trustees from a range of different types and sizes of private sector occupational pension schemes. The study, by IFF Research Ltd, was commissioned by the Department of Social Security (DSS). It was carried out prior to the implementation of the Pensions Act 1995. The Act introduced introduced a number of legal requirements on trustees concerning the management and funding of occupational pension schemes The research was designed to provide baseline information from which the effects of the reforms can be evaluated.
The research examined trustees' knowledge and understanding of their role and responsibilities and how these duties were fulfilled; their relationship with other parties, for example, professional advisers, the scheme administrator and sponsoring employer; whether their role had changed or would change in future and if so, the reasons for any changes.
Becoming a trustee
Most employer-appointed trustees became trustees because of their position in the senior management of the sponsoring employer, typically managing director or finance director. For many, becoming a trustee 'came with the job'. Other employer-appointed trustees were asked by the existing trustees or the sponsoring employer. Member trustees either volunteered for the role through having a strong interest in the running of the pension scheme or it was initially suggested to them by the trustees or the sponsoring employer.
Routes to becoming a member trustee
The means by which member trustees were appointed varied, and many would not necessarily be classed as member-nominated trustees according to the requirements of the Pensions Act 1995. Some member trustees were elected by the full membership, others were chosen by the trade union. In some cases the employer had the right to approve the final decision or to select from a number of candidates put forward by the trade union.
Terms of office
Nearly all employer-appointed trustees had an open term of office. The majority of member trustees, however, had fixed terms which usually involved elections every year or every three years. There was usually no limit for the length of time for being a trustee, although for a minority of member trustees there was a maximum period, usually two terms (six years).
Relevant experience
Most trustees came to the position with little or no relevant experience. The minority of those with prior experience had either been trustees of other schemes, or had some involvement in the scheme, or had more general experience or interest in pensions. For employer-appointed trustees this prior experience usually resulted from their position as managing director or finance director. For member trustees their previous experience was typically a result of involvement with pensions through the trade union.
Training
The majority of trustees had received some training since becoming a trustee of the current scheme. They were evenly divided between those who had received training soon after being appointed and those who had received training later on. Some received both.
Initial training
Trustees of medium and larger schemes were more likely than trustees of small schemes to have received any training on becoming a trustee. Those who had been trustees for a long period of time were less likely than those who had become trustees more recently to have received any training on first being appointed to the position. The initial training most commonly consisted of one or two day courses provided by the actuary of the scheme. Training courses typically covered the trust deed, the legal framework and legislation, the role of trustees and the duties of the employer. Many trustees considered the training courses to be essential, particularly as they provided them with a basic understanding of their duties and responsibilities.
Subsequent training
Around half the trustees had received training sometime after being appointed to the position. This subsequent training usually involved one day courses updating trustees on new legislation and any changes to their duties.
Reasons for not receiving any training
A minority of trustees had not received any training. Among the reasons given were: they considered they already had relevant experience; the size of the scheme - some trustees of small insured schemes did not feel training was necessary as their insurance company was responsible for running the scheme; the length of time they had been a trustee - some trustees had become trustees a long time ago when training was seen as less necessary than at present; lack of time or a lack of awareness that training was necessary.
The role and responsibilities of trustees
Respondents were asked without prompting what they considered to be the roles and responsibilities of trustees. They were then shown a list of the key roles and responsibilities and asked which they considered to be the trustees' responsibility, and how the trustee board as a group, ensured that each of these responsibilities was fulfilled. No trustee was unable to think of any roles and responsibilities associated with the position. The most common aspects mentioned spontaneously were that trustees ensure that: the funds were safe; they got a good investment return; the scheme was properly administered and they acted in the members' interests. A minority of trustees spontaneously mentioned the following to: ensure the sponsoring employer fulfils his obligations; know and act in accordance with the trust deed and the scheme rules; be aware of changes in legislation and make discretionary decisions. Trustees of larger schemes tended to mention more areas of responsibility than other trustees. In small schemes, trustees often focused on the need to ensure the funds were in safe hands. Trustees of insured schemes were the least likely to mention having to know the scheme rules and the trust deed. Once prompted all the items listed previously were mentioned as responsibilities by the vast majority of the trustees, although fewer trustees recognised that making discretionary decisions was part of the trustees' responsibilities compared to all the other duties. Each area of responsibility is examined in turn.
The scheme rules and the trust deed
Once prompted, there was almost universal recognition of the need to act in accordance with the scheme rules and the trust deed. Few trustees claimed to have a detailed knowledge of these documents. Many trustees relied on professional advisers (such as the scheme actuary, legal advisers or the scheme administrator) for interpretation of the scheme rules and the trust deed.
Legislation
Nearly all respondents were aware of the need to act within pension legislation. Detailed knowledge of the legislation varied and there was again a heavily reliance on professional advisers to inform trustees of the legislation and the impact of any changes. Some larger schemes had set up sub-committees specifically to keep abreast of pension legislation. A number of trustees had also attended training courses on new legislation and its implications.
Investments
The vast majority of trustees recognised their overall responsibility for investment decisions and monitoring investment performance. They saw this responsibility in terms of making sure that the funds were safe and that they were getting a good rate of return for their investment. Some trustees of small and medium-sized insured schemes did not believe that this was their responsibility, believing that this was the responsibility of the insurance company.
The responsibility for investment was one that trustees took particularly seriously. They mentioned a number of ways in which this duty was fulfilled, most commonly by reviewing and discussing investment performance at meetings. Trustees of larger schemes often used performance measuring services such as Combined ActuVerdana Performance Services (CAPS) or World Markets (WM) to monitor their fund's performance. Some larger schemes had also set up sub-committees looking specifically at investment performance. In addition to monitoring investment performance, the overall performance of fund managers was reviewed regularly. In a number of schemes trustees had changed or planned to change their fund manager because of poor performance.
While some trustees felt that they personally did not have a detailed knowledge of financial issues, most trustee boards either had at least one person with a detailed knowledge of investment matters, usually the managing director or finance director, or a trustee who took the lead on financial issues. However, even those trustees without a detailed knowledge of investment matters questioned the advice and information they received from their fund managers.
Ensuring that the employer fulfils his obligations
Most trustees were aware of their duty to ensure that the sponsoring employer fulfilled his obligations with regard to the pension scheme. Trustees, particularly in small schemes, commonly interpreted this as ensuring that the employers' contributions were paid. In larger schemes, formal procedures had been set up so that non-payment would quickly be brought to their attention by the scheme administrator or the actuary. In small and medium-sized schemes, where trustees were also senior members of the sponsoring company (for example the finance director or the managing director), many trustees reported that separating the employer and the trustee functions was not straightforward. A number of trustees commented on the difficulty of 'wearing two hats'.
Acting in the best interests of the beneficiaries
This was felt to be the overriding duty of trustees. However, it was rarely seen as being fulfilled in any specific way. Rather, it resulted from the other duties being carried out effectively, in particular safeguarding the scheme funds and ensuring that the scheme was well funded. A few trustees mentioned good communication with scheme members as a specific function falling within this category.
Ensuring that the scheme is properly administered
Ensuring that the scheme is properly administered was recognised as one of their duties by nearly all trustees. It was seen as being fulfilled by a variety of means including having clear, well written scheme rules, keeping up to date records, appointing a good administrator if this role is outsourced, receiving regular administrative reports and questioning the scheme administrator about these reports.
Making discretionary decisions
The majority of trustees recognised the making of discretionary decisions as one of their duties although fewer mentioned this responsibility than the other main responsibilities. Trustees who did not recognise it as a duty tended to be from small or recently set up schemes where there had been no occasion to make such decisions. Where discretionary decisions had been made this was either by the full trustee board, or by a sub-committee of trustees and the decisions were then ratified at the next full board meeting. In the former case it was often necessary to call a special meeting if a decision was required before the next scheduled trustee meeting. A number of trustees felt the making of discretionary decisions was a challenging and occasionally time consuming area.
The division of responsibilities among the trustees
The overwhelming view was one of collective responsibility between the trustees. They were all involved in the decision making process and were all equally liable. Within this framework of collective responsibility, though, a number of trustees had specific responsibilities. These included sitting on sub-committees, being the main point of contact with the scheme's advisers and supervising the production of the annual report. However, any decisions made were agreed or ratified by the full board of trustees.
Problems encountered by trustees as individuals
A minority of respondents felt they personally faced problems carrying out their duties as trustees. These problems included: difficulties keeping up to date with legislation; the time consuming nature of the work; occasional conflicts of interest and, for some members, the position initially being quite intimidating. No trustees, however, felt that these difficulties meant they were unable to carry out their duties properly.
Problems facing the trustees as a group
A small number felt that as a group the trustees had experienced difficulties. These included the difficulty of keeping abreast of changes in legislation; differences in opinion on investment strategy and difficulty deciding some of the discretionary decisions. These were occasional problems which had not affected the running of the scheme. Differences of opinion between the trustees were not uncommon but a consensus could nearly always be reached on a fuller discussion of the matter.
Trustee board meetings
For the majority of schemes, the trustees met at least once a year. Larger schemes tended to meet more regularly. Where regular meetings were held these tended to be twice or four times a year. All the trustees were invited to attend these meetings and they nearly always did so. Larger schemes tended to have other people present including the secretary to the trustees and the administrator or actuary. Fund managers and legal advisors were usually asked to attend some trustee meetings but not all.
How decisions are made
In the vast majority of schemes, decisions were reached by consensus. For this reason voting was rare in many schemes.
The role of professional advice
Advice was sought by trustees on a range of issues such as investment, legislation and its impact on the scheme, interpretation of the scheme rules and trust deed, and advice on actuVerdana matters. The majority of trustees thought that an important part of their role was to question and challenge the advice they received, and if necessary, to seek a second opinion. Very few trustees saw the relationship with the scheme's advisers as one where they accepted the advice unquestioningly.
Insurance companies
For insured schemes, trustees reported that the insurance company took on the central role of administering the scheme, investing contributions and providing advice to trustees and members. Trustees of small, insured schemes often felt there was little need for regular contact, and the questioning of advice was limited to an annual review of the insurance company's performance.
Legal advice
It was often the case, particularly in smaller schemes, that those providing the legal advice were the solicitors used by the sponsoring employer. In insured schemes, legal advice was often part of the 'package' provided by the insurance company. Legal advice was an area where a number of trustees admitted there was some deference to the advice received. This was in part a result of the complicated nature of the subject matter but also because in this area advice was usually actively sought by trustees. The relationship with the legal advisers was one that appeared to be particularly stable and long term, and there were no examples of the company providing legal advice having been changed.
Investment or fund managers
Dealings with investment or fund managers tended to be either the receipt of written reports or an annual face-to-face review of performance. In larger schemes contact was often much more regular, in particular where trustee approval was needed for certain investment decisions. Larger schemes used a number of fund managers. The questioning of investment advice was seen as one of the key responsibilities of the trustees. There were a number of instances where the fund managers had recently been changed as a result of poor performance.
Scheme administrators
Administration of the scheme was either carried out in-house or outsourced (for example, with an actuary). In the former case it often appeared as if the choice of the personnel had historically been made by the sponsoring employer, though some trustees were unsure as to the procedure. Where the scheme administration was outsourced, there was much more certainty about the selection procedure, it typically involved a number of candidates being interviewed by the trustees. Contact with the scheme administrator involved their attending some or all trustee meetings, and especially in larger schemes, fairly regular dealings on day to day matters.
Actuaries
Trustees' contact with actuaries was either through the actuVerdana firm administering the scheme or actuaries being contacted for specific functions (for example, the actuVerdana valuation of the scheme). ActuVerdana firms were also responsible for carrying out much of the trustee training. In insured schemes there was no independent contact with an actuary since the insurance company carried out these functions. Relationships with the actuaries tended to be stable and long term. Again, it was often the case that the decision as to the selection of the actuaries had historically been made by the employer, though this was commonly cited as becoming a duty for the trustees under the Pensions Act 1995.
Sponsoring employer
The relationship between the trustees and the sponsoring employer varied from the very informal in small schemes (often no communication was felt to be necessary because the managing director and finance director were both trustees, and often the only trustees) to more formalised procedures in large schemes. Employers' involvement ranged from allowing the trustees a very free hand to their having a high degree of involvement. Although there were some instances of difficulties with the employer, these were never severe or long term or sufficient to prevent the trustees carrying out their duties. More often the relationship was felt to be good and the employer was considered supportive.
Trustees' views on whether their role has changed in the last five years
Trustees were evenly divided between those who felt their role had changed over the last five years and those who did not. Trustees of large and very large schemes were particularly likely to have felt their role had changed within this period. Changes included the role becoming more formalised and structured, trustees taking the role more seriously and their role becoming more complicated and onerous. These changes were nearly always seen as being the result of the Pensions Act 1995, though some put them in the broader picture of Maxwell and the Pension Law Review Committee report.
Trustees' views on whether their role will change in the next three years
Most trustees felt their role would change in the next three years. The changes anticipated were either specific aspects required to conform with the legislation (especially regarding member-nominated trustees), more general changes relating to increased administrative time or more time spent double checking that things were being done correctly. A minority of trustees did not think there would be any changes in their role over the next three years. Most of these thought that this was because their scheme already complied with the legislation, particularly the requirements of the Pensions Act 1995.
Relevant publications
Other publications on pension schemes:
B Casey, J Hales, N Millward (1996) “loyers' Pension Provision 1994” Research Report No. 58) London: TSO
D Dundon-Smith, J Hales, M Chetwynd, A Thomas, J Keegan (1997) “Pension Scheme Inquiries and Disputes” (DSS Research Report No. 66) London: TSO
K Bunt, D Howells and M Winterbotham (1998) “Experiences of Occupational Pension Scheme Wind-Up” (DSS Research Report No. 75) London: TSO
C Pratten and S Satchell (1998) “Pension Scheme Investment Policies” (DSS Research Report No. 82) Leeds: CDS