UK Pension Scheme Governance - Why History Matters

From as early as the 1800s, UK organisations have provided Pension Schemes for their employees. These were initially “Defined Benefit” (Final Salary) Schemes, but in recent times have been replaced by “Defined Contribution” (Money Purchase) Schemes for the private sector. This move to Defined Contribution has been driven by a number of different factors, including additional regulation, costs and the funding uncertainty associated with Defined Benefit Schemes.

UK Pension Scheme assets and their supporting businesses are material to the UK economy which is one of the reasons why Pension Schemes are subject to a high degree of political and regulatory involvement. This can make the complexity of the UK pension sector a difficult subject to grasp, especially for overseas based owners of UK based employers.

By law, occupational pension schemes in the UK must be set up as trusts. This keeps the Scheme’s assets separate from those of the Employer, providing greater security for members’ benefits. The Scheme’s assets are held in trust by the Trustees, who have a clear legal responsibility to safeguard the members’ benefits and are responsible for ensuring the smooth and compliant running of the scheme.

While the Trustee board is ultimately responsible for a Pension Scheme’s management and performance (akin to a Company Board of Directors), Trustees will naturally rely on, and be guided by, other professionals in undertaking their responsibilities, for example: Lawyers, Investment Advisers, Covenant Advisers and Actuaries.

Over the last 20-30 years, many factors have made Pension Scheme management more complex, resulting in the Trustee’s role becoming more onerous. These include:

• More stringent regulation and regulatory oversight including the need to demonstrate sustainable investment strategies.
• The cost of funding benefit promises becoming more material, hence more closely managed by Employers and more stringently audited.
• With most private sector Defined Benefit Schemes now closed, there is an increased need to consider complex, often specialist, sometimes irreversible, options like: benefit buyouts; longevity hedges; specialist investment management and Scheme consolidations.

These additional challenges have coincided with available management time being increasingly stretched. It is becoming harder to find suitable potential Trustees, whether Employer, or especially, Member Nominated, who are willing and able to join Trustee Boards.

This is leading to increasing demand for Independent Professional Trustee and the additional value they may bring to meeting these challenges. We will explore the pros and cons of engaging an Independent Professional Trustee and consider the main operating models used to deliver their services in future articles.

Contact us for additional information on the role of Professional Trustees and Scheme Managers if you wish to discuss your requirements in more detail.

Terry Webster is an experienced Independent Trustee and has over 20 years’ experience in the pension industry. A qualified actuary, in 2017 he completed a “One Planet “ MBA accredited by the World Wildlife Fund which has brought an additional perspective to his role as a trustee on embedding ESG, where he is able to bring a clear focus to the various aspects of the impact of sustainability.