What is a pension trustee?
The majority of workplace pension schemes are trusts and are run by trustees who are separate from the employer. Guest blogger Richard Butcher of Pitman Trustees, explains what pension trustees do.
In “It’s a Wonderful Life” the suicidal but good man George Bailey (James Stewart) is saved when his trainee guardian angel, Clarence, shows how awful the world would be if George had never been born. Clarence wins his full wings by protecting his charge from harm.
As a professional pension scheme trustee, my job is in many ways similar to this. I look after and protect the interests of members of pension schemes. The members will be employees or former employees of the relevant business or organisation.
All Defined Benefit (DB) pension schemes – also known as final salary schemes - are trusts and have trustees. With Defined Contribution (DC) schemes, some are trusts, and some are contract-based. No trustees are required for contract-based schemes.
In principle, the role of a trustee is simple. The execution of the role is more complex.
The trustee acts as a proxy for the members. The trustee acts with the members’ interests first in their mind (it would be a breach of the law to put themselves first). In other words, a trustee should act for you as you would if you had the same knowledge, resources and time available.
That said, when trustees act, they must act for the members collectively not for each member individually. They are acting for the “average” member. So if one member has interests that are very different from the average, he or she may suffer.
Trustees do not have a completely free hand. There is a mass of law and regulation defining their function, empowering and restricting them.
The principal instrument for this purpose is the trust’s constitutional documentation: the trust deed and rules. Trustees can only do what the deed and rules allow unless there is overriding law, even if they find it objectionable.
I once acted on a trust where the rules provided that a pension payable to the orphan of a member was halved if the parents were unmarried. When a young, but unmarried, couple died in a car accident, I had no choice but to halve the pension paid to their 2 year old child.
On a routine basis, the trustees will carry out a number of functions. Let’s look at some examples for DC pension schemes:
- They will select an appropriate range of investment funds for the members to choose from
- They will select a suitable default fund (or funds) for those members who fail to choose
- They will monitor the performance of all these funds to ensure they are delivering the expected returns
- They will monitor the charges deducted to ensure members are getting fair value
- They should provide sufficient information so that members can make informed decisions on their contribution level, their investment strategy and eventually how to secure their pension
The trustees will take suitably qualified advice before making these decisions.
In a DB scheme, trustees will, for example, negotiate with the employer to agree the funding and contributions required. They will also deliver the benefits members expect to receive (subject, of course, to there being sufficient funding).
In both DC and DB, the trustees will monitor the administration of the scheme to ensure it is being done properly, they will check that your employer pays the contributions they have promised to pay in a timely way and they will keep records of how the trust has operated.
As this is such a large workload, trustees are allowed to delegate (for example, the investment of the assets). When they delegate, however, they must monitor and manage the delegates to ensure that they are properly carrying out their jobs.
Almost as important as what they do is what trustees can’t do.
It is often assumed that the trustees represent the members of a pension scheme in front of the employer. They do not. They merely administer the scheme in accordance with the deed and rules.
If the employer wants to change the rules, they can normally do so (although there are restrictions). This means that, for example, if an employer decides to close a pension scheme, usually they can. It is not a function of the trustees to campaign against the closure.
Clarence saved George. I can’t promise that a trustee will be able to do the same for you, but our involvement should, at least, mean that you get a better outcome from your pension.
Richard Butcher is managing director of Pitman Trustees