20 February 2020

Background – tPR consultation on future of trusteeship and governance

The Pension Regulator (‘tPR’) has a long-running objective to improve the standards of trusteeship and governance. Its response to its ‘Future of trusteeship and governance' consultation has just been published. 

tPR says that ‘good governance is vital in ensuring schemes are well-run’ and that it is important for trustee boards ‘to have the right structures and processes in place to enable effective and timely decisions to manage risks appropriately’.

tPR’s consultation put forward various ideas to improve how trustee boards are run, including:

  • upskilling trustees’ levels of knowledge and understanding (‘TKU’) – perhaps by introducing minimum training requirements
  • improving diversity on trustee boards and
  • the professionalisation of trustee boards.

On the whole, we completely support tPR’s initiative to improve how trustee boards are run to get better outcomes for members. However, we would caution against a ‘one-size-fits-all’ approach. For example, the trend towards professionalisation of trustees should bear in mind the many benefits that lay trustees can bring to pension trustee boards.

tPR’s Response is measured and does not propose radical change. tPR will not require there to be a professional trustee on every board (although they may revisit this in the future), nor will they prohibit sole trustees. tPR supports the initiatives of the Association of Professional Pension Trustees and is to do further work on increasing diversity and updating the TKU code of practice and trustee toolkit. 

Trustee incorporation as an aid to good governance?

Although tPR does not mention it in its Response, one practical step which can help improve scheme governance where there is a board of individual trustees is to incorporate the trustee board. Typically this will (at the least) focus attention on decision-making processes.

Trustee incorporation involves creating a trustee company to act as the scheme's sole trustee in place of the former board of individual trustees. Usually the former trustees then become directors of the new company.

In our experience, there is a growing trend towards this type of trustee board structure. Benefits include:

  • an easier process for the appointment and removal of trustees (Companies House forms and corporate procedures rather than a deed of appointment and removal)
  • simpler administrative processes (as not all trustees will need to sign deeds) – we are advising a number of schemes on the consequences of incorrectly executed deeds and we are seeing this remains a hot topic for trustees - and in particular
  • greater protection from personal liability for trustee directors compared to individual trustees.

From a good governance perspective, each of these aspects may help the way the scheme is run.

An easier process to switch trustee directors can mean appointment and removal changes do not lag behind the reality. Similarly, because it is easier for a trustee company to execute deeds, rule changes and other deed agreements can be executed in a timely fashion, again ensuring the scheme is up to date. Finally, greater protection for trustee directors might make it easier for them to participate in full and open board discussions; helping governance and member outcomes.

On top of all that, an incorporation project requires trustees to turn their minds to their decision making processes as a trustee company’s articles of association will need to reflect these. Are current processes appropriate? Should any decisions be taken unanimously rather than by majority vote? Should there be a casting vote and who holds it? What procedural steps are required to take a decision?

Clearly, not all trustee boards will be suited to incorporation. There may be valid reasons why trustees would prefer to continue to operate as a board of individuals. These can include: 

  • the upfront cost of incorporation (although this is balanced against reduced costs on appointment and removal of trustees)
  • some extra corporate administrative requirements (although these are generally simpler than having to execute deeds when trustees change) and
  • the potential perception that a trustee company is less personal and transparent than individually named trustees (however dealing with a company may give a sense of reassurance to members which helps to remind trustees of the importance of their role).

On the whole, we are seeing more and more trustee boards acting through a corporate trustee. Perhaps the greatest benefit for the trustees is greater protection from personal liability. 

If you would like more information about trustee incorporation and whether it might be right for your pension scheme trustee, please contact Chris Brown, Partner on 0117 939 2242.

This article was written by Chris Brown, Partner in Burges Salmon’s Pensions Team.

Key contact

Michael Hayles

Michael Hayles Partner

  • Pensions
  • Public Sector Pension Schemes
  • Financial Services

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