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Understanding the role of a pension scheme trustee.

Trustees of pension schemes have a legal obligation, under section 249A of the Pensions Act 2004, to implement adequate internal controls. This covers a broad range of governance functions including operational, financial, funding, regulatory and compliance processes and risk. Therefore all the scheme’s operations need to have adequate internal controls.

Trustee’s role

Trustees have a legal obligation to act in the best interests of the scheme’s beneficiaries. Trustees need to understand their scheme rules and all relevant legal requirements. They should also be familiar with The Pensions Regulator code and guidance. Trustees have a legal duty to have the necessary knowledge and understanding of their legal duties, their scheme and the legislative and regulatory framework.

Composition of the board of trustees

All pension schemes to which the member nominated trustee rules apply are required to appoint at least one-third of the board of trustees as member-nominated trustees (MNTs). Controls should be in place to cover the nomination and election process for MNTs.

Controls should be in place relating to the retirement, re-appointment and new appointment of trustees.

Consideration should be given about how many trustees should be on the board of trustees and how many professional trustees there should be, as their expertise can boost governance and administration standards. 

Managing conflicts of interest

Conflicts of interest can inhibit open discussions or result in decisions, actions or inactions that are not in the best interest of beneficiaries. This may invalidate a decision or transaction and can result is trustees acting improperly. Conflicts of interest involving trustees and advisers should be adequately identified, recorded, monitored and managed.

Professional advisers (auditors, actuary, legal advisers, fund managers and custodians) should be directly appointed by the trustees. They are bound by law and professional ethics to declare conflicts. Trustees should also have in place control procedures relating to adviser conflicts. 

Relationships with advisers

The scheme should have in place a number of controls relating to advisers, such as:

  • suitable processes for appointing scheme advisers
  • understanding the basis for charging fees and documenting this basis
  • understanding the terms and scope of services provided
  • understanding what information the advisers need to fulfil their role
  • information and advice received from advisers is clear and understood
  • trustees are able to question the advisers
  • trustees have access to key personnel and there are clear lines of communication
  • advisers are suitably qualified and experienced
  • advisers acknowledge that they are accountable to the trustees for advice given.

The scheme’s risk register is likely to contain many of the above points together with suitable controls. 

Record keeping

Trustees need to ensure that accurate and complete membership data and records are maintained. Incorrect or incomplete data could result in the over- or under-payment of benefits or misappropriation of funds. While poor record-keeping may lend itself to inadvertent errors in member benefits, a poor system of internal control will also result in an increased risk of fraud.

Trustees should design a framework to evaluate data to provide an indication of whether records should be improved. If data deficiencies are found the trustees should set about eliminating these over a reasonable time.

Employer covenant

The employer covenant is the employer’s legal obligation to fund the scheme and the employer’s ability to meet that obligation. If the financial position of the employer weakens it may become less likely to be able to meet its obligation to fund the scheme. It may result in insolvency and scheme wind-up which may lead to members not receiving all their benefits under the scheme.

Trustees need to understand the employer and employer’s obligations. To assess the strength of the employer covenant the trustees should ask for information from the employer or employers. The information from the employer to the trustees should be provided on a regular, often and timely basis: this should enable trustees to notice any weakening in the employer’s covenant.

If the trustees consider that the employer covenant has weakened this may affect the schedule of contributions and recovery plan which may need to be renegotiated. 

Investments

The trustees are responsible for preparing a ‘statement of investment principles’.

The trustees will also need to decide on the investment strategy of the pension scheme. This will usually involve obtaining advice from a financial adviser and deciding on the asset allocation between different types of assets. They will need to understand the risks inherent in both the investment strategy and the underlying investments.

They should understand the nature and characteristics of their scheme’s investments. They will need to regularly review their investment strategy to ensure it is still appropriate and they will need to amend the strategy and asset allocation when they consider it necessary to do so. Investment performance should be compared to industry benchmarks to monitor both investments and the managers.

The trustees are also responsible for the security and safe custody of scheme assets. 

Retirement processes

Systems should be in place to help members decide when to take benefits from the pension scheme and what form those benefits are taken. For example a cash free lump sum may be available with a result that the annual income thereafter is reduced as a result of taking the cash lump sum. This may involve informing the members of the options available to them in a timely manner and producing accurate forecasts of their likely benefits so that the members can make the decisions which are right for them.

Typical controls would involve keeping contact details of employee members and deferred members up to date, contacting those members say six months before their normal retirement date to inform them of their options, providing figures of their expected benefits and asking them what their intentions are.  

Risk register

The Pensions Regulator expects trustees to maintain a risk register to identify, document and mitigate key risks. This should include an assessment of the implications of risks identified and solutions for risk management. Recording risks in a register helps to formalise risk management procedures. This would normally be referred to and updated if necessary during each trustees meeting. Trustees need to verify both the existence and the effectiveness of a control or combination of controls. These should be designed to prevent and detect errors which could result in the failure of achieving specified objectives.

Article contributed by ACCA

You can find a longer article on this area on ACCA’s Technical Advisory website.