Widespread deployment of sole trusteeship has almost become the norm in the pensions industry, as these now account for one in three professional trustee appointments. However, concerns mount over their independence and robustness in sponsor discussions.
The Isio 2021 Professional Independent Trustee Survey, which analyses 12 major trustee companies and 260 independent trustees, shows that 50 per cent of schemes have at least one professional trustee. A further 41 per cent of appointments are for a trustee chair, while one-third of trustee appointments was for a sole trustee.
Small schemes were the first to use the sole trustee model, but the report states that it is becoming increasing popular with larger schemes too.
Their uses ranges “from ‘basket case’ schemes, where governance has previously fallen below the desired standards and a steady hand is needed, through to endgame or wind-up cases, where a hands-on approach or rapid decision-making capabilities may be more valued”, the report states.
Mike Smedley, partner at Isio and one of the authors of the report, told Pensions Expert that it is a “rather odd situation when it is the finance director who gets to appoint the person who sits across the table, negotiating pensions”.
“There is obviously a risk there but it is rarely a problem in practice. There are bound to be cases where it goes wrong, where the trustee may be too compliant because they have their paymaster across the table.”
“There are bound to be cases where it goes wrong, where the trustee may be too compliant because they have their paymaster across the table”
The Pensions Regulator has weighed in on this topic as well, with David Fairs, TPR’s executive director of regulatory policy, analysis and advice, writing in 2019 that “there appears to be anecdotal evidence of a small number of employers appointing sole trustees in the belief that a sole trustee arrangement will enable them to negotiate an employer-friendly funding agreement”.
He adds: “A sole trustee will also struggle to replicate the advantages of robust decision-making based on a diversity of views.”
However, Alison Bostock, client director at PTL, has a different view, and writes in the report that “sole trustee can a be simple route to good governance, if it’s not possible to build a board”.
Chris Martin, managing director of Independent Trustee Services, adds that schemes “moving to an endgame solution can benefit from a sole trustee that can be fast moving and seize opportunities”.
Set the bar higher
The feeling in the industry and from the trustees themselves is that regulation has lagged behind this fast-growing sector, with trustees being responsible for £3tn in assets and millions of members.
There is no equivalent test for professional trustees to the fit and proper person test that the Financial Conduct Authority has for investment professionals.
Smedley stresses that “it does feel odd that the market has effectively no regulation”.
“There is accreditation from the Association of Professional Pension Trustees and the Pensions Management Institute, which is in effect voluntary.”
Independent trustee Wayne Phelan, managing director at Punter Southall Governance Services, agrees: “It’s still too easy to become a trustee. I’d like to see the bar a little higher.”
Most companies are not averse to more regulation. However, how far that regulation should go is a question for debate.
Smedley points out: “Anyone can call themselves a professional trustee provided you can pass the accreditation process from the APPT and PMI, and that accreditation process is not overly demanding.
“There is no CPD [Continuing Professional Development], monitoring or oversight. It was designed to put in a baseline when prior to that there was no accreditation at all.”
“Anyone can call themselves a professional trustee provided you can pass the accreditation process from the APPT and PMI, and that accreditation process is not overly demanding”
However Nigel Hill, APPT council member and chair of the APPT’s sole trustee sub-committee, has a different opinion. He said: “The Code of Practice for Professional Corporate Sole Trustees – which came into force on January 1 - sets out a range of governance and risk controls that firms offering sole trusteeship must adhere to, to manage potential conflicts of interest and maintain independence from the sponsoring employer."
He explained that under the code, "at least two accredited professional trustees must be involved in PCST decision-making processes, and PCSTs must assess whether they should report to TPR if they are removed, or resign, from an appointment as a result of the sponsor company’s actions".
He added: “The APPT’s view is that only trustees signing up to the code should be appointed as sole trustees, and we are working with TPR to ensure the code – and APPT accreditation more broadly – underpins the work professional trustees do.”
Meanwhile, trustee time commitment has also steadily increased over the past decade, from an average of 17 days a year in 2010 to 26 days in 2020, according to recent PwC research.
This has led to the professional trustee market seeing something of a boom, as companies are finding it difficult to get lay trustees with the time or inclination to take up such onerous responsibilities.
Smedley believes that “it is a bit of push and pull”. He says: “It might be harder to get senior employees or member elected [trustees], since pensions are more complicated so you need people with more knowledge.”
He also notices that there is “a slight trend towards professional trustees who work for larger firms rather than professional trustees who are ‘one-man bands’”.
Growth is expected to continue as more pension schemes appoint a professional trustee — the next three to five years are key in terms of winning new appointments for companies. A number of these have ambitions to double in size over that timescale, while currently showing “pretty much double-digit growth”, according to Smedley.
He adds: “Some firms are achieving 15 per cent growth or more. At least one of them has achieved 30 per cent growth.”
Still stale, white and pale?
Diversity of age, race and gender is still a big issue in pensions, but the professional trustee is probably slightly more diverse than the pensions industry a whole.
Even so, the Isio research showed that average black, Asian, and minority ethnic employees at professional trustees were just 7 per cent, while the most recent census (2011) shows that white British only account for 80 per cent of the population.
The role is popular as a stepping stone to retirement, although there are changes afoot. Smedley says: “One of the people I talked to said their youngest trustee was 25. The major firms are looking for people in mid-career who can do the job for 10 years rather than four or five years and then wind down.”
Encouragingly, 39 per cent of the individual trustee directors are female, but a recent Barnet Waddingham survey shows that only 14 per cent of trustee chairs were female. Unusually, they were paid more, but there is still a long way to go in the march towards equality.