Sole trustee appointments are featuring more often in tender proposals as schemes seek nimbleness and expertise. James Phillips looks at a Kempen white paper on the burgeoning market.
With governance burdens rising, nimbleness more necessary, and legacy schemes finding it difficult to attract talented lay trustees, the time appears ripe for the growth of the sole trustee market.
At least, this is the key argument in a white paper issued by Kempen this month. Defined benefit (DB) sponsors are looking for more effective and efficient solutions to meet growing governance demands.
This trend is reported at many professional trustee firms. As part of the paper, 42 trustees were surveyed, with 78% reporting they have sole trustee appointments and 42% saying their schemes have considered sole trusteeship in the past year. At a firm level, nine which provided information - and represent 1,345 schemes between them - said 32% of those schemes had a sole trustee appointment.
In fact, one firm said, based on their conversations with employee benefit consultants, they expected that "over the next three to five years, at least 35% of our book will be sole trustee". At another, sole trusteeships were only included on 5% of requests for proposals three years ago; now that figure is 50%. As one trustee told Kempen: "In the last six to 12 months, sole trusteeship is not a phrase that is missing from tenders."
But, specifically, what is causing this heightened interest? Kempen points to several clear conclusions: a growing difficulty in finding trustees; a need to ease complexity and tackle regulatory requirements; and sponsor preference.
Business development director Lara Edmonstone-West says it is obvious that governance requirements are "consuming trustees' time", but there is keen awareness the benefits a sole trustee appointment can bring.
"It's not an unknown anymore. People talk about professional trustees; people talk about sole trusteeship. It's just a conversation point, so people think about it a little bit more, and therefore it's only natural that you're going to see increased growth and this acceleration in the market."
As schemes mature, the ability to appoint lay trustees becomes more difficult, making sole trusteeship more attractive.
"It's pretty hard to find somebody who's relevant to [legacy] schemes or has the appetite to put themselves forwards when there is an increased regulatory burden. There's a growing reluctance perhaps for a lay trustee to step up when running a pension scheme is just getting harder in itself."
While sole trusteeship has been considered as a small-scheme solution, this difficulty is also easily found at large DB schemes sponsored by large sponsors, she adds. Five firms reported to Kempen they have sole trustee appointments in schemes in the billion-pound-plus bracket, although the arrangement remains primarily used by sub-£50m schemes.
Larger schemes also tend to be focused on a specific project, she continues. "It might just be to add a certain level of professionalisation, but often it's driven because they've got a particular project in mind. Perhaps they're looking for a big buy-in or buyout and therefore it's easier to appoint a person to drive that project forward."
There is a desire to access some of the key identified benefits, most notably proactive, real-time decision-making, expertise & professionalism, and improved governance.
The first point is key, says Edmonstone-West, especially in the current environment. The economic impact of the pandemic has shown schemes need to be able to engage in nimble and effective decision-making, she says, much like the global financial crisis brought to the fore the advantages of fiduciary management.
"Covid-19 has really forced people's hands in terms of having to make a decision quickly, particularly when they've got an advisory framework. There's perhaps a greater need for education where you don't have the depth around the table, or you have more lay trustees. The professional trustee has been able to help push these decisions through a board.
"A sole trustee on top of that, if they've got back at the ranch a group of experts around the table who can they go and bounce ideas off, is pushing it more quickly.
"That nimbleness of decision-making, Covid-19 is showing the benefit of it. Today's almost the inflection point for sole trusteeship."
With the increasing maturity of schemes, trustees cannot afford to make any mistakes that may have been more acceptable in their earlier years, she says.
"Schemes don't get younger. They're getting quite old and quite mature, and therefore they're almost running out of time to be able to make the same mistake, or perhaps not as make as quick decisions as they should. If anything, this is just going to fuel that continued growth in the market."
Nevertheless, there were concerns expressed by the respondents to Kempen's survey with sole trusteeship. Firstly, adopting such a model could result in the loss of member knowledge and experience, the loss of scheme experience, and diversity. It could also cause sponsor bias, and see sole trustees taking on too wide a range of specialist roles, while there may also be difficulty in identifying differentiators between trustee firms because of a potential lack of transparency.
However, there are ways of evaluating sole trustees and recognising any potential shortfalls, Kempen found from the responses. There are myriad questions schemes and sponsors should be asking, including what intensity of engagement would be required with the sole trustees, whether nuanced scheme history will be retained, and how key metrics, including value, can be measured.
Schemes can also make use of a consultation committee and ensure the selection process is transparent, while also including a transitional period with the outgoing board. And schemes should also examine their own beliefs before selection begins.
Many of the perceived benefits of sole trusteeship are similar to those also ranked highly when survey respondents were asked about fiduciary management. For the latter, proactive, real-time decision-making, trustee focus, and expertise & professionalism came out top.
In tandem with a concern that sole trustees may need to show value and take on too wide a range of specialist roles, Kempen believes the two arrangements will come together.
"The sole trustee industry is still relatively young, but it's really accelerating," says managing director and UK head Andre Keijsers. "Over time, with the pressures of performance and regulators, they'll probably want some people next to them to make sure they have someone practically focused on elements like the portfolio, for example.
"Our theory is that over time, the paths of fiduciary management and sole trustees will converge, particularly driven by this concern and regulatory developments."
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