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The Actuary The magazine of the Institute & Faculty of Actuaries

A case for independent trustees?

The role of trustee is difficult and demanding and requires knowledge and the exercise of judgement. This has become more the case over the years, and the Myners report will lead to further changes. In particular, Paul Myners has challenged the ‘prudent man’ principle and suggested something else that can perhaps be described as an ‘informed man’ (or woman) principle, something the government agrees with.
Regrettably Myners’s brief focused solely on investments, and he chose not to stretch it towards the benefit side of trustees’ responsibilities. This deficiency can, however, be rectified by trustees and in fact many of the larger schemes are doing this.

Recommendations and change
So how should trustees react to this change? Well, there are a few things they can do. Before they start, they can take some comfort from a survey carried out by Cranfield for Watson Wyatt, presenting trustees more favourably than major company boards, but it did highlight the need for more expertise.
The first step has to be to look at Myners’s recommendations and decide which, if any, should lead to a change in the way the trustees undertake their responsibilities. I say, ‘if any’ because many schemes already comply in some respects. In addition, the recommendations are not mandatory they are backed by the heavy hand of the Treasury, but this may not yet have much influence on most trustees’ individual decisions. It is also clear that the recommendations are, in some respects, inappropriate for many schemes, both large and small.
Second, as mentioned above, trustees could look at the spirit of Myners’s recommendations to assess the extent to which it could be applied to their benefit responsibilities. In particular, they could look at how they deal with all their advisers and contractors.

Risk management
I also think that trustees should look at what is going on at board level in large companies. Turnbull has caused company boards to look at risk management and control. Surely the same should apply to the pension scheme, which in many cases is worth more than the company? Indeed, in a few cases, the scheme is worth several times more than the company. So the trustees should think of all scenarios: what could go wrong, the probability of that happening, and the subsequent consequences for the scheme. Once they understand the risks, they can prioritise their efforts to minimise, eliminate, insure against, or avoid them.
It will be apparent from the above that the need for more knowledge is very real, and growing. This is not to criticise lay trustees, who in general are doing an excellent job it is to recognise the ever-increasing demands being made of trustees.

Independent expertise
Many trustee bodies have reacted to this need for knowledge by bringing independent experts into their midst. Some companies are appointing an independent pension professional as one of their nominated trustees. Others are bringing in investment experts to strengthen an investment subcommittee.
I also think some company directors will feel that they do not have the time to do the trustee job properly, and will bring in an independent to replace themselves, even if there is already one on the trustee body.
By bringing in independent expertise, trustee bodies are following company boards which for years have had non-executive directors. There are parallels between the NED and the independent trustee, but in one respect the latter has a bigger role to play. Typically, the independent trustee is an authority serving alongside laymen, so his or her views will carry great weight, whereas the NED is serving alongside his or her peers.

Added value
Although there are some parallels between the two roles, the nature of the added value brought by the independent trustee does differ from the NED. It also differs depending on the needs of the scheme. Let us look at some of the benefits.
– First, independent trustees bring a wider level of understanding and experience, enhancing the overall knowledge of the trustee body.
– Second, they have a broader experience that allows reference to be made to other schemes and advisers’ methods. In this respect it is vital that the independent complements rather than competes with advisers. If the match is right, the independent can enhance the value of the advisers. Conversely if it is wrong, they can detract. It is vital to choose the right independent.
– The final benefit is one that is not always achieved. Many schemes have features that are common to only a minority of schemes: university schemes for non-academic-related staff, shared cost schemes, and former public sector schemes, to name but a few. An independent trustee with experience directly related to your own particular circumstances will obviously be able to add value in a way that others will not.

The right match
It is easy to find an independent trustee. However, it is worth making an effort to find one who not only has relevant experience, but who will also enhance the value the scheme gets from its advisers. If you can appoint the right independent trustee you will find yourselves in a strong and enviable position.