Independent trustees offer the experience many schemes need 

An independent trustee can bring the expertise your scheme needs to navigate complexity and change.

Boards of pension schemes face a growing array of demands — from growing governance requirements to the complexity of consolidation options and losing vital experience as trustees retire. Faced with these pressures, many schemes are turning to independent pension trustees to provide the experience and continuity they require on their journey.

Independent trustees typically have many years of experience as a pension scheme trustee that can benefit a trustee board. Independent trustees are autonomous of the parent company and are distinct from an individual trustee, which is a sole practitioner.

The right independent trustee will provide the scheme with astute guidance and informed decision-making that puts members first while understanding the commercial realities faced by the employer. The independent trustee should have the backup of a firm with a bank of knowledge and succession planning in place.

The Pensions Regulator (TPR) considers someone to be an independent trustee if they have represented themselves to one or more unrelated schemes as having general expertise in trustee matters. They are expected to comply with requirements of TPR’s draft General Code and show a greater level of knowledge than other trustees.

In today’s challenging climate, we are seeing an increase in the number of boards and employers considering an appointing an independent trustee. TPR data published in March 2021 indicated that one in three pension schemes have a professional trustee. This article is designed to help you consider:

  • The advantages and potential drawbacks of appointing an independent trustee
  • How the selection process works
  • What to look for in an independent trustee
  • How Mercer can help

Why appoint an independent trustee?

There are many reasons to consider appointing an independent trustee and also reasons that certain schemes may not wish to do so.

Typical reasons for choosing to appoint an independent trustee are to:

  • Improve scheme governance
    The trustee boards of many schemes feel overwhelmed by the endless ratcheting up of governance and regulatory requirements — especially when employees’ time is limited. An independent trustee can take on a large share of the workload and apply knowledge gained from working with other schemes to make sure your scheme is compliant.
  • Acquire specific additional expertise/experience
    Setting an investment strategy and deciding on consolidation options such as buyout or master trust requires specialist knowledge that many trustee boards lack. The right independent trustee will bring experience that helps your scheme achieve its goals.
  • Help manage and mitigate conflicts of interest
    As well as being independent of the sponsoring employer, the professional trustee can bring a disinterested eye to questions such as whether to pursue consolidation, which some other trustees might resist.
  • Mitigate risk of attrition
    Valuable knowledge for many schemes is concentrated in one or two longstanding trustees. Replacing an experienced trustee is the main reason schemes come to us for advice on appointing an independent trustee. An independent trustee can help with succession planning and step in if there is a vacancy. And if an individual independent trustee leaves, their firm should provide backup from another professional.

Potential drawbacks to an independent pension trustee

An important consideration when appointing an independent trustee is the prospect of extra costs, particularly for smaller schemes. Most independent trustees charge fixed fees for board and committee meetings they attend regularly. There is usually an agreed fixed fee or hourly fee for extra work. Hourly rates can range from around £220 per hour to £460 per hour depending on factors such as:

  • The size and complexity of the scheme
  • Whether the professional trustee chairs the board or any committees
  • The frequency and length of meetings
  • The trustee’s knowledge and experience

However, an independent trustee’s fees are often broadly offset because their knowledge reduces the need for ad hoc advice from lawyers and other providers. Independent trustee firms also offer scheme secretarial services, allowing you to streamline these expenses. It is important to weigh up these considerations before deciding whether you can afford an independent trustee.

Other potential disadvantages to consider are:

  • Apathy/undue reliance from other trustees
    The arrival of an independent trustee can cause other trustees to sit back or defer too much to their more experienced colleague. This can lead to an unhealthy lack of debate and challenge. But an insightful independent trustee should know how to deal with this problem — for example by seeking other trustees’ views before offering their own opinion.
  • Lack of corporate knowledge
    Independent trustees may not have the same degree of understanding of the organisation as an employer or pensioner trustee — at least at first. A good independent trustee will, however, work to get up to speed quickly and bring an objective view to the trustee board.
  • Availability
    You need an independent trustee who has enough time to devote to your scheme. Many independent trustees have a large number of appointments and their capacity is an important point to test in the selection process. Diligent independent trustees may be stretched at times but will make sure they do the job well.

How to select an independent pension trustee

A properly conducted process for appointing an independent trustee is long and rigorous. It’s important that you find the right person for such an important role and you should expect the timetable for the selection process to last about three months.

A key consideration is whether you are looking for a trustee to join your existing trustee board or a sole trustee arrangement, which replaces the trustee board with a single entity.

The employer will generally appoint and pay the independent trustee but we recommend that the employer and the trustee board are both involved because the successful candidate will need to work closely in an empathetic way with existing trustees. Mercer can guide you through every step on the way.

Key considerations in selecting a candidate include:

  • Experience as a trustee, or chair, as appropriate, on the board of a similar sized scheme
  • Expertise in any areas where the trustee board has skills gaps or is looking to strengthen its knowledge — for example setting an investment strategy or pursuing consolidation
  • A way of working that is similar to your own — you want a good cultural fit
  • Proven ability to foster relationships with the company, fellow trustees and others

We have worked with many schemes to help them match their requirements with the right independent trustee. We draw on our network and market knowledge to select candidates with the right experience and cultural fit for your scheme.

Here is a brief checklist of the main steps in the process:

  • Prepare and issue a profile of the role, including what meetings the independent trustee would be expected to attend and any skills gaps to be filled. Send this to identified candidates along with questions about their experience, commitments and fees. This is known as a request for proposal (RFP).
  • Draw up a shortlist of three or four candidates based on replies.
  • Conduct interviews with the shortlisted candidates.
  • Decide who to appoint based on the agreed criteria and after reviewing the preferred candidate’s commercial terms to ensure value for money, alignment with market practice and that all relevant areas are covered.
  • Send for references if you have not done so earlier in the process.

We manage these steps for schemes to ensure a smooth, fair selection process. Support we provide includes:

  • Centralised documents for the RFP with questions from firms made available to all candidates
  • Agreeing with the scheme which firms to approach and drawing up a shortlist based on the scheme’s preferences and our market knowledge
  • A scoring matrix to assess each firm fairly and provide constructive feedback
  • Ensuring the independent trustee is aligned with the company, especially if the company is opting for a sole trustee
  • Helping the scheme set the scope of its contract with the independent trustee so that the arrangement is cost-effective and provides what the scheme requires

Many schemes already have independent trustees and we expect this trend to continue for the reasons outlined in this article. If you are considering appointing an independent trustee, please get in touch to find out how we can help.

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