There was a time when being a trustee of a pension fund was pretty simple. You attended the odd meeting and issued the occasional briefing note to members. But times have changed and the world is growing more complex which has put more pressure on trustees.
“Being a pension trustee has moved from being an honorary position to an onerous one,” says Raymond McKenna, a partner and managing consultant at Watson Wyatt. Onerous it may be but it is also very important as the decisions trustees make can have a massive impact on the financial wellbeing of members or individual pension funds.
Earlier this year, the Pensions Authority issued a warning over trustees. It said some “are choosing, consciously or otherwise, higher risk investments in order to achieve the investment return they need” and putting members’ financial health in retirement in danger.
“The overall situation is one where many trustees are relying on equities to outperform bonds in order to meet their liabilities,” said pensions regulator Brendan Kennedy, noting that such a strategy entails “considerable risk”, which will fall especially on the younger members of the schemes.
“High risk is not an appropriate approach to take where the benefits cannot otherwise be afforded,” he said.
It is hard not to have some sympathy for risk-taking trustees – after all bond yield have been at historically low levels for nearly seven years and were trustees to stick with the safest of methods pension funds would not be able to deliver promised returns to members.
Difficulties
Experts in the field understand the difficulties. “Their responsibilities are huge in both defined benefit and defined contribution schemes,” says McKenna.
“They are the ones who ultimately have to ensure benefits as defined are in place. When it comes to defined contribution schemes they have to be on top of collecting contributions and making sure funds are properly invested and explaining the details of schemes to members. Trustees who are too passive in the present could find themselves in trouble in the future.”
He says a key role of a good trustee is to “select an appropriate range of funds for members which suit their risk appetite”.
He is upbeat in his assessment of the quality of trustees currently looking after pensions in Ireland.
“I think the Pensions Authority has done a lot to ensure there is high levels of compliance when it comes to training and I think trustees are wising up to their responsibilities more,” he suggests.
Fiona Daly of the Rubicon Investment Company is not so sure. She trains trustees and says that some of those who chose to serve as trustees see it as a box ticking exercise but they have a real role to play.
She points out that trustee training is compulsory but many people who want to be trustees “still seem to be reluctant to do it”.
There is a real risk that if trustees are not taking their role seriously in defined benefit schemes, then investment strategies may go askew and leave funds short,” warns Daly.
Important role
“There is an assumption when it comes to such schemes that the money is guaranteed but that is far from the truth, and if a company with such a scheme goes bust or if the funds aren’t there to pay members, then they don’t get paid, which is why trustees have such an important role in managing the funds carefully,” she adds.
When it comes to defined contribution schemes, poorly informed trustees can make poor decisions on overly complex fund choices or they may not manage the costs associated with running the funds properly, and ultimately those costs are borne by members of the scheme.
“A lot of trustees take a very hands-off approach to the running of schemes and that can leave members in limbo,” she says.
