The Government released a report in April 2014 entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business”, which put forward some proposals for change in corporate regulation. The changes primarily focus on reducing complexity in UK corporate structures, including a proposed ban on corporate directors (i.e. a company being appointed director of another company). In the pensions industry this may have an unintended side effect, by preventing independent professional trustee companies from acting as a director on the board of a corporate trustee company.
The board of trustees is arguably the most important mechanism in a pension scheme. The trustees are responsible for ensuring the smooth running of the scheme, protecting the members’ interests and keeping everything in working order. Trustee boards come in many shapes and sizes, however, for many schemes a popular model has been for the employer to set up a corporate trustee company to look after the scheme, appointing individuals and often professional trustee companies as directors, to manage the trustee company and its duties to the scheme.
However, the Government’s paper on transparency and trust may force many schemes to restructure the composition of their trustee boards. The Government’s aim is to harvest economic growth by improving accountability and transparency in UK companies, creating more trust in the structure of UK businesses. One proposal is a prohibition on the use of corporate directors of companies. This could prevent independent trustee companies from taking appointments as a director on corporate trustee boards.
Achieving transparency and trust are two key aims of an employer when appointing a professional independent trustee to act as a director of its corporate trustee company. Aside from adding a wealth of professional knowledge, experience and resources, professional trustees can add greater transparency and increase trust in corporate trustee boards. This is particularly so when the majority of the other directors may be individuals who also have senior roles within the scheme’s employer and face a daily challenge of managing conflicts of interest between their responsibilities to the company and to the scheme. In this context and specifically in relation to corporate trustees of pension schemes, the government’s proposals appear counter intuitive.
For pension schemes to lose the benefits that professional independent trustees can offer is clearly undesirable. There are several possibilities which could avoid this scenario:
- The report envisages exceptions to the prohibition on the use of corporate directors of companies and specifically states that the use of corporate trustees should continue. The paper lists exceptions for entities which in the Government’s view, should still be able to make use of corporate directors. However, corporate trustees of pension plans do not make the list of exemptions. The professional trustee community is lobbying the Government to bring the need for an exception to its attention, however it is possible that schemes will have to look at alternative structures when appointing independent trustees.
- If the changes come in as proposed, a solution may be for pension schemes simply to appoint individual professionals from their independent trustee company to sit on the board of the corporate trustee. This is also a common way for an independent trustee to be appointed and it is arguable that this would make little difference in practice for the scheme – the scheme would still have access to all the expertise and resources of the professional trustee company, despite only having one individual as director. This action would still require a change, as the independent trustee company would need to step down as a director and replaced by the individual.
- A third option is for schemes to revert to a non-corporate structure, i.e. setting up a traditional board of trustees where each trustee is appointed under the terms of the scheme’s trust deed and rules, rather than joining a corporate structure as a director.
It is clear that pension schemes will need to monitor the proposals as they develop, and many corporate trustees may have to take action if the Government continues its present course.