Feature – Focus on pensions: Conflict of interest sees FD trustees flee

Finance directors, who serve as trustees find themselves in a position of conflict when it comes to negotiating reductions in pension deficits, says Jamin Robertson

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Some finance directors have opted out of serving as pension scheme trustees due to conflicts of interest.

These have arisen due to pressures placed on employers by the Pensions Regulator to increase scheme funding in order to cut deficits.

As a result, demand for professional trustee companies and individuals is growing.

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Finance directors (FDs) who are trustees of defined benefit (DB) schemes have had a tough time of it lately, torn between a loyalty to their job and employer and the demands of their trusteeship. Trustees hold a scheme’s assets for the potential recipients and must act independently of the employer, for the benefit of the scheme members. As a result, many FDs have stepped down from trustee roles.

Stephen Yeo, senior consultant at Watson Wyatt, explains: "We have a dinner every year with large clients. Last year, half the people in the room had FDs on the trustee body. We had another dinner recently and there were none. I’m not saying there are no FD trustees now, but there are fewer."

The difficulties stem from obligations under the Pensions Act 2004 to ensure that DB scheme deficits are cleared. Kevin LeGrand, head of technical services at Buck Consultants, explains: "The Pensions Regulator is pushing very hard for [deficits] to be wiped out and trustees are being told they’ve got to be very tough with the employer."

In these instances, FDs who also act as trustees could find themselves caught between being part of the lobby for more employer funding, while also acting as a key figure in determining their organisation’s response. While FDs may leave the room on such occasions, many have made that a permanent arrangement, leading to increasing interest among schemes in the appointment of external trustees.

Paul Clark, regional managing director at Jardine Lloyd Thompson Benefit Solutions, says the demand for professional trustee companies is growing, but the cost will deter some firms. Less costly are independent professional trustees who serve on several boards at once on a part-time basis.

But even where employee trustees do choose to remain in their posts, the expectations that are placed on them have increased under the terms of the Pensions Act 2004. This raised the bar in terms of trustee competence.

Although the role of a trustee has always demanded a base level of competence, sections 247 to 249 of the 2004 Act require trustees to have a knowledge of pensions and trust law, as well as the principles around scheme funding and investment. And trustees have been warned that trustee indemnity insurance will not excuse negligence.

The Pensions Regulator, meanwhile, expects trustees to be conversant with relevant policy documents, and on 30 May this year announced four new codes of practice, bringing the total to seven. Mark Polson, head of corporate business at Scottish Life, believes this has moved the goalposts for trustees. "The Pensions Regulator expects trustee knowledge to be robust although it should always have been the [case]. High-profile failures are making people look at the governance of schemes and realise trustees do have responsibilities," he explains.

However, others believe such emphasis on trustee responsibility may deter potential employee representatives from taking up trusteeships. But Yeo disagrees: "I think the tools are there to enable people to do the job."