The key relationship: the employer and the trustees

Employer-sponsored schemes are established under trust, whether the benefits are provided on a defined benefit or defined contribution basis. It has become more common in recent years for employers to seek to minimise legal, financial and regulatory exposure by moving away from trust-based schemes to contract-based schemes. Here, the employer is not a party to the scheme, which is essentially an individual contract between the employee and the chosen provider. The governance of contract-based schemes has recently received much attention, precisely because they do not have trustee boards fulfilling a fiduciary function.

There may be uncertainty about the parties’ role and responsibilities

Historically, a scheme sponsor could within few constraints (largely concerned with the maximum benefits permitted by the Inland Revenue) determine its benefit structure and governance. Successive waves of regulation and legal and tax changes have modified trustee duties and employer powers and added a statutory layer to the trust law framework. The trust deed and rules, however, remain a crucial element in understanding how a particular scheme is or should be run. They contain the blueprint for the way in which decision-making powers were to be shared between the employer sponsor and the scheme trustees. However, much pensions legislation is overriding and does not require a change to scheme rules to be effective. As a consequence, there may be uncertainty about the parties’ role and responsibilities. Clarity on this point is essential to good scheme governance (see Governance Audit). Most schemes have a ‘balance of power’ analysis showing the scheme’s governance arrangements, and it is important to ensure that the scheme’s practice operates on this basis.

The policy vacuum left by the employer’s failure to engage will, if not corrected, incrementally weaken its area of legitimate control

Since the trustees are responsible for running the scheme, employers may feel that they have little part to play. They may assume that there is a ‘right’ way of doing things, which can be taken care of by the trustees’ advisers. Such an approach may work so long as difficult issues do not arise. However, the policy vacuum left by the employer’s failure to engage will, if not corrected, incrementally weaken its area of legitimate control (see Adviser Selection).

With greater regulation, there is also scope for misunderstanding about the trustees’ role. Concerns have been expressed that, encouraged by the Regulator, trustee boards are unwilling to deviate from regulatory guidance rather than forming their own judgement on scheme issues within the legal and regulatory framework. Still, it is heartening that alongside its other statutory objectives, the Regulator must now weigh the impact of funding decisions on the employer’s business. The Regulator acknowledges in recent guidance that a cooperative working relationship between employer and trustees is a cornerstone to good scheme governance. As with all relationships, work is needed to keep it running smoothly (see Relationship Management).

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