RSS feedsUK trust law has its origins in the desire of wealthy nobles who were heading off to the crusades, to dispose of their goods in an orderly fashion should they fail to make it home again.
As Alan Pickering, partner at Watson Wyatt points out, it is a quaint, Anglo-Saxon concept with no parallel in European law.
Its use in the world of UK pensions is deeply entrenched. This is partially for reasons of historical familiarity – we have, after all, been working with trusts for a long time – and partially because there are some tax efficiencies that flow from having trusts at the heart of pension schemes.
Another very good feature of trusts, and a very sound argument for their continued use, is that once funds are placed in a trust they cannot easily be extracted other than to fulfil the objectives of the trust. They are hard things to mess with.
The value of this last point was cast into sharp relief after the Maxwell scandal. As Pickering points out, as proprietor, trustee and bully all rolled up into one, Robert Maxwell showed that these three roles can be a powerful force for evil when combined.
But the underlying strength of the trust concept proved itself when foreign banks, made aware of the trust relationship, decided that they themselves, having been “touched by the money” were in loco trusteeship, and had to return it.
“It was like playground piggy, if you get touched by trust money, you’re ‘it’, the trust relationship reasserts itself and you have to acknowledge the supremacy of the trust consideration,” Pickering says.
To work, trusts require a body of willing trustees to assume the duties and obligations that are required to make trusts possible. Herein lies a dilemma in that the concept of trustee returns us to that hallowed British notion of the skilled amateur – a notion that has had difficulty surviving modernity in spheres other than trust law.
What the Maxwell affair did was to focus attention on the need to modernise the operation of trusts in relation to multi billion pound pension schemes. Both trustees and government recognised that large pension schemes were, in fact, a business within the business, and all the modern tools of business, including planning, reporting and accountability, needed to be brought to bear on the operation of trusts.
Contradiction in terms
This, in turn, alerted people to the question of who trustees should be. If trusts are going to use all the modern tools of business and comply with complex legislation, those involved need a fairly specialised degree of understanding of the attendant paraphernalia.
As Pickering says, what has developed from Maxwell to the present day is a fairly schizophrenic vision of the trustee. This schizophrenia arises because of two incompatible demands that government is placing on trustees. It simultaneously wants trustee boards to be ever broader, involving more employees, and it also wants to deepen quite considerably the knowledge required from trustees and the responsibilities shouldered by them.
“Broader and deeper are not easily compatible concepts,” says Pickering.
It might be thought that this apparent contradiction can be got round through the notion of delegation. In this view, trustees can opt to be advised by specialists, which they retain the responsibility for selecting.
Provided the trustees select the specialists, be they actuaries or investment managers, with “due care”, they can sit back and feel that they are doing their jobs, even if they don’t really understand the niceties of what it is that the specialists “do”. However, there are some real problems with this approach.
“The lawyers split into two camps on this,” says Pickering. There is a camp that argues that delegation, if done properly, is an acceptable defence for the trustees if things go wrong. However, there is a second body of legal opinion, which argues that the trustees cannot delegate responsibility for failure away from themselves.
They can delegate but, ultimately, they carry the can, so the implication is that the trustees have to know in detail what it is that the specialists are doing, and they have to be able to tell if the specialists are doing a good, bad or indifferent job. Where does this fit with the government’s notion of broadening trustee board membership? Broad-based membership and specialist knowledge of multiple arcane areas do not go hand-in-hand.
Essential knowledge
Rachel Vahey, head of pensions development at Scottish Equitable, believes that the way things are going, it is fairly safe to say that it will be the latter vision of things that trustees4 will have to deal with, not the former.
“With my knowledge of how the Pensions Regulator and pensions law works, it seems clear that while trustees are free to pick scheme advisors, they have to be involved in the process. As the trustee you are the one employing the advisor and there is not going to be any way around that,” she says.
Vahey points out that the Pensions Act 2004 brought in a code of practice for trustees, overseen by the Pensions Regulator, and this came into effect from 6 April. All trustees now have to have the knowledge deemed necessary for them to perform their roles.
“Basically, trustees have six months, from 6 April to 6 October to get themselves up to speed,” she says. The Pensions Regulator has made it clear that it is dedicated to helping trustees acquire the knowledge they need. Not all trust schemes require the same depth of knowledge. A money purchase trust involving 20 members is one thing, a final salary scheme for a few thousand members is a different beast entirely.
Tools of the trade
However, in the case of the latter, the Pensions Regulator’s online Trustee Toolkit only requires around 20 hours of work from a trustee for them to be fairly confident that they have a grasp of what is required. “The Toolkit is modular, and you pick the courses that suit your circumstances as a trustee,” Vahey says.
This is all well and good, but we have to remember that in addition to being specific about the duties it requires from trustees, the law is also specific about holding trustees responsible for inappropriate acts and judgements.
In a very real sense, you can get into very serious difficulties being a trustee, and one has to remember that for the vast majority of member-appointed trustees, this is a job without fees. Why should people continue to take on such huge responsibilities for no direct gain?
Viewed simply as a cost-benefit equation, being a trustee doesn’t add up. You have to be motivated by civic zeal or a strong sense of duty towards your fellow members to volunteer for trustee duties in the first place. Something other than logic has to come into play.
“Of course, if they are members of the scheme, then there is a sense in which they are looking after their own interests, as well as the interests of other members, but it is a lot to ask,” Vahey admits. However, she points out that the trade unions have a strong history of encouraging members to act as trustees.
The unions also do a very reasonable job of supporting those members, helping them to educate themselves on trust law, due diligence, the setting of investment strategies, what to look for in advisors and so on. Nevertheless, one cannot get around the fact that trustees do shoulder some fairly daunting responsibilities and can be faced with some very difficult decisions.
They are also expected by the regulator to “push back” at senior management and to query senior management decisions sternly where they affect issues such as the strength of the employer’s covenant. Pushing your employer hard is not usually considered a great career-enhancing move, so trustee duties carry at least a degree of potential career risk. So the question remains, why do it?
Pickering argues that if the UK does reach a position – and this is by no means just an academic possibility – where fewer people are prepared to become trustees, then we will inevitably end up with a “governance void”. “If we retain the trustee concept but no one volunteers for trusteeship, then that is the worst of all possible worlds,” he says.
However, it is always possible that if government and the industry is forced by a decline in volunteers to rethink trusteeships, we might end up with quite a sensible debate based on the who, when and the how of pension scheme governance.
Limited resources
One solution, of course, is for companies to appoint professional trustees. However, there are far too few of them to go around and while they undoubtedly do a good job, there has to be at least a theoretical question over their commitment.
As Vahey puts it: “Members are very tightly related to the scheme when they act as trustees. A professional trustee, on the other hand, will always know that they can move on to another trustee role on another scheme,” she says. They will be very professional, but they are also rather more detached, which is precisely why the government is so keen on employees coming forward to be trustees.
One of the more difficult areas for any trustee to get to grips with has to be the scheme investment strategy, not least because of the impenetrable jargon that makes up the language of fund management. In his book, All You Need to Know About Being a Pension Fund Trustee (Longtail Publishing), the financial journalist Andrew Freeman argues that trustees need to stay focused on the fact that the biggest investment risk their fund will face is what he calls “their loan to the sponsor”.
“This, after all, is what a pension fund deficit really is,” he says. Trustees find themselves with this “loan” as a historical state of affairs that has been thrust upon them. Once they grasp that it is a loan it quickly occurs to them that it is a “horribly concentrated” risk. If the sponsor company goes under, their “loan capital” goes with it.
Having grasped the extent of that risk, moving into the world of financial investment should not be too shocking for trustees, particularly since investment management is full of rather clever ways of mitigating the risk that investments will go pear shaped.
In other words, trustees have some control over investment risk, and not too much control over sponsor risk, other than pushing back hard at the employer if the employer seems to be favouring a course of action that, in the trustees’ view, weakens the sponsor’s covenant.
However, what is clear from Freeman’s approach is that there is no way for trustees to avoid mastering at least the rudiments of investment management skill. He cites “shorting”, for example, as a mechanism of protecting against the risk that the equity markets might drop 20%.
One wonders how far people who already have a full-time job will be prepared to go to attain an understanding of techniques that fund managers spend years acquiring – and still get wrong.
Will member trustees, backed by the Pensions Regulator, prove resilient enough to keep the trust concept trucking through the current pensions market turmoil? It is possible, but far from certain. The era of the amateur could well be passing.
