New disclosure rules adding to pressures on U.K. plan trustees

Outsourcing could see an uptick in the U.K. as pension trustees grapple with even more scrutiny as a result of new and upcoming regulations.

The job of a U.K. trustee has become much more complex in recent years because of an increase in governance risk and time spent on decision-making processes as well as a growing need for technical knowledge, which trustees, who are elected from the workforce, typically don't have.

But that burden is set to increase again, sparking further need to delegate. Demands are growing around disclosure in retirement plans' statement of investment principles, an annual report that outlines the investment policies and principles of U.K. occupational plans. Although plans have had to report their investment policies in the past, under new rules effective Oct. 1, trustees will additionally have to prove how they incorporate environmental, social and governance factors and present financially material ESG considerations over the lifespan of their plans' investments.

One year later, on Oct. 1 2020, trustees will be required to produce an implementation report setting out how they acted on the principles set out in their policy.

In the implementation report, trustees will be expected to state:

• Their policy regarding financially material considerations over the appropriate time horizon of their investments, including climate change.


• Plan participants' views on non-financial matters, including their ethical views and their views on social and environmental impact.


• Stewardship of investments, including how trustees exercise voting rights and undertake engagement with their investee companies.

Sources warned many trustees haven't yet realized the rigor and magnitude of the new requirements. As a result, U.K. trustees will rely more on advisers, independent trustee firms or fiduciary managers to free up their time to cope with the increasing workload, according to some sources.

Nick Clapp, head of business development at fiduciary manager Kempen Capital Management in London, believes trustees have not yet absorbed the full complexity of the new regulation.

"Their agenda this year is significantly different to what it will be five years from now," he said.

Cindy Rose, head of ESG clients and products at Aberdeen Standard Investments in London, said trustees should not ask money managers to tell them what "their SIP should look like."

"There is a real conflict of interest (around this issue) and there should be," Ms. Rose said. "Money managers should be providing (ESG) information but trustees have to write their own SIP based on that information," she said. Starting in October, the regulation could transform existing governance structures as trustees will have to spend time on defining and outlining the plans' approach to ESG.

"The legislation is shifting the obligation on trustees" from managers, Ms. Rose said. "They (could be) making a move to fewer schemes. We are going to see (multiemployer plans known in the U.K. as) master trusts grow."

"We will end up with fewer trustees, who have much more responsibility," she said.

In the U.K., trustees, acting separately from the plan sponsor, are responsible for ensuring that the plan is run properly and that participants' benefits are secure.

According to the U.K. Pensions Regulator data, the number of trustees in the U.K. market has fallen 11% to 16,000 in 2019 compared with 2018 and was 30% lower than 2015. However, of these, only 4% have identified themselves as a professional trustee — an individual not affiliated with the company — and are likely to act for a number of plans, the Pensions Regulator said.

Duties are already considerable. Last year, a host of updated regulations around the trustee chairman's statement, which includes the annual report, the SIP and accounts, have taken hold. Trustees also have been compelled to produce more detailed summaries on how the plan represents value for money and present costs of running the plan.

Some sources said the increased regulation is a reflection of the U.K. government's efforts to induce plans to consolidate. And these sources said the regulator is increasing scrutiny of trustees who did not disclose adequate information in their statements or failed to provide sufficient information on how they are running the plan. Most recently, on May 8, the professional trustee firm of the McDonald's Franchisee Pension Scheme — Link Pension Trustees Ltd. — was fined £103,750 ($134,878) for failing to share information with plan participants about their savings and for not reporting breaches of the law to the regulator.

Some in the industry said the regulations are overkill.

Robin Ellison, head of strategic development for pensions at law firm Pinsent Masons LLP, cautioned: "The (requirement around the statement) is asking to produce more documents that nobody wants to read. (The requirements) are not protecting the plan participant, they are protecting the regulator."

Alan Pickering, chairman of independent trustee BESTrustees in London, concurred. Mr. Pickering thinks trustees should be able to focus on how to take advantage of the ESG requirements rather than having to decide "how I have got to comply."

Still, Pieter Steyn, head of delegated investment services U.K. for Willis Towers Watson PLC in London, said: "Trustees can handle the (incoming) requirements provided that there is an effective governance system in place."

Fiduciary management can facilitate better governance because it creates time for trustees through the delegation of investment decision making, he said. KPMG data shows that a third of U.K. plans appoint an independent trustee firm to sit alongside the trustee board. KPMG's annual U.K. fiduciary management survey also showed that the number of fiduciary management contracts has been increasing around 10% per year in the last 10 years.

Hannah Simons, head of fiduciary management at Schroders PLC in London, noted trustee boards are finding it hard to recruit new trustees.

"We are definitely seeing a trend toward appointing independent trustees to the board," she said.

Rory Murphy, a trustee of the £3.5 billion Merchant Navy Officers Pension Fund, Leatherhead, England, and the £100 million Carnival U.K. Pension Scheme, London, said even with fiduciary managers in place for both plans, the workload related to governance has increased.

"The whole board is involved in reviewing the work from fiduciary managers rather than a small group of people. We scrutinize the managers on a regular basis."

Sources also agreed that existing fiduciary management models are evolving with fewer plans buying the fiduciary solution off the shelf.

Greg Wright, director and head of fiduciary advisory at KPMG U.K. in London, said: "Growth of fiduciary management has picked up again, despite having plateaued last year, we think, due to the U.K. Competition and Markets Authority's probe into the consultants' market" in 2018.

The CMA has found competition issues in that pension trustees tend to choose their existing investment consultant to be their fiduciary managers.

Following an investigation, the CMA recommended that trustees who decide to delegate should run competitive tenders with at least three firms.

Sources also said that a partial delegation model, where execution and advice are separately bought, is becoming more popular with plans vs. the more common full delegation model, where investment decision-making, asset allocation and portfolio implementation are outsourced to fiduciary manager. "We are starting to see some evidence that more clients are starting to appoint a fiduciary manager for implementation alone,'' Mr. Wright said.

"The cost of the fiduciary management without the investment piece can then be lower," Mr. Wright added.

"Trustees like that model, as it gives them have an extra layer of independence," he said.