Trustee Briefing: Will IORP II spell the end of member-nominated trustees?

Maria Rodia, partner at CMS, and Elizabeth Richardson, lawyer at CMS, consider the impact new legislation will have on member-nominated trustees in Engaged Investor.

Trustee Briefing: Will IORP II spell the end of member-nominated trustees?

27 August 2014 |By Maria Rodia, Elizabeth Richardson

In a guest Trustee Briefing, Maria Rodia and Elizabeth Richardson consider the impact new legislation will have on member-nominated trustees 

What happened?

There has been much debate among the UK pensions industry regarding the draft IORP Directive (IORP II), which is intended to replace the current 2003 IORP Directive.

Of particular concern is the proposed requirement that any person “who effectively runs a pension scheme or has other key functions” must have adequate “professional qualifications, knowledge and experience” to carry out their key functions.

This is intended to replace the section of the 2003 Directive which states that a person running a pension scheme must have “appropriate professional qualifications” or employ advisors who do.

If the above change is included in IORP II when it is brought into force, will it result in the end of member-nominated trustees (MNTs) and other lay trustees who are generally unlikely to have an appropriate professional qualification or experience relevant to governing a multi-million pound pension fund?

What does this mean for trustees?

At present, one third of trustees on every trustee board must be nominated by scheme members. However, there is scope in the legislation for this to be increased to half.

All trustees are required by the Pensions Act 2004 to have “appropriate knowledge and understanding” of, amongst other things, pension and trusts law and their scheme’s governing documents which is “sufficient to allow them to understand fully any advice they are given, to challenge that advice if it seems sensible to do so and enter fully into all decision-making processes”.

To assist trustees, the Regulator has produced a Trustee Toolkit for trustees to complete voluntarily and obtain a “Certificate of Successful Completion” at the end of each module. There are currently no mandatory assessments to evidence that trustees satisfy TKU requirements and trustees are not required to obtain an official qualification.

“IORP II may result in trustees being required to actively develop their knowledge in a more formal way”

In practice, whilst many MNTs complete the Trustee Toolkit, they often rely on the knowledge and guidance of their advisors and independent trustees when making key scheme decisions.

What next?

Firstly, it is debatable whether the new requirements will apply to trustees individually or to trustee boards collectively. The terms “effectively run” and “have key functions” could be interpreted to mean that key trustees (such as an independent trustee), or alternatively the board between them, must satisfy the IORP II requirements.

On this interpretation, provided the trustee board consists of individuals with some or all of the above qualities, MNTs would not need to be ‘qualified’ or have a higher level of knowledge and experience than they do currently. It may therefore be possible to satisfy the new requirements by simply appointing an independent trustee to the board of each pension scheme.

If it transpires that each trustee must satisfy the new IORP II requirements, a sensible approach to implementing these changes would be to incorporate the changes into the current TKU requirements and the Trustee Toolkit.

At this stage we cannot be sure what level of “professional qualification” will be required to satisfy the new rules but we would not expect all trustees to be lawyers, actuaries or Associate Members of the PMI in order to carry out their role. However, it is possible that trustees will need to meet a higher standard than the current TKU requirements.

One solution could be for Certificates of Successful Completion of the relevant modules of the Trustee Toolkit to become mandatory for all trustees within the first six months of their appointment. Alternatively, a more formal qualification or trustee training program may be rolled out by the Regulator.

MNTs are considered a valuable part of the make-up of UK trustee boards and were introduced to ensure better visibility and accountability to members.

It is likely that IORP II may result in trustees being required to actively develop their knowledge in a more formal way.

However, we do not believe that the Directive is aimed at removing MNTs altogether and would be surprised if the government created requirements making the position of MNTs untenable or removed the current MNT requirements from the statute books.

Maria Rodia is a partner and Elizabeth Richardson is a lawyer in the pensions team at international law firm CMS.

Read the full article here.