Action points for trustees
This case highlights some key trustee duties and emphasises the importance of good scheme governance.
1. Act in members' interests
Trustees should act in members' interests and not personally profit from their position to the detriment of the pension scheme. When making investment decisions trustees must act prudently and obtain and consider "proper advice" as to whether an investment is satisfactory. "Proper advice" is written advice from someone who is reasonably believed by the trustees to have appropriate knowledge and experience.
Trustees must also comply with statutory requirements. They must ensure that scheme assets are invested in the interests of members and that they consist predominantly of investments admitted to trading on regulated markets. Trustees must exercise their investment powers in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole.
Professional trustees are subject to a higher standard of care than lay trustees. They must act with such care and skill as it is reasonable to expect of them. Lay trustees acting with professional trustees should not allow the professional trustee to do everything without any involvement or oversight from them.
2. Take professional advice from a suitably qualified person
Trustees need to take professional advice from a number of advisers including lawyers, accountants, actuaries and investment consultants. Trustees should make sure they satisfy themselves that the adviser is properly qualified to provide the advice. In addition, they should be prepared to challenge advice or to ask questions if it is unclear.
This case raises questions as to whether professional trustees should be regulated. There have been calls from the pensions industry for the Government to introduce such regulation or to require professional trustees to have a qualification (in order to provide some form of quality assurance). Although greater regulation would no doubt limit the opportunities for a professional trustee to commit fraud (particularly where such trustees are appointed as the sole trustee) it can never totally eliminate fraud. The advantages of greater regulation will need to be weighed up against the costs involved.
3. Operate adequate internal controls
In this case there were inherent control weaknesses which were not properly managed. The other directors of GP Noble failed to supervise or control the activities of Mr Pitcher and Mr Cordell, despite an internal audit report highlighting concerns surrounding the "ethics, practices and risks attaching to GP Noble".
Trustees are under a duty to establish and operate adequate internal controls. Internal controls help trustees to monitor the management and administration of their schemes. They also help to protect the scheme from risks which could be detrimental. The Regulator's Code of Practice sets out practical guidelines in relation to internal controls. Trustees should start with a risk review to identify internal and external risks affecting the scheme, initially focusing on those areas where the impact and incidence of a failure relating to internal controls is high. Trustees should then decide what internal controls are appropriate to mitigate the key risks they have identified and how best to monitor them.
Internal controls should be reviewed periodically, at least on an annual basis, or sooner if substantial changes take place (for example where there is a deterioration in funding or a control has been found to be inadequate). Trustees should document their arrangements and procedures in respect of key internal control systems.
Where the internal controls, such as internal audit, reveal weaknesses or suggest improvements trustees must respond appropriately.
4. Recognise and manage conflicts of interest
In this case there was an inherent conflict of interest which was not properly identified or managed. It is important for conflicts of interest to be managed effectively so that trustees make (and are perceived to make) valid decisions in accordance with members' interests. Trustees should have a conflicts of interest policy in place and ensure that it is regularly reviewed. It is best practice for conflicts of interest to be dealt with up front at each trustee meeting by including them as a standing agenda item.
The way in which any conflicts are managed will be case specific and will depend on the nature and scale of the conflict. The Regulator says in its guidance that where a conflict could have the potential to be detrimental to the conduct or decisions of the trustees, it expects the trustees to "seriously consider" obtaining independent advice from a lawyer.