There was a time when trustees could afford to take the long view. After all, it would be decades before schemes paid out all of their benefits and as a consequence, trustee meetings were relatively informal affairs. The Chairman might make a comment or two about individual stocks and how he had made £x out of shares in ABC Ltd and the actuary, having descended from his ivory tower, would comment on how a small adjustment was needed to company contributions or members’ benefits. The world of pensions turned very slowly and the role of the pension scheme trustee, whilst important, was rarely taxing.

Contrast that with the world of today’s pension scheme trustee: negotiating with the employer over contributions and deficit recovery plans; evaluating the strength of the company’s covenant; expected to behave like a banker; lying awake at night wondering about notifiable events or a private equity bid for the company; debating whether to exercise a Section 75 debt or accept an apportionment deal; grappling with medium cohorts, long cohorts and life expectancy assumptions; maintaining a training log; having to comply with Codes of Practice for this and Regulations for that... The list goes on. Oh, and not forgetting of course that members still need to receive their benefit entitlements on time!      

In recent years there has been a seismic shift in the demands placed on pension scheme trustees but many trustee boards are still trying to operate in the way they have always done. Whilst their primary duty to act in members’ best interests has not changed, the means of demonstrating its execution has increased dramatically.

Of course, things are no less rosy on the company side of things. The relatively benign approach to the management of pension arrangements in the twentieth century and legislative “benefit creep” – pension increases to deferred members and pensioners – saw the costs of pensions rising inexorably. A willingness to accept “the long view” of pensions pretty much changed overnight when pension deficits started appearing in company balance sheets each year. Risk mitigation has become the order of the day with companies transmitting their concerns through changes in pension arrangements and in their dealings with pension scheme trustees.

So, the evolution of pension schemes has brought us to a point in 2008 where pension schemes represent significant financial risks to the companies that sponsor them; where improvements in life expectancy continue a pace; where risk management has risen to the top of the agenda; and the demands on trustees have increased significantly.

Can, and should, trustees continue to run their multi-million pound pension schemes on quarterly meetings and on a part time basis? That they have continued to do so in many cases is not a criticism – after all, most trustees fulfil the role in addition to a day job and pension schemes, despite the risks they pose, are still not considered to be core business. However this is an increasingly untenable way of operating.  Pension schemes need to be run in a more business like manner and whether they like it or not, trustees have to accept that they are running multi-million pound financial institutions and that they are in the business of risk management.

Trustees on the front foot

So what does running a pension scheme in a more business like manner look like for trustees (whose first reaction is likely to be along the lines of “we haven’t the time or the resource to do any more than we are already doing”)?

Accepting the notion that a successful business needs an effective board, then a successful pension scheme, by extension, needs an effective trustee board.

In a business context, the board exists to provide the strategic leadership and objectives for the company it believes are necessary for the company to succeed. It will hold management accountable for the execution of the agreed strategy and objectives, it will satisfy itself of the integrity of the financial statements, and that systems of risk management are robust.

Such a board will have the right mix of executive and non-executive directors with an appropriate balance of skills and experience and without undue reliance on a small number of those directors. Members of the board will receive a full, tailored induction into their role and will undertake to update their skills and refresh their knowledge regularly.

Finally, an effective corporate board will evaluate its own performance and that of its committees and individual directors.

The parallels for a trustee board are simple to draw. An effective trustee board will be of an appropriate size to facilitate the efficient running of the pension scheme. Too large and it becomes unwieldy and too small it cannot function effectively. Trustee boards are of course required by law to appoint Member Nominated Trustees. If carried out in an appropriate way, the selection process can be used to seek out the necessary skills needed for the board in question. And although the sponsor will be appointing the majority of trustees, there is no reason why the trustee board cannot indicate the kind of skills it desires from the company’s appointees and some are indeed doing so. Appropriate induction and ongoing training and development are clearly important and of course are expected by the knowledge and understanding requirements of the Pensions Act 2004.

A trustee board which has a strategic and objective focus can concentrate its limited time and resource on achieving its strategy, providing very clear remits to those tasked with delivering that strategy such as investment managers, pensions managers, administrators and other advisers and, most importantly, holding them accountable. 

Effective decision making is a key function of any board. Trustee boards in particular, whilst required to demonstrate reasonable knowledge, are heavily reliant on expert advice to ensure that they make robust and informed decisions. It is therefore hugely important that relationships with advisers are managed sufficiently well in order that the advisers understand what is expected of them and that they deliver their advice in a way which is timely and accessible to the board.

The relationship with the scheme sponsor is paramount to the ongoing security of members’ benefits. Again, it needs to be actively managed if the trustees are to make effective funding and investment decisions. Formalising these relationships is often new ground for trustees – there is a line to be walked between mutually constructive formality and the creation of conflict and friction where none existed previously. 

The management of risk is integral to this whole process, as envisaged by the Turnbull Guidance on Internal Control within the Combined Code on Corporate Governance and, by analogy, the Pensions Regulator’s Code of Practice on Internal Controls. It is important to understand the value of integrated risk management before dismissing the exercise as something to be undertaken simply to meet regulatory requirements.

Whilst neither the Combined Code nor the Pensions Regulator’s codes of practice and guidance make specific reference to “business planning” such activity is born of the need to execute the desired strategy. The desired strategy can be articulated through a number of key objectives (usually around funding, investment, service delivery, communication or relationship management and governance). It is essential to the effectiveness of the trustee board that the strategy and subsequent objectives are agreed by the board as a whole thus providing a shared strategic focus.

Such shared focus will give rise to a series of key tasks in order that objectives are fulfilled. In addition, it will be apparent that there are a number of risks that might prevent objectives being met. Prioritising the tasks and the actions required to control the identified risks allows the trustees to schedule activity (including relevant training) over an acceptable time period thus creating an objectives-driven and strategically focused business plan.

It isn’t too difficult a step to recognise that such planning should then dictate board and committee meeting agendas thus providing trustees with the means to concentrate on the areas they have deemed to be important to the running of their particular scheme. It also demonstrates how and why risk management has to be integral to the management of the pension scheme.

For trustees upping their game won’t necessarily be a simple process. It will require up front investment in establishing the board’s vision of its desired future state and in what needs to be done to achieve it. But its implementation ought to allow the trustees to be more organised and efficient in their use of time, more rigorous in their decision making and risk management, and in their supervision of those to whom they have delegated functions.

Of course nothing stands still, none more so than in the world of pensions. Having set their course, therefore, it is incumbent on trustees, as it is with corporate boards, to evaluate their performance periodically. There are ways and means of achieving this without spending a lot of time and resource but if the board is to remain effective, it is an essential part of managing your pension scheme as a business. So, to the question at the start: pension schemes are big businesses – are you meeting the challenge?