How to appoint a professional trustee

The use of independent trustees within pension schemes in the UK is no longer the novelty it once was.

Trustee boards – and employers – are increasingly engaging with professional trustees to bolster their scheme's governance, usually for a perceived lack of skill in one or more crucial area of expertise.

Clearly, they are considered an important component of a properly functioning scheme, yet, there are concerns from some quarters how they are appointed. There is no prescribed method – nor wish for one – of appointing an independent, but to what extent do schemes conduct their recruitment process with the same levels of governance they aspire to apply once that individual is on board?

A popular choice
There is little doubt that the application of an independent trustee's skills on a trustee board are valuable. The Hymans Robertson Independent Trustee Survey 2015 found that the use of professional, independent trustees does indeed improve scheme governance because the individuals are generally better prepared to face the challenges facing UK schemes, particularly in defined benefit (DB).

That may seem like motherhood and apple pie, but it confirms there is an advantage to be had, though like any other tender process it should be done in an impartial and systematic way.

Many appointments of independent trustees are done on the basis of recommendation. They are then invited to interview and given an hour in which to make a mess of the appointment.

Many would argue their process is more robust than that, but there is plenty of anecdotal evidence to show that most candidates are not subject to the rigours a consultant or fund manager might expect. Of course, independent trustees are not advisers, but does that mean their appointment could be seen as inconsistent?

Could do better
Sarah Smart, chairperson at The Pensions Trust believes UK schemes need to up their game when it comes to appointing independent trustees.

She says trustee appointments – and non-executive directors – often do not receive the due diligence of other adviser interviews.

The greatest single failing according to Smart is the reliance on a single one-hour interview in which to assess a candidate.

"You cannot possibly assess the abilities of a trustee director – let alone a chair of trustees – under such circumstances," says Smart.

This requires a much fuller process that might include presentations but she would prefer to see a more dynamic session where a candidate is put through their paces in a live environment with some or all of the rest of the trustee board they would be working with.

"This would give them an opportunity to demonstrate how they work with people, demonstrate problem-solving skills and whether, while you're in the same room, the trustees feel this is something that they could work with."

Without a more inclusive and dynamic process, especially with member-nominated trustees (MNTs) who may feel unable to challenge the views of other board members, there is danger of groupthink confirming a candidate who has been recommended by another individual or group of individuals they trust.

This is simply not good enough as far as Smart is concerned, nor should it be for the scheme as those appointing the trustee must be sure they will add value to the governance process.

Old boys' network?
They say that what doesn't kill you makes you stronger, and the pensions industry has certainly been through a lot over the past two decades. It has undoubtedly become a sophisticated and modern machine, but it is equally true that it is a business built upon relationships.

Some claim there remains the occasional sighting of the old school tie applied in the cementing of some of those relationships.

City Noble founder and managing director Alexandra Noble admits that sexism does exist in the industry, but no more than any other.

"The old boys' network has never been an issue for me, and I've been a woman in the City for a long time," says Noble. "I have found that if you could do the job, people accepted you could do the job."

However, Noble concedes the governance applied to appointing independent trustees is not always consistently applied.

The key relationship is with the chairperson, who will have a strong influence on the decisions of other members, in particular MNTs who may be less confident in their role, says Noble.

"Perhaps in some cases, proper governance is lacking, but I'm not sure how we change it," she adds.

The idea of broader discussions with shortlisted candidates is appealing, she says, and it would be a useful exercise to ensure the appointment process fits with the governance levels for similar tasks undertaken by the board.

"We are looking at how we might assist trustee boards in assessing and reporting on their own decision-making processes," says Noble. "We are talking to clients how behavioural science might be used to identify traits – positive and negative – within their processes to improve the quality of their decision-making."

Third way
Ian Pittaway is both a senior partner at law firm Sackers and chair of the Association of Professional Pension Trustees (APPT).

He fully agrees that a one-hour interview is not the right way to go about appointing an independent trustee.

The APPT has a ‘buyer's guide' on its website (see box), outlining how the association believes organisations should conduct their recruitment process.

The first thing to remember, says Pittaway, is that many of these appointments are made by employers as part of their two-thirds representation on the trustee board.

In order for this to work, the employer needs to understand exactly what it is that the existing trustee board is lacking.

In other words, is there a specific problem coming up in the horizon? Does the board need specific assistance with, for instance, investment strategy as it seeks to plug a deficit or is moving towards derisking? And, what kinds of qualification are you looking for?

Then you need to decide who you want to target - the big trustee firm or franchise model that has grown rapidly in recent years, or a one-man band who has gone out on its own after years working within the industry?

"Your scheme or employer must then talk to their advisers and other schemes about what they are considering – one would hope they have contact with other schemes," says Pittaway. "They need to do their homework and draw up a long list."

And this is just the beginning, he says, as discussions should be had as to whether that individual's style fits with the employer organisation, not to overlook the rest of the trustee board.

What is most important is that the interview should be competency-based to get a fuller picture of the candidate. Don't ask how they would approach a particular situation, but get them to explain where they have applied their skills to tackle specific scenarios and to break down how they have resolved the problem.

After all, they will be appointed based upon their experience and a belief in their ability to do the job. If they haven't been under fire in the scenarios you anticipate the scheme facing in the future, how could they possibly add value to the governance process?

Once you have started the process, it is important the potential candidates are not thrust upon the board.

"Expose them to the trustee board, don't parachute them in," says Pittaway. "Perhaps do this with a training session and then you can get everyone as comfortable as possible in this new relationship."

Know your limitations
Pittaway hasn't seen a role-play based trial for candidates, but presentations are often used as a good way to check their knowledge, challenge their ideas and see if the board likes their style. There are, however, still things to watch out for, as we all have our own prejudices and should be mindful of them.

"I've chaired a lot of member-nominated trustee selection panels and they can be dominated by those of a similar set - the same sex, similar outlook, and this means they could recruit in their own image," he says.

Sexism is just one of those prejudices, says Pittaway, but thinks a panel focused on the skills will largely be oblivious to any notable difference.

He points to the many successful female trustees who are plying their trade in the industry simply because they are excellent at what they do.

There is another potential prejudice to watch out for, but largely unavoidable given the kind of individual being sought.

"Age is a bit more of a problem," suggests Pittaway. "You don't look to become a professional pension trustee at the age of 25 and so you are more likely to find somebody who is in their 50s at the end of their primary career and looking at moving into a portfolio career instead."

That is more a question of professionalism on the part of the trustees, he adds, not to ignore differences, but be aware of them and make sure they do not influence the decision as to who is the most appropriate appointment.

Raising the bar
The Pensions Regulator is increasingly placing trustee knowledge, understanding and execution under the microscope, while there are calls from Europe – and certain elements of the industry – for greater professionalism among trustees.

That is unlikely to change, and so we should expect trustees to continue to develop this 21st-century concept of professional trustees from within or face additional regulation.

Where better to start than by making sure that governance is improved and appointment processes – be they for fiduciary managers, actuaries or independent trustees – are not only up to scratch, but totally robust?

The Purple Book shows that more than half of all schemes have appointed independent trustees to their boards, a trend that is likely to continue.

While the larger schemes looking for independent chairs or trustees have the resources to invest a lot of time into the process, taking six months or a year to find the right person, smaller schemes don't have that luxury.

These are more likely to rely upon recommendations and short interviews to fill these posts, but beefing up the process and following the tips outlined in the APPT buyers guide (see box), will go some way to providing justification for an appointment.

After all, these are professionals who are there to challenge not only the advisers, but the board's approach itself. Trustees must be confident they have chosen someone who will add value by gradually tightening up the governance process underpinning the work of the scheme.

 

 

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