UK 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 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
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.
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,”
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.
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
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
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