The central relationship in any company scheme is that between the employer – who has set it up and pays most or all of the cost – and the trustees – who manage the funds and pay the benefits. Two decades of legal and regulatory change have pitched increasingly assertive trustee boards against employers grappling with increased cost and reduced flexibility. An over-simplification? Possibly. In any event, and encouragingly for scheme governance, collaboration rather than confrontation seems the order of the day following the introduction of a new statutory objective for the Pensions Regulator and revised funding guidance for defined benefit (DB) schemes.
The employer/trustee relationship often works reasonably well for most of the time. There are occasions when it breaks down completely; more often there is a feeling that matters could be managed better. The starting point in achieving a better working relationship is for each party to be clear on its respective role under general law and specific scheme provisions. Employers should not interfere with trustee duties and responsibilities, and trustees should not take decisions that are properly the employer’s, or take decisions on their own that should be made jointly.
Employer disengagement may happen from ignorance or because it has been a convenient way of managing things in the past. The employer may have assumed there were unlikely to be contentious issues, or thought that there was a ‘right’ way of doing things and that the scheme’s panoply of advisers would take care of it. While the issue may appear academic where routine matters are concerned, it will matter if difficult or contentious issues arise. The policy vacuum left by the employer’s failure to engage will incrementally weaken its area of legitimate control if not corrected.
Once there is clarity about which decisions are which, the scheme becomes easier to manage. The parties generally become more confident about consulting the other because ultimate responsibility is clear. The issues where there are likely to be differences are easy to identify, and on other occasions the interests of both parties will coincide, notwithstanding their different roles. A more constructive relationship can be created. The management of these relationships is well worth the trouble. It avoids the wasted time, unnecessary costs and poor decision making that can result from communication lapses and political infighting.
The same goes for professional relationships. A fresh pair of eyes in the form of an independent governance review may be helpful in considering how these relationships are managed or dovetail. Employers typically juggle a variety of pension arrangements that all have to work within a wider HR and risk management strategy, and an objective and independent review of how its schemes are run may be useful for the in-house legal team who are typically responsible.
Are advisers duplicating advice and charging accordingly? Is it clear which adviser is responsible if a problem crops up? What exclusions from liability are there? When were service agreements last looked at? Are there gaps in the advice armoury? Methods of working may have evolved over the years without any thought being given to whether they are still valid. Continuity is important – but what if long practice may simply have resulted in errors being perpetuated? What about conflicts? Does taking a variety of services from or both parties using the same provider add value, or could it hide complacency or inefficiencies? And governance changes coming along in the revised IORP Directive need to be considered thoughtfully. Advisers generally have no incentive to keep things simple!
Corporate activity – buying or selling companies – may have a material impact on pensions issues, such as when additional borrowing is injected or when schemes are to be integrated into a group-wide benefits strategy. Independent advice may be needed on a temporary basis to aid decision making where unusual circumstances such as a public takeover, intervention by the regulator or a dispute crop up; all of which carry reputational as well as financial risk. This may be in the nature of a hand-holding exercise, ensuring for example that advisers are asked the right questions, but it may improve the quality of decision making itself, bringing additional objectivity, experience and confidence to the table. Pensions are too expensive and too risky not to warrant regular scrutiny.