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Friday, 14th August 2020
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Independent trustees to become the norm as trustees are put ‘on the spot’ Back  
Now more than ever before good pension scheme governance is critical in terms of regulatory compliance, employee relations and market perception, writes Elma Fox, who expects independent trustees to become the norm in Ireland.
Enron, Worldcom, Sarbanes Oxley ‑ every director of a publicly quoted company has become intimately familiar with these names in the last few years. Company governance is now firmly ingrained in the minds of all ‑ it is widely accepted that proper governance is key to minimising such difficulties.

Whilst it might seem logical that such standards would be universally applied a blind spot seems to exit in relation to pension schemes.

Its not as if the potential for problems is unknown. Locally both Bank of Ireland and AIB hit the headlines over their staff pension schemes. Independent Newspapers itself faced criticism when proposing increasing employee pension contributions.

In relation to pensions the responsibility for ensuring good governance falls to the trustees. While trustees may delegate most of their duties to various service providers such as actuaries, investment managers and administrators the ultimate onus is on the trustees to ensure that all these parties are fulfilling their duties correctly.

Applying some of the key principles of good governance to pension schemes would have the following implications:

1. Clear lines of accountability
2. Review system
3. Conflicts of Interest
4. Professional approach
5. Fiscal awareness

The above are key features of any system of good governance. How do pension schemes apply these principles in practice? The following issues in my experience are commonplace in pension funds:

1. The trustees of a pension scheme are responsible for the governance and operation of that scheme. In practice many schemes are established so that most of the practical duties of the trustees are delegated to service providers. The manner in which this delegation occurs is often flawed with little or no consideration of the specific tasks delegated and the abilty of the chosen parties to discharge those tasks.

By way of example one common method of delegating these duties is for the employer to establish a pension plan with a life office where the life office provide administration, investment, actuarial, accounting and reporting services to the scheme. Each of these are critical elements of the governance process. In practice however the selection process tends to focus on the investment service to the exclusion of the other critical elements. In addition this process is, in many cases, carried on with little or no involvement from the trustees. Finally there is often no review of the quality of these services with action usually only taken when disaster has occurred.

It is now recommended, as per the Pensions Board Trusteeship Review, and industry best practice that there are written contracts in place between the service providers and the scheme trustees and that these would establish clear lines of responsibility and appropriate review mechanisms.

2. By definition a trustee is meant to act with impartiality, representing the interests of the scheme and its members. This is best achieved when the trustees not only act impartially but are seen to do free of any or all conflicts of interest. Given their role in supervising the activities of the service providers to the scheme the independence of trustees from these service providers is critical. Frequently however schemes are established:

i. With the employer as trustee. As a major player in the financing of the scheme the employer clearly has a vested interest in ensuring the scheme is operated in a manner which suits the employer. This by definition can conflict with what is best for the scheme members as the high profile cases referred to above amply illustrate.

ii. With trusteeship provided as an add-on service by one of the service providers to the scheme for example the scheme administrator, actuary or benefit consultant. In this situation the responsibility for good governance has in practice been retained by the employer (as the trustee is clearly unlikely to fire themselves as service provider). The scheme is now much more susceptible to claims due to this lack of impartiality.

3. The position of trustee is a highly technical and legally onerous one. With an increasing amount of regulation in this area it is critical that the role is approached in a professional manner, utilising individuals of appropriate probity and competence and with access to adequate resources and support. Regulations already exist to provide for compulsory training for trustees. We have also the note the requirements for such trustees to have formal written contracts with the service providers to the scheme. Ultimately this will remove the amateur from this process ‑ the hard pressed company executive who has the role of pension trustee foisted on them. Independent trustees, which are currently the exception in Ireland, will become the norm.

4. Other jurisdictions have already recognised this and have introduced provisions obliging pension schemes to appoint independent trustees in certain circumstances. Whilst this is not a direct legislative requirement in Ireland it is clear that the increasing complexity and onerous nature of the regulatory regime is prompting an increasing number of businesses, national and international to reassess the situation and to look at engaging professional trustees. In a climate of higher governance these firms are finding that the costs, time and risks associated with pension trusteeship are quite significant and can no longer be managed in a cavalier fashion.

In addition to the existing regulation in place for pension scheme compliance there are further regulations being introduced or under consideration. This month sees the introduction of the ability of the Pensions Board to issue on-the-spot fines for breaches of the Pensions Act. These new powers will inevitable lead to more prosecutions and negative publicity for employers. Now more than ever before good pension scheme governance is critical in terms of regulatory compliance, employee relations and market perception. Now is the time for companies to look at their pension arrangements from a governance perspective and to ensure they are in good order.

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