Can you trust your trustee?

Trustees are the front line of defence for defined-benefit (DB) pensions-scheme beneficiaries. But can you trust them, asks David Prosser.


Trustees are asleep on the job
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Trustees are the front line of defence for defined-benefit (DB) pensions-scheme beneficiaries in the UK, protecting members' interests in the face of the often-conflicting demands of employers and individual savers. However, trustees aren't always up to the job. Indeed, new figures from the Pensions Regulator, which polices the occupational-pension sector, show many trustees aren't even getting the basics right.

Last year alone the regulator had to take action against more than 800 pension schemes whose trustees had failed to publish standard reports, such as a statement of governance from the chair of the trustees or a scheme return. More than 160 schemes ended up with fines after failing to respond to the regulator's complaints.

The problem isn't limited to small pension schemes where limited resources might be to blame for compliance failures. Last month, for example, the Pensions Regulator announced it was fining the pension scheme of the London Borough of Barnet for failing to submit its 2016 scheme return. Such cases may sound like minor governance transgressions, but if trustees can't file basic paperwork on time, how can members be confident about their ability to safeguard members' interests?

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Pension-scheme members themselves are usually entitled to nominate at least a third of the trustee board, strengthening the link between scheme beneficiaries and those responsible for the scheme. Such moves were designed to ensure trustees behaved more proactively, intervening to prevent sponsoring employees from acting against the interests of members.

However, the pressure on trustees has increased in recent years, as many employers have grown increasingly uncomfortable with the size of their pension-scheme liabilities, particularly since large numbers of schemes are now in deficit. Many employers have closed schemes to new members, while sponsors have opted to postpone dealing with their liabilities by extending their deficit-recovery plans, for example. In some cases, trustees have felt compelled to accept unattractive proposals from scheme sponsors in fear of the possibility of the employer otherwise going bust.

The Professional Trustee Standards Working Group, a group of pension professionals, including regulators, now proposes to develop a new set of standards that trustees should meet in order to represent members' interests properly. The group said it would aim to reach a compromise on the minimum competencies and experiences that pension scheme trustees should be expected to have. The question will be whether such standards ensure that trustees are equipped with the skills they really need in what is increasingly becoming a confrontational line of work.

At the rate of attrition seen over the past decade, within 20 years as many as a third of DB pension schemes will be managed by the Pension Protection Fund, the industry lifeboat that steps in when a sponsoring employer is no longer able to support its pension scheme.

That puts trustees under more pressure than ever above all, to secure scheme funding before it's too late, either from increased contributions from employers, or from improved investment returns and a more aggressive investment strategy. That will not be an easy task and the failure of some trustees to fill in forms on time will hardly convince members that their interests are in safe hands.

Are consultants a waste of money?

The trustees of leading occupational pension schemes are reconsidering their relationships with investment consultants. Regulators say these firms' performance may not always justify their fees.

The UK's three largest consultants, Aon Hewitt, Willis Towers Watson and Mercer, dominate the market, advising hundreds of occupational pension schemes on how and where to invest members' cash. However, the Financial Conduct Authority (FCA) sees little evidence that consultants help schemes find fund managers who deliver better returns.

The FCA also pointed out that the consultants, who offer an increasing range of management services of their own, often end up competing with the very fund managers that pension schemes pay them to assess independently. The regulator is so concerned about a lack of competition in the investment-consultancy market that it has called for an inquiry led by the competition authorities.

In light of the FCA's criticism, many schemes are thinking about changing investment consultant for the first time in years, a new study from SEI suggests. Of the 35 leading pension schemes representing £42bn of assets between them polled by SEI, 19 said they now planned to look again at their current investment-consultant relationship.

Tax tip of the week

If you give away gifts (ie, anything that has value, such as money or property) worth more than £325,000 in the seven years prior to your death, it's important to be aware that these may still incur inheritance tax (IHT). The tax will be applied on a sliding scale, starting at 40% for gifts given in the three years before you pass away, falling to 8% if given between year six and seven.

However, no IHT will be due on small gifts you make out of your "normal income" this includes things like Christmas or birthday presents. Each tax year you can give away up to £3,000 worth of gifts, and you can carry any unused annual exemption on to the next tax year, though you can only do this once. (See for more details).

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.