How trustee boards can operate effectively


Financier Worldwide Magazine

May 2014 Issue

May 2014 Issue

Governance boards of all types face challenges – the stewardship of any organisation is rarely an easy task and issues such as conflicts of interest, ‘group think’, diversity and allocation of scarce resources will invariably need to be overcome.

Trustee boards responsible for running a pension scheme, which are often made up of individuals with very limited time and resource, are subject to a quite different set of challenges in addition to those set out above. These are not always recognised or addressed fully by trustees’ advisers, the sponsoring company or the trustee board themselves. Failure to meet these challenges has accounted for some of the problems experienced by UK pension schemes over the last 10 years.

Unique governance challenges faced by pension scheme trustee boards

Pension scheme trustee boards are tasked with the effective running of a pension scheme – ensuring that the interests of all members, and other stakeholders such as the sponsoring employer, are protected. This involves the oversight and implementation of a wide ranging set of policies and procedures, covering issues such as: (i) accurate calculation of member benefits in line with often complex governing documentation; (ii) maintenance of an extensive and accurate data set, often reaching back 30 years or more and spanning several computer systems and sets of previous advisers; (iii) the setting and monitoring of an investment strategy, designed to meet the scheme’s objectives; (iv) agreement of a funding strategy with the sponsoring company, balancing affordability of contributions, the need to avoid placing an undue strain on the operations of the company, and the requirement to hold sufficient and appropriate assets to meet an uncertain set of future payments; (v) communication of complex pension calculations with an often disparate membership, with varying levels of financial sophistication; (vi) compliance with a seemingly ever changing set of legal and regulatory requirements; and (vii) procurement and management of a set of legal, actuarial, administration, governance and audit advisers.

This extensive set of duties is undertaken by a board of trustees, many of them non pensions professionals, with limited time and resource. Unsurprisingly, that presents a unique set of governance challenges to be overcome. The most effective trustee boards rise to these challenges as follows:

Clarity of objectives. In complete contrast to most boards, perhaps the biggest challenge faced by trustee boards is lack of clarity around what they are trying to achieve. Wooly statements such as ‘hold sufficient and appropriate assets to meet the liabilities of all members’ abound. Objectives have to be broken down into defined, measurable objectives for each year if trustee boards are to have any hope of making progress towards their scheme’s specific funding goal. There should also be secondary objectives set for each scheme year, such as reduction in running costs, reviewing the investment strategy, improving service to members, reviewing operational risks and implementing an improved mitigation structure – these also need to be defined, prioritised and metrics agreed for measurement of outcomes against these objectives.

Measurement framework. Once a clear set of objectives is set, measurement of performance each year is a significant challenge for trustee boards. They also have a great deal to measure – the performance of advisers against service level objectives and fee budgets, the performance of investment managers, the extent to which the investment strategy has performed as expected and whether, when combined with investment returns, the contributions paid by the sponsor have been sufficient to keep the funding plan on track. Putting in place a framework to measure performance in these areas is essential but effective monitoring also relies on availability of timely information.

Difficulty and cost associated with accessing information. Overall performance relies on timely access to a range of investment, actuarial and membership data. Quality metrics have historically been difficult for trustees to access. Many actuarial and investment advisers have significantly improved their offerings recently and many will now provide regular updates of asset and liability information. The most effective trustee boards work with their advisers to consider how best to integrate the data provided into their funding and investment decision-making and monitoring process.

Frequency of meetings. Tied in with the objective setting and monitoring challenges faced by trustee boards is the frequency with which they meet. Unlike company boards, it is not uncommon for trustee boards to meet no more often than once or twice a year. This can impede timely decision making and relies on strict prioritisation of issues to be considered at each meeting. It also relies on effective delegation of decisions which may need to be taken between meetings (such as those relating to movements in investment strategy) and access to information from advisers to enable those decisions to be taken between meetings. Where this delegation, access to information and clear prioritisation of agenda items is not present, the infrequency of meetings can lead to missed opportunities and significant scheme risks going unchecked.

Knowledge and understanding. Again, in contrast to company boards, for many trustees, running a pension scheme is not their day job. It is however vital that trustees build up and maintain sufficient knowledge of all the data, investment, actuarial, legal and risk management issues associated with a pension scheme. In order to assist the process, many trustee boards now employ the services of a professional trustee to help to manage this challenge. However, a heavy reliance on advisers is still prevalent on most trustee boards. This relationship with advisers is best managed where advisers are monitored against service level agreements, fees controlled, conflicts of interest recognised and addressed and where a strong relationship and understanding from the advisers of the specifics of the scheme exists.

In addition, trustee boards suffer all the ‘standard’ challenges of other boards – conflicts of interest (where trustees are also officers of the company, for example), diversity issues (a recent survey showed that around 80 percent of pension scheme trustees are male and only 6 percent are non-white), lack of representation from all participants and limited budgets.

Having said that, pension scheme trustees are, on the whole, rising to these challenges and working with advisers and regulators to address some of the issues they face. This has resulted in a drive towards more holistic and coherent funding plans, better value administration services on the market, a step up from advisers in respect of the frequency with which they are able to provide liability data to trustees and an improvement in the quality of data and record keeping processes across the industry.


Marian Elliott is a director at Spence & Partners. She can be contacted on +44 (0)20 7495 4619 or by email:

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