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Be careful what you wish for!

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Trusts play an important part in UK law, and they have stood the test of time. While the first trusts date back to Roman law, the concept of personal trusts which apply whilst the creator is alive, were developed in the 12th and 13th centuries. There are exceptions but virtually anyone can become a trustee. The trustee boards of occupational pension schemes undoubtably play a pivotal role in achieving good outcomes for scheme members and there is no doubt that more and more is being expected of pension scheme trustees in a constantly changing and ever more complex pensions environment.

Against this background, The Pensions Regulator is consulting on the future of trusteeship and has asked the pensions industry whether an accredited professional trustee should be required to sit on every trustee board. The industry is divided on this point, and the Regulator has acknowledged that this is currently somewhat of an academic question, given the number of occupational pension schemes greatly exceeds the current capacity of professional trustees.

Professional trustees do, in many cases, have a valuable role to play and can often improve levels of scheme governance. The well-known professional trustee firms have built up a good reputation in the market and are well respected. But not every professional trustee currently in the market is as reputable. The Regulator has recently announced it has disqualified three individuals from acting as professional trustees and is prosecuting a fourth in a separate case.

Any move to require professional trustees to sit on the trustee boards of all occupational pension schemes at some date in the future would involve a significant expansion of the professional trustee market. Query therefore whether there are sufficient numbers of pension professionals around with the right skills to become professional trustees, or whether a massive expansion in the industry would actually lower the current standard of professional trustees. It’s not just about having sufficient numbers of “professional trustees”; it’s about ensuring those trustees have the necessary skills to do the job properly.

Moreover, introducing professional trustees on every occupational pension scheme will have a significant cost implication and could potentially have negative effects on issues such as diversity and connection with the underlying sponsoring employers.

The Regulator appears to have been driven to asking this question by the laudable desire to drive better scheme governance. Despite all the Regulator has done in recent years, including its 21st Century Trusteeship campaign, there are still trustees out there under-performing. The consultation highlights a subset of trustees who remain disengaged, and who are either unwilling, or unable, to take action to improve the governance of their schemes. While this subset is not a large one it is to be found, according to the Regulator, more often in small and micro schemes. To that end the Regulator is also consulting on driving scheme consolidation.

While fully supporting the Regulator’s desire to improve scheme governance across the industry, and particularly in small and micro schemes, the suggestion of making it mandatory to have a professional trustee on every scheme is impractical and to my mind a step too far. It’s fine to raise aspirational questions such as this, but the full impacts and consequences of what such a policy might actually result in need to be carefully thought through.

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