The Association of Professional Pension Trustees (APPT) has published today its responses to two of the key ‘Mansion House’ evidence calls on Trustee skills and Options for DB schemes. The Trustee skills response calls for updates to the trustee toolkit and supports the mandatory accreditation of professional trustees, whilst cautioning against further onerous requirements being placed on lay trustees that could backfire. On the options for DB schemes, APPT calls for cautious and careful consideration of reforms to amend surplus rules.
Key points in the APPT responses:
Trustee Skills and capability: Knowledge and understanding.
APPT Chair, Harus Rai, commented: “Amongst accredited Professional trustees we believe that trustee requirements are well understood, and Professional trustees recognise that they are held to a higher standard of care. Knowledge and understanding of lay trustees could be monitored more closely by the Pensions Regulator, for example with an addition to the annual scheme return requiring confirmation by the Chair of trustees that all trustees have met their TKU requirements.”
• APPT supports the planned major overhaul by TPR of the Trustee Toolkit, or whatever replaces it, as the recognised source of minimum required trustee knowledge and understanding.
• For Professional trustees who follow the accreditation regimes there are already checks on knowledge, understanding and standards made ahead of accreditation being achieved and annual checks made including submission of the previous year’s Continuous Professional Development record.
• APPT has recently reviewed our accreditation process to make sure it continues to be in line with the standards currently required.
Accreditation
Harus Rai added: “Our understanding is that very few lay trustees have chosen to accredit under the voluntary accreditation framework set up in 2021. The broad range of skills, qualifications, and experience of lay trustees, together in many cases with their first-hand knowledge of the businesses that sponsor pension schemes, is a vast resource that has underpinned the good governance of most UK trust-based schemes over the last century and beyond and should not be under-estimated.”
• APPT says careful consideration is needed before placing accreditation requirements upon lay trustees. A likely outcome would be that the recruitment of lay trustees becomes even more difficult than it can be at present for many schemes.
• The APPT adds that accreditation for Professional trustees, which has been in place since 2020 has proved a great success and is ‘fit for purpose’ with close to 400 APPT Professional trustees accrediting under a framework which is not currently mandatory. Those who have accredited meet knowledge and understanding, educational, continuous professional development and ‘fit and proper’ requirements and are reviewed annually.
• The response summarises the recommendations for further enhancements to the framework made in the 2023 APPT Accreditation Review, published on 9 August 2023.
• APPT supports the accreditation of Professional trustees being made mandatory to ensure consistent high levels of scheme governance. This will enable the frameworks to be further enhanced over time.
Better scheme governance
• APPT favours a gradual move whereby schemes meeting certain criteria, for example schemes of a certain size or category are required to appoint a Professional trustee. The response recommends that in consultation with TPR and industry, a decision is made on the most practical approach given the resources available and any moves towards consolidation, so government can set a phased introduction over a few years for the requirement for schemes to appoint at least one Professional trustee.
The role of advice and support for unlisted equities
• APPT points out that investment consultants support trustees in their investment decision making by putting forward strategies which meet the goals of each scheme. Such advice is required under law. For trustees to decide to invest in unlisted equities it will be necessary for suitable investable products which meet the varied needs of schemes.
Harus Rai, added: “It is likely that there would need to be further amendments made to the DB Funding Regulations allowing TPR to adapt its DB funding guidance to enable trustees to be confident in accepting the additional/different risks involved. For DC schemes, subject to the availability of suitable funds and structures, an option to invest in unlisted equities may be in members’ long-term interests but would need to be balanced against the additional risks involved, such as increased cost and illiquidity. These risks may exclude smaller DC schemes.”
• APPT adds that given that Trustees are the legal owners of scheme assets, investing on behalf of the scheme beneficiaries, their fiduciary duties under trust law and legislation and regulation tend to result in investing in asset classes which are commonly perceived to involve lower risk and therefore lower return.
Options for DB schemes
Extracting surplus, its return and boosting DC contributions
Harus Rai, commented: “Importantly, it must be remembered that a surplus only really materialises on scheme wind up when the scheme benefits have been bought out in full. Whilst in its broadest context we understand and support consideration being given to wider uses of surplus, we would highlight that, as it stands, use of any surplus is determined by individual scheme rules and would need to be with reference to the full range of circumstances, including - but not limited to - the scheme funding position, long-term objective and strength of the sponsor covenant.”
• Levels of surplus would need to be significant and sustainable before trustees would be confident in retaining investment risk but reducing funding levels (by paying out surplus), given the risk that funding levels may deteriorate again in future.
• However, the response makes recommendations on how the procedure for returning a surplus might be simplified and shortened.
• Whilst in its broadest context, APPT sees attractions in using surplus to boost DC contributions, the challenge to trustees would be how the DB scheme would meet any future deficit, should one emerge, as it would not be possible or desirable to take the funds back from members’ DC pots. This could mean that recovery plans would need to be agreed with Sponsors to cover this contingency or consideration would need to be given to buying some kind of guarantee.
PPF wider guarantee
• In response to the proposal that in return for the payment of an additional levy by Sponsors, PPF provide a guarantee to pay full benefits to schemes where some level of surplus is extracted, but where funding levels later fall short of that allowing for a full buy-out, APPT’s response says:
‘Whilst we welcome the consideration of all options which could increase the certainty of delivering full benefits to scheme members, we believe any proposal needs to be carefully considered by Sponsors, trustees, the PPF and Government to test its viability in cost terms and over the longer-term under various adverse economic and financial scenarios.
‘We believe the Government must take full account of the complexity of the UK pension regimes, including its legal frameworks, and carefully consult over a reasonable timeframe with all stakeholders before adopting a particular consolidation proposal or proposals.’
LCP has highlighted that trustees need to be given more extensive guidance and support to invest in asset classes, which could ultimately deliver a win-win for members, sponsors, UK plc and the energy transition and managing the impact of climate change.
In their response to the DWP’s Call for Evidence on pension trustee skills, capability and culture, LCP has warned that these investment opportunities can only be maximised if trustees have the right regulatory framework and guidance to support making decisions to invest in productive assets. LCP highlights they do not believe trustees’ knowledge and understanding is a barrier to investing in complex assets such as illiquids, but rather the current regulatory framework and definition of fiduciary duty may be acting as a barrier.
In their response to the Call for Evidence, LCP is calling for new regulations that create a different risk/reward environment for DB trustees that, in turn, can be expected to support more widespread, and for longer, DB investment in productive finance.
LCP propose that a key to doing this would be to undertake a wider review of fiduciary duty to enable trustees to look beyond scheme membership to the members’ best interests over their lifetime and to allow trustees to consider the macro impact of their investment decisions in terms of the energy transition and climate change.
Other key things that LCP raised in the consultation are:
• There should be an extension of existing guidance on investment to set out how trustees should best think about “productive assets” and how to balance the different time horizons of members and risks.
• Accreditation shouldn’t be a “tick box” exercise. Any strengthening of the current accreditation schemes would need to be at a pace that could be supported by the trustee community naturally rather than rushed through.
• There should be more guidance for DC schemes on the selection and oversight of a DC pension in a Master Trust and on the valuation of illiquid assets.
• There need to be improvements from investment managers on both product offerings and transparency/disclosure with regulation to support this if necessary.
• Encouraging or requiring all employers to provide trustees (member and corporate appointed) sufficient time to fulfil their duties.
Nathalie Sims, Partner at LCP, commented, “Trustees know what they are doing. This consultation is a great opportunity to review the current regulatory framework and support provided for trustees to make the best decisions for the future of their members. The rapid growth of the Professional Trustee industry is a testament to how much demand there is to have additional support on trustee boards within the investment industry and beyond, and this growth is likely going to continue.”
Laura Amin, Partner at LCP, added: “There are exciting prospects ahead for how DB pension funds can help contribute to the wider economy, and there is a common thread across the DWP’s Calls for Evidence as DB investment in productive finance could be a win for scheme members, for sponsors, for UK plc and the government’s net zero agenda. But only provided trustees have adequate support/guidance to make these investment decisions for a sustainable future - and in this context, a rethink of fiduciary duty is warranted to enable trustees to look beyond scheme membership to the members’ best interests over their lifetime and to acknowledge the macro impact of their decisions in terms of the energy transition and climate change.”
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