The recent release of the sole trustee Code of Practice (CoP) from the Association of Professional Pension Trustees (APPT) will ensure a continued drive for improved governance and standards for pension schemes. It also provides a benchmark for sponsors and advisers of schemes when selecting a Professional Corporate Sole Trustee (PCST), should that model be an appropriate option for them.
Many in the industry may be questioning why the CoP is needed now and how it will be enforced. Others may be wondering whether the CoP will have any authority as it is not mandatory or legally enforceable. There may be some who may feel a sole trustee is a perfidious way for an employer to further its own interests. These are fair challenges and can be tackled head on.
So why is the PCST model needed now? There are a multitude of reasons: financial volatility and the spectre of negative interest rates; the continuous governance a pension scheme now demands; regulatory scrutiny and tightening of legislation; and sponsor stress and, in some cases, distress due to Covid-19, as well as the uncertainty of Brexit. Individually these factors could derail a well-managed scheme, combined they will magnify the issues faced unless managed professionally and with alacrity.
The CoP, and the professional trustee standards released in 2019, have both been long overdue from a risk management perspective. There is no barrier to entry for an individual to call themselves an independent or professional trustee in an industry holding £1.7trn of assets, which are still managed predominately by lay individuals.
It is widely accepted that not every scheme needs, or indeed will ever have, a professional trustee on its board let alone appoint a PCST. Is it, however, in the best financial interests of beneficiaries to use a model that may not be fit for purpose when an alternative risk management structure is available? It is also accepted that, although the PCST model is not always perfect, it does promote efficiencies as well as neutralising sensitivities that may veil some of the thinking and clarity of thought needed when tough decisions are required.
The PCST model allows mitigation of risk through speed of decision making, acting impartially and implementing best practice. Cutting edge innovation is also adopted without lengthy discussions and training sessions. We have seen many scenarios where a PCST has delivered better outcomes, be it capturing market opportunities during periods of volatility, reviewing advisers or enhancing relationships with employer and overseas sponsors and their advisers too.
It has been noted that it is not only sponsors who are viewing PCSTs with a keen interest but trustee boards too in terms of managing continuity, longevity and succession planning.
The answers lie through both promoting and policing the standards and through the PCST firms holding themselves accountable through a transparent reporting mechanism. Embedding the CoP in the audit and assurance frameworks of PCSTs is a must have and an easy way to measure compliance. The pensions community may well develop a framework whereby PCSTs are reviewed, much like the CMA order where investment consultants are set objectives and reviewed.
The Pensions Regulator has a part to play too and it was encouraging to see the positive comments made in relation to the CoP. Perhaps this could be taken a step further in the future with a “comply or explain” regime monitored through the Scheme Return showing whether a scheme has a professional trustee and/or the sole trustee model.
The CoP is a welcome development, however it is the first step into further refining and improving the governance of those ultimately accountable for ensuring the benefits from a scheme are paid whilst acknowledging their responsibility to sponsors too.
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