Concentration risk concerns aired over professional trustee market
PP survey shows concern over dominance of largest professional trustee firms
Thanks to Professional Pensions for bringing the issue of “concentration risk” to the fore.
The rise of the professional trustees is interesting, trusteeship is increasingly occupying a space that actuarial, legal and investment advisers called their own. Indeed many pension consultants are now doing the job of professional trustees in much the way they ended their careers as advisers.
Rather than being the representatives of the members, this new class of professional trustee is being called upon to help the corporate execute the end-game of the scheme. The job in hand is align the scheme’s data, assets and strategy with that of the sponsor and the insurer.
If there is concentration risk, it is in this focus on meeting the twin peaks of achievement , a scheme that is self-sufficient of its sponsor and pre-packed for buy-out,
If there is “group think” it is because of the strong messages sent out to trustees by the Pensions Regulator via the consultancies that makes for violent agreement in trustee meetings. It was evidenced in the herding of schemes towards the same LDI solution and it is now being repeated in the long queues forming outside insurer’s doors.
What is also clear is that in all this, the interests of members are being less and less promoted. Witness the fractious disputes at BP and Shell over surplus distribution.
I am not against professional trustees, but I do wonder if they can be sole trustees and exclude the lay trustees from the trustee boards.
So the question of concentration risk is not so much about the group-think of professional trustees, but of the strategic imperative to consolidate, buy-out or lock-down – being the received idea of the Regulator.
Yes, totally agree with the sentiment. Professional Trustee appointments are a sign of the failure of the system., one that systematically distanced both members and employers from their own benefits and schemes, and as foretold to me by one of the architects of the 2004 Act. The coup de grace of the consultant class capture of our DB schemes. Representative trustees should be supported to operate schemes, advised by advisers,.
I note the concerns over professional trustee appointments raised by the DWP Committee with the Minister last week and that the matter is very much on his agenda.
It does appear that DB pension schemes with a sole professional trustee suffered disproportionately greater losses from the LDI crisis, particularly in schemes with long recovery plans. In such schemes I believe the professional trustee, indeed I have heard a trustee say this in a public forum, saw their role as getting the Scheme to buy out as quickly as possible. This appears to have been without regard to the impact of LDI investments on the Scheme’s cash flows and the capacity of the employer to provide the necessary contributions to cover the Scheme’s short term cash requirements without the sale of income generating assets, let alone provide the additional contributions to meet the buy-out cost. The trustee is therefore increasing the risk of employer insolvency and and a PPF triggering event even though actual PPF entry may be unlikely after contingent assets have been realised. Trustees following this policy surely cannot be said to be acting in the Member’s interests.
I am not entirely sure the existence of lay trustees solves the problem because the current emphasis on trustee’s knowledge and understanding inhibits a lay trustee from asking a “naïve” question when faced with a “professional” trustee and/or advisors advising them to follow a widespread industry practice, even when they might have concerns. When I first joined a Trustee Board many years ago, I was advised that the role of any Trustee was to put their advisors on the spot to justify why their proposed actions were in the interest of scheme members. I believe the current emphasis on “professionalism” of trustees not only discourages lay trustees to putting themselves forward in the first place but also being “trained” on industry norms detracts from their capacity to protect the members interests.
The new General Code only puts the duty to act in the Members interests as point 6(d) on Page 10 of the Code.