Response to consultation paper: Draft standards for professional trustees of occupational pension schemes
23 February 2018
Response to consultation paper: Draft standards for professional trustees of occupational pension schemes
The Law Debenture Pension Trust Corporation p.l.c. (“Law Debenture”) welcomes the opportunity to contribute to the consultation.
Law Debenture is the largest and longest established provider of Professional Pension Trustee services in the UK. Our clients’ pension schemes have over 2 million members with over £250 billion in assets invested on their behalf. As well as working with some of the largest and most complex pension arrangements in the country, we also work with more than 100 schemes with fewer than 500 members.
Our responses (shown in italics below following each of the questions posed in the Consultation document) reflect the perspective of, and our position as, a professional trustee of pension schemes. The comments are Law Debenture’s own and do not necessarily reflect the views of the trustee boards of schemes on which Law Debenture serves.
High standards of governance are central to our business. We welcome the establishment of the Professional Trustee Standards Working Group (PTSWG) with its mission that is consistent with TPR’s drive to increase standards of trusteeship.
We consider it important for the regime to take into account that there are broadly three categories of professional trustee:
a. Individuals operating on their own account
b. Individuals operating through the umbrella of a franchise-type operation. These operations vary in size.
c. Companies or other entities that act as trustee or trustee director and are represented on a trustee board by one or more employed individuals. Again, these vary in size. Law Debenture is in this category.
In our view the standards expected of individuals who act in any of these capacities should be the same. However, different accreditation or monitoring processes may be appropriate. To take the extremes, a large company in category c. is likely to have processes to ensure the quality of its work that differ from those a sole trader could operate. This matter is discussed further below.
1. To what extent do the proposed standards make clear the higher standards expected of professional trustees?
The proposed standards are generally what could reasonably be expected of a professional.
2. What impact do you expect adherence to the Standards will have on improving the quality of professional trustees?
For schemes that appoint the many professional trustees who are already working to the standards set out we would expect there to be little or no impact on the quality of work.
For those schemes that appoint professional trustees who are not working to these standards improvements will be made if:
- The professional trustee recognises that he/she falls short of the required standard and either makes improvements required to comply or ceases to act
- The scheme or sponsor recognises that the service of the professional trustee falls short and either insists on the improvements required or terminates the appointment and appoints instead a professional trustee who meets the requirements
There is a risk that those that have not taken the trouble to comply with these sorts of standards will continue not to recognise the benefits of doing so. TPR’s approach to penalties creates an incentive for the professional trustee to recognise shortcomings and take appropriate action, as should the desire to avoid liability for negligence or breach of trust. The self-evident interests of members, sponsors and other trustees that any professional trustees are effective should be sufficient incentive to drive for change. However, we acknowledge that there is no legal obligation on either professional trustees or schemes to ensure compliance.
- Inclusion of a short statement at the top of the document explaining its legal/regulatory standing, its voluntary nature, how TPR will use the framework and how trustees/sponsors should use it
- Consider encouraging trustees to sign up to adherence with the standards (consistent with both the “comply or explain” interim approach and the accreditation process that is to be developed)
- Consider introducing a requirement that the Trustees’ Report and Accounts includes a statement whether or not its professional trustee(s) have signed up to the standards. We are aware that the Pensions SORP working party intends to publish a revised Pension SORP imminently. There is therefore a short window of opportunity to propose such a reference in the pro forma Trustees’ Report contained within the Pensions SORP.
- TPR and the PTSWG consider what publicity should be given to the new structure
3. What impact do you expect this will have on trusteeship generally?
Subject to the points made in 2 above, over time there should be a significant improvement in the quality of overall trusteeship.
A limitation is that there will be no direct impact on the many schemes that do not make use of a professional trustee.
Consider introducing a requirement that, in schemes where there is no professional trustee, the Trustees’ Report and Accounts includes a statement how the trustees ensure that adequate governance arrangements are in place. As and when a general governance statement is required for DB schemes (equivalent to the DC Chair’s Statement), a comment could be required on the scheme’s policy so far as appointing professional trustees is concerned.
4. What are your views on the proposed interim approach for professional trustees to comply or explain against the standards until an accreditation framework is established?
We support this approach, within the context of the comments made above. Further refinement of the standards may assist with some practical aspects of “comply or explain”. In particular:
- Professional trustees may be individual or corporate. In the case of the individual the compliance obligation is self-evident. For a corporate professional trustee it needs to be clear whether responsibility rests with the individuals who represent it or with the company (see also 5, below). The standards include:
a. attributes of the individual trustee or trustee representative (for example “Ensures professional judgement is not compromised…”
b. requirements relating to the conduct of the trustee’s business (for example “Has in place processes to maintain continuity of service and ensure peer review…”)
c. scheme-specific measures (for example “Implements a performance review process for the chair, individual trustee board members and the trustee board as a collective”)5. What is your preferred accreditation structure?
A number of the standards are hard to measure objectively. We believe assessment of category c measures for the comply or explain process may present particular difficulties. An individual professional trustee might be compliant in relation to one scheme, but not another and hence could be faced with explaining why not for each exception. The challenge would be greater for corporate trustees acting for scores or hundreds of schemes.
5. What is your preferred accreditation structure?
We can envisage various structures that could be deployed. There will inevitably be some trade-off between costs of compliance and rigour of the process. Ideas include:
- Accreditation of individual professional trustees through some form of evidence gathering and inspection
- Accreditation of professional trustee companies through some form of evidence gathering and inspection, with the trustee company being responsible for monitoring the individuals that represent it
- Continuation of the comply or explain self-assessment approach
The principles and assessment framework laid out by TPR in its Assurance Reporting Framework used for trustees wishing to be on the Trustee Register provide a good base, and we suggest this should be supplemented rather than a wholly separate process being established. This would mean that, at least for professional trustee companies and franchise operations, quality assurance in relation to the individuals representing the organizations or using their name would be the responsibility of that organization with monitoring being possible through an extension of the current independent AAF assurance process.
The current control objectives in relation to Key People could readily be expanded to include the scope of the proposed standards (subject to the reservations over measurability expressed below).
6. What do you think would be appropriate evidence that a professional trustee meets each of the standards in relation to:
- Fitness and propriety
An absence of evidence of contrary behaviours
- Expertise and care
For individuals or individuals representing professional trustee companies:
3 Membership of a specified relevant professional body (e.g. actuary, accountant, lawyer, APPT) Completion of TPR toolkit and/or PMI Award in Pension Trusteeship
6 Compliance with CPD requirements of a relevant professional body
For items 2, 4 and 5 it is hard to develop objective measures and self-certification may be the best approach.
- Impartiality and conflicts of interest
7, 8 evidence of compliance with schemes’ and/or professional trustee company conflicts registers
- Professional behaviour
9-12 Framing an objective test of these measures is not straightforward. It may be necessary to rely on self-certification and an absence of evidence to the contrary.
We would also suggest that the phrase “acts in the best interests of the members…” , which has been criticised by legal authorities, is re-considered, perhaps most simply by removing the word “best” and referring to beneficiaries rather than members. We can provide further information if it would be useful.
- Systems and controls
13-18 This section contains a number of scheme-specific items – see response to Q4 above.
13, 16 and 17 might be re-worded along the lines: “Takes reasonable steps to ensure that schemes have in place robust systems and processes and associated internal controls.” Evidence could come from scheme audit reports or similar.
14, 15 – documentary evidence should be straightforward
18 – for professional trustee companies evidence from internal records
We note that TPR has developed more detailed requirements of those wishing to be on its register of independent trustees to operate sound administrative and accounting processes. An independent accountant’s report prepared for these purposes would be a good source of evidence
Please refer to the standard number when suggesting suitable evidence to demonstrate a professional trustee meets that standard.
7. For professional trustees:
a. What impact do you foresee on your business of obtaining and maintaining this accreditation?
Provided the requirements are established in a proportionate manner we do not expect obtaining and maintaining accreditation to be unduly burdensome.
b. What do you envisage the costs to your business might be?
This cannot be determined without understanding the accreditation system. Provided it is not disproportionate we would not expect it to have a material impact on the level of our fees. However if the approach entailed a detailed annual audit of full evidence the cost could become significant.
8. How effective are the conflicts of interest examples in demonstrating how professional trustees might look to manage any actual or perceived conflicts of interest? What other examples could be included?
These are useful examples.
Example 1 could be enhanced by pointing out that if Arthur were a member of the GSC he would be conflicted in relation to any decisions on the appointment of Good Trustee Services to perform secretarial work for the scheme. (Also, the example states “In this way, the Trustees are providing their own secretarial services rather than outsourcing to a third party.” We do not think this is true as it is outsourced to Good Trustee Services)
Example 2. A brief explanation of the matter giving rise to potential conflict and whether it is appropriately addressed would improve the example.
Example 3 could be improved by pointing out that if Germaine had not absented herself from the discussions she would have been conflicted.
One area that can result in conflicts and might provide a useful example is corporate activity resulting in a sponsor of one client coming into the ownership chain of another client – and hence the two pension schemes having competing calls on the employer or the group of which it forms part.
9. Do you have any further comments on how to improve standards of trusteeship, generally and specifically to professional trustees?
10. Do you have any other comments / suggestions in relation to the standards?
Schedule 2 includes additional standards for professional trustees who act as chairs. We agree that these are good things for Chairs (and not just professional Chairs) to do. We would note that a number of these may be difficult to measure objectively or support with evidence for reasons similar to those indicated above. In pointing this out we do not mean that they should not be expected.
If you have any questions about the consultation, LawDeb's response or professional trusteeship contact email@example.com