Quis custodiet ipsos custodes?
The importance of independence in your Professional Trustee
24 Jan 2019
Juvenal’s oft cited question – “Who shall guard the guardians?” – has stood the test of time. The question has been raised by such diverse thinkers as John Stuart Mill, Terry Pratchett, Homer Simpson and Batman but not, to my knowledge, in the context of UK pension trustees.
A central tenet of the role of pension trustees is the transparent management of the potential conflicts of interest that can arise in the execution of their fiduciary responsibilities. Indeed, the independent pension trustee sector finds root in the most famous and egregious mismanagement of conflict of interest, Robert Maxwell’s pillaging of the Mirror Group pension funds before his death in November 1991. Capital Cranfield was established soon afterwards - as were a number of other trustee firms - to meet the clear need for an independent voice on pension trustee boards to protect members’ interests against Maxwellian malfeasance.
These early pioneers at the foothills of independent trusteeship were not necessarily steeped in pensions, nor did they hold themselves out to “having expertise in trustee matters generally”. They were, however, independent of other scheme stakeholders – be they sponsor, lay trustees, scheme members or advisors. Essentially, they were there to act as a bulwark against the potential conflicts of interest other stakeholders faced which could potentially or directly threaten scheme members’ interests.
It is important to remember that they were paid for their services, as are professional, independent and many lay trustees today. The Regulator explicitly recognises this in its definition. It dismisses payment for services as a defining characteristic of professional trustees (it also discounts independence as a defining characteristic). This payment for services - generally by the sponsor – needs to be transparent and recognised. The potential conflict of interest it represents does not, and should not, trump the overarching fiduciary responsibility of the trustee to protect member interests, a responsibility that is facilitated by the independence of the trustee from scheme stakeholders.
The Corinthian independent trustee has evolved into today’s professional trustee, as defined by the Pension Regulator. There is increasing demand for these professional trustees. This demand is being driven by many forces -the inexorable demographics of a shrinking pool of willing lay trustees, the complexities and exigencies of financial and regulatory markets increasing the risks involved to stakeholders, particularly DB scheme sponsors, and the Regulator’s explicit objective to raise the standards of trusteeship through its 21st Century Trustee strategy.
In response, the professional trustee sector is evolving into different models to meet and capitalise on this growing demand. While the sole operator professional trustee model remains largely unchanged – an individual sitting on multiple trustee boards where there is no current or prior employment relationship – it does face increasing governance requirements. Key among these are such matters as indemnity insurance, GDPR, cyber security, fit and proper tests, peer review procedures etc. While the challenges are increasing, the role is consistent – professional Chair or co-trustee on a trustee board.
The corporate professional trustee model is developing differently. Some firms – such as Capital Cranfield – view the role through a narrow, tightly focused prism, namely the provision of professional trustee and related governance services to clients. These related services principally cover scheme secretarial. We will not take on a client unless there is a scheme secretary appointed. We are agnostic where the secretary comes from.
We view this tight focus as essential to ensure our independence, which is central to both our ethos and our approach to trusteeship. For example, we have no buy lists, preferred suppliers or partnership arrangements with advisors.
Other firms take a different approach. Some offer their clients a range of services in addition to providing a professional trustee - for example actuarial, administration or project management – services that have been traditionally provided by the advisory community. Some are teaming up with an advisory firm to provide the professional trustee role in the advisor’s bundled, turnkey offering, particularly in the realm of sole trusteeship.
Which approach is the better way to meet the needs of the client is, of course, for the client to decide. Our concern lies with Juvenal’s question – who shall guard the guardians? Independence from both advisory firms and the activities they undertake for clients enables the professional trustee to avoid the potential conflicts of interest that arise when lines are blurred and responsibilities are conflated, particularly the responsibility to hire or fire an advisor. With this unconstrained independence the trustee - the guardian of members’ interests – can focus on that guardianship responsibility without the obscuring cloud of potential conflicts of interest.
Neil is Managing Director at Capital Cranfield.