No ‘I’ in ‘Sole’

In January 2021, the Institute and Faculty of Actuaries (IFoA) published its report into the first extensive research programme on the decision-making processes of pension trustees. The IFoA reports that recent regulatory changes have strengthened the governance of trust-based pension arrangements, which has placed additional requirements and scrutiny on the skills, knowledge and experience of trustees.

The ground-breaking research focussed on the judgment and decision-making processes of pension trustees, using quantitative and qualitative in-depth interview methodologies although, given its importance, it is surprising that this is the first research programme on the subject.

The qualitative research examined the social and cultural context for decision making and offered an understanding of the ways in which decision biases are formed. The IFoA reports that despite extensive training and displaying higher financial literacy than a lay person, trustees are not immune from decision biases; in particular, when comparing member-nominated trustees with professional trustees. In terms of the capability challenges, the IFoA recommends considering employing a higher percentage of professional trustees, with more stringent selection requirements.

The IFoA’s qualitative research also found evidence that trustees’ concerns about their liability affected their attitudes to risk, increasing their dependence on financial advisors’. Disappointingly, these concerns are unlikely to have been eased by the criminal and civil sanctions incorporated within the Pension Schemes Act 2021.

However, there is an effective governance and stewardship model that can be deployed, which removes the liability concerns for lay trustees and which unsurprisingly is receiving yet further interest.

Advantages of appointing a sole trustee

A sole trustee takes on all of the work and legal responsibility, which was previously the remit of the whole trustee board. With a sole professional trustee, Member Nominated Trustees are not required and the time, cost and effort needed to develop the skills, knowledge and experience of lay trustees are also removed.

The sole professional trustee approach provides significant time savings, dynamic scheme management, streamlined processes, minimal conflicts of interest and decision biases, with improved scheme governance and value for members.

Do not, however, confuse sole with solo. Sole trusteeship is a team game. To work effectively, the sole trustee should be represented by a minimum of two experienced professionals to ensure diversity of skills, experience, and perspective in decision making and good governance. Issues are discussed by the sole trustee team, with appropriate peer review processes in place, along with effective internal controls.  

Without losing the historical knowledge and involvement of the lay trustee board (AKA the Pensions Committee)

The combined knowledge and experience of the lay trustee board can provide very important information for the ongoing operation and effective governance of the pension scheme. With the appointment of a sole professional trustee and the previous trustee board stepping down, there is the potential for this knowledge and experience to be lost. This changing of the guard can also be perceived negatively by the members.

This is where potentially the ideal model is the appointment of a sole professional trustee, supported by a Pensions Committee, consisting of the members of the previous trustee board.  The Pensions Committee could be permanent or for an agreed transition period.

With this model you have all of the benefits of the sole professional trustee, combined with the historical knowledge and experience of the previous trustee board, positive member perception but without the lay trustees taking on the onus of for on-going training and legal responsibilities.  

Code of Practice for Professional Corporate Sole Trustees (PCST)

Unsurprisingly we are seeing an increasing demand for this sole trustee model and, recognising this, the Association of Professional Pension Trustees (APPT) published a new Code of Practice for PCSTs, effective 1 January 2021. Where a sponsoring employer is thinking about appointing a PCST, it should ensure that the prospective PCST can evidence robust processes are in place for adhering to the requirements of the Code of Practice.

The APPT Code states that PCST firms should have a documented decision process governing how decisions are taken and recorded and are not unduly influenced by outside interests. All material decisions affecting the use of any discretion or power conferred on the trustee should involve at least two Accredited Professional Trustees, which is a big step towards allaying the concerns of the IFoA on decision making bias.

When is the most effective trustee board not a trustee board?

When it’s a sole professional trustee, supported by a Pensions Committee consisting of the previous Trustee board, where the sole trustee is a PCST, providing appropriate diversity and inclusion in its robust decision-making processes. Trusteeship is never the remit of an individual and no matter what it says on the tin, sole trusteeship is most definitely a team effort.