The role of a DC trustee is becoming increasingly more complex. Our panel of experts met up recently to discuss some of the key issues facing them and their members as the DC market grows to full maturity

Biographies
Chairman: John Lawson is head of pensions policy at Standard Life. His current role includes dealing with UK, European and Asian governments on policy issues, both on behalf of Standard Life and as a representative of the UK insurance industry. He has wide experience of the pensions industry and is a frequent commentator on pension issues in the press. He is chair of the Tax Incentivised Savings Association's Retirement Council, and a member of various industry bodies and committees.

Panellist: Ian Buchan is the corporate client development manager at Standard Life. Buchan has over 20 years' experience in the corporate pensions arena. After graduating in actuarial mathematics, Buchan joined Buck Consultants as a pension consultant. After a short time with Punter Southall, Buchan then moved to Scottish Life to spearhead the business development of DC Solutions - the third party administration division. He is responsible for the development of the Standard Life Corporate Pensions Brand.

Panellist: Alan Pickering is chairman of BESTrustees and of the financial literacy charity Life Academy. He is chairman of the Plumbing Industry Pension Scheme and serves as a trustee of a number of other large schemes. He is a non-executive director of The Pensions Regulator and a past chairman of the National Association of Pension Funds (NAPF) and the European Federation for Retirement Provision (EFRP). His Government sponsored report, A Simpler Way to Better Pensions, was published in July 2002.

Panellist: Stephen Bonner is currently an independent trustee on the OCS Group Pensions Trustee Board. Before retiring in 2009 he served as a trustee for their DB and DC schemes for over 10 years taking on the role of chairman for the latter 3 years. During his 30 years at OCS Group, a support services company, he held various senior management roles within finance, risk management, acquisitions & internal audit and was a member of the Group Board for 19 years. He is a Fellow of the Institute of Chartered Accountants

Panellist: Mark Ashworth is pensions director at Law Debenture. A barrister and chartered secretary, he joined Law Debenture in 2001 from the NatWest Group where he was head of group pensions, responsible for pensions policy and administration. Before joining NatWest he was a research economist at the Institute for Fiscal Studies. He is a member of the Council of the Society of Pension Consultants and served as president from 2006 to 2008. He is responsible for Law Debenture's pension scheme trusteeship activity.

Panellist: Huw Wynne-Griffith has spent over 40 years as a consulting actuary. His career started when he joined Duncan C Fraser & Co (which subsequently became Mercer). From 1977 to 1981 he ran the firm's office in Kuala Lumpur. He then left Mercer to help set up Barnett Waddingham in 1989. He stepped down as the senior partner in 2005 and retired from active consulting work in 2009. He remains active in other work for the University of Wales, as a pension scheme trustee and with the Institute of Actuaries.

Panellist: Philip Mendelsohn is a managing consultant and a trustee of the pension fund at Atkins Limited, the planning, design and complex capital projects enabling firm. He has been a principal consultant at the MVA Consultancy and a senior engineer at Strathclyde Regional Council. He specialises in the collection and analysis of traffic data to provide performance statistics to those involved in the operation and management of highway networks and advises on the use of this data.

Pensions Age DC trustee roundtable

Engagement
Chairman (John Lawson): What roles should trustees have in encouraging scheme engagement? And are some employers less concerned with having engaged staff in order to keep take-up rates low and hence costs down?

Alan Pickering (AP): It's for employers to decide the level of take up across the piece. It's our job as trustees to administer that and not to shape it. Likewise, in terms of active engagement, that is up to the employer and what the corporate culture is.

Chair: Are some employers less concerned with having engaged staff in order to keep take-up rates low and hence costs down?

Stephen Bonner (SB): The more people who go into a scheme, the more the costs go up for the employer. In terms of encouraging engagement, trustees must not be seen to be offering investment advice, but need to get people to save for a pension.

Mark Ashworth (MA): I would agree with Alan's comments; what I would add is that if participation and engagement were to appear to be very low, then it might prompt the trustees or the governance committee to ask why. Examination might reveal a need to change some aspect of the process or communications.

Ian Buchan (IB): For me, the crucial difference between a trustee's role in DB and DC is employee engagement. Trustees in DC schemes have the responsibility to make sure that members are taking informed decisions. That has to be their main duty. This is not a one-off task. They then have to monitor the scheme to make sure that these decisions continue to be appropriate.

AP: But how many decisions do you want the members to take? Should we be worried that many people are in the default scheme? Well, as long as the default is well designed, I'd rather they were in the default than, for example, Mongolian smaller companies. It's for the trustees with the employer to decide how many decisions you want the members to make. Trustees of a defined contribution scheme can make a decision for members that in a contract-based scheme members might have to take.

Huw Wynne-Griffith (HWG): That's right, you get engagement at different levels, entrance to the scheme, investment decisions, levels of contribution, retirement and the level of involvement of the trustees and engagement is important, at these various levels.

IB: Engagement doesn't necessarily have to mean making decisions. There are so many people in defaults that simply don't know what types of investments they have. So in some sense engagement can just mean people knowing what level of exposure they have to volatility and how much risk is in their portfolio. This is essential so that they're not taken aback by statements that show poor returns over certain periods.

Chair: The average take-up rate in DC is only 55 per cent. Auto-enrolment may help increase that, but how do we get more people interested in pensions, especially younger workers?

HWG: The Americans have a system of making no payment today, but you are undertaking to sacrifice some of tomorrow's pay rise when it comes. And by apathy it happens.

SB: The trouble is that younger people, when they start off, their salaries aren't very high. So they're going to simply say that they don't want to sacrifice their salary now for something in the future.

MA: Looking specifically at younger employees, if they have debts then it's not always right to say it's better than anything else. That is a hard fact. And when young people look at what has happened in the past, it's not a pretty or encouraging picture. So they are not obviously irrational.

AP: In the DC world, it's perfectly rational for someone to save in their 20s and say that a pension scheme is not the right place for them to save at that stage in their life journey. An IFA would get banged up if they told a 23-year-old with no savings and lots of debts that they should set aside some of their small income into a savings contract that was meant to last for 80 years - and nobody could tell you what you were going to get out of it at the end of that period.

Chair: Should we give them choice of what they're auto-enrolled into then?
Philip Mendelsohn (PM): Employers are offering more packages now where people can pick and mix how they get their remuneration: it is the role of the employer - not the trustee - to provide sensible access to advice so they make sensible decisions. Do they pay off their student loan, do they save up for a deposit on their house? Do they have a pension? If you're a 24-year-old with all this choice, you don't know what to choose.

HWG: But sometimes they get married, they have children, and that's the time perhaps when the savings community can be introduced to them, for example, through life cover for their families. And that I'm sure may be something that they perceive more of value to their families then just savings in a pension scheme.

Pensions in relation to other benefits
Chair: Do the trustees have a role to play in the menu of benefits offered?

PM: What the trustees have to do is make sure the employees understand the value of the pension in that menu.

HWG: Yes, if there is a corporate platform of benefits available and the pension scheme is one of them.The employer is responsible for the content of all the other benefits.

MA: That's increasingly the case and trustees need to be sensitive and balanced in the way they wish to see the pension scheme positioned in that range of offerings. There should be sufficient understanding and airtime for the options so that people can make the informed choice that we would like them to make.

Chair: Does a trustee have a more narrow role, is it limiting compared to that of a governance committee that could perhaps oversee the whole benefits package?

AP: Where the trustees do have a role is also in not just educating the employee, but also the employer. Sometimes firms need educating. There are some people who are being sucked into the employee benefits community who are not really fit for purpose and they are unleashed on employers. Experienced trustees can have a place in saying to an employer: 'hang on a minute, have you thought this through? Are you doing enough? Are you expecting too much?' If you see someone driving head long into a brick wall, it's your duty to try and stop them.

HWG: And a trustee, by definition of his function, probably knows more about pensions than the employer, and in that sense he can take himself out of the trust fund context and as Alan says, help the employer avoid the brick wall problem. But nevertheless as a trustee, with his trust fund hat on, he is limited in his advisory role by what the trust requires of him.

PM: I'm an MNT (member-nominated trustee), but some of my colleagues who are company nominated trustees get drawn into discussions with colleagues and are able to give the trustee perspective on wider remuneration matters.

MA: As an informal sounding board, and if there is a good healthy relationship with the trustee, the conversations may well stray into that area and this could be helpful. But I'm not sure if it would be right because the responsibility of being a trustee is enough and I wouldn't want to pretend to be engaged across the whole area.

IB: The modern-day DC trustee may have to start to spread his or her wings and look at a much wider picture - start demanding more sophisticated online tools, and top-of-the-range education. They must not be restricted by any trustee 'baggage' and be able to be as innovative as any governance committee. They will have to ask themselves if they should be looking at the wider picture of employer sponsored 'retirement benefits' or just 'pension benefits'.

MA: I'm cautious about expanding beyond the scheme, but I agree, trustees should be demanding on behalf of their members.

PM: The biggest problem people have is asking 'what am I going to get out of this pension?' So a decent modeller that reflects scenarios of returns on contributions, you could also link that with a budget modeller so that they can look at affordability. These sorts of tools are good examples of what should be provided.

SB: When we closed our DB scheme to future accruals, the active members were transferred into a DC scheme, so in order to help them we ran a series of road shows with professional presenters. We found it very useful and attendance was about 80 per cent. The feedback we got was 'I understand it a lot more now'. It was an employer idea, but there was a discussion with the trustees on what the best way of doing this was.

AP: That's spot on. Because the trustees are ideally placed to know if their folk need a road show or a gizmo. I don't think we should be insisting that every trustee sanctions the use of every modern technological tool. It's up to the trustees to think about, for example, all the tools Standard Life have, but then determine what is the best for them.

PM: We had a similar scenario a few years ago and what we thought would happen was that most people would show a much higher level of engagement if they came into DC from a DB scheme, but that hasn't really happened. So they're all excited by what's happening at first and will attend these presentations and the like, but then we've seen it tail off and they're back in with the masses now.

IB: My experience with trustees is that they have been very methodical and reactive. These are not bad traits, but do trustees now need to take a much more pro-active role? Things are changing very quickly in the DC world, and I believe DC trustees need to be taking much more of the initiative, and be more demanding from employers and providers to deliver solutions that will meet all of their members needs.

SB: As a DC trustee we do ask why isn't the take-up so good, as we are concerned that perhaps the employer is not passing on the application forms at the right time or something simple like that, but that's about all we can do. That's not our problem.

PM: As DC has built up, there was an expectation that member activism would go up as pots grew, but everyone can see that the same numbers are in default funds still today and these funds are not really reflective of people's career cycles. Five years of lifestyling at the end - are we really saying that keeping members in the same equity allocation for 20-odd years is sensible strategic decision making? That is where trustees really need to be more pro-active and respond to that inertia.

IB: That's exactly what I mean by the type of pro-activity that's needed.

HWG: One of the advantages of a trust-based arrangement is that you do have trustees and when the default option is taken then you're either 100 per cent right, or you're 100 per cent wrong. So it's on the shoulders of the trustees to make sure they plan and review the selection of the default fund as carefully as they can. And a lot of effort would go into that. Whereas with a contract-based arrangement, different kinds of providers will provide different kinds of defaults to have your colleagues (the MNTs) involved in the selection of that fund would give some reassurance to members.

AP: There's a big debate in America as to why it is that there are lots of default funds on the market but I think Americans have got it wrong - it is good that there are lots of default funds on the market if the people designing them have had their minds set on their particular market segment. When we use the word default we always assume it means life-styling, but the model is moving on.

Chair: Auto-enrolment from 2012 onwards will put more emphasis on trustees building a good default for the member. How much do you think trustees consider the needs of members at the moment when designing a default fund?

PM: We've just got to the stage where we realise we need to have a new default and we're about to go through that exercise. We have auto-enrolment already, so we get 90 per cent plus take-up. So we've go high level of membership but still a huge default level. It's going to be an interesting journey for us.

MA: The interest of the members has to be central to that decision, I don't see how you can begin to construct the default option without having the members in mind. The difficulty is of course that they are not homogenous, they are a group of people with all sorts of situations and needs, so thinking about them and getting something that is appropriate for as many of them as possible, signposting where people might take decisions to invest in other funds must be central.

Chair: Should we try to find out what members' attitudes to risk are and should we default different members into different default funds depending upon their level of risk appetite?

IB: Bernazzi (a behavioural science scholar) has made the point that we must take into account human behaviour when deciding on the construction of the default strategy. Trustees may need to balance a strategy that they believe will maximise the fund at retirement with a default strategy that members are most comfortable and less anxious about. Default strategies still have a long way to evolve - the next ten years will see wide changes.

MA: But if we move away from what we perceive as members' best financial interests to a more generalised holistic concept, then our legal advisers might have something to say about our fulfilling our duties. We need to be careful when factoring in human nature - it must be right financially.

AP: I would as a trustee happily sign up to a one fund approach, but there are other circumstances where you might want to offer people a choice, and I would rather offer them a choice between a volatile ride or a smooth ride, rather than active or passive exposure. There are some people who can only sleep if the capital value is safe, others are more risk tolerant.

PM: This time last year was a great example of that: members got a statement that showed they had lost assets and that generated a lot more interest in the membership.

SB: What we did was to have a default scheme and ten or 12 different funds that the consultant recommended rather than 'here's 300 you can choose from, best of luck'.

MA: It is likely that we will move into some sort of guided choice to help members identify what is appropriate for them. That's desirable in theory, but very difficult to deliver in practice because the outcome is so sensitive to the way that you pose the question or present the information. What always sticks in my mind is an experiment involving patients. If one group is told that they suffer from a condition, and there is treatment that has a 95 per cent success rate, and they are asked whether they would opt for it, a large proportion say 'yes'. If you ask another group of patients but say that there is a five per cent chance that the treatment will fail, then a much higher proportion would decline the treatment.

AP: It's also very important that we use lawyers who are DC-literate and have empathy with what we are trying to do as there are many lawyers who have been trained in a DB world. So when we start thinking about guided choice in DC, they would say, 'don't go there, I wouldn't touch it with a barge pole', but the courts are moving towards a stance that says, so long as you did your best and you thought it through and offered a steer, you get more brownie points than if you didn't.

IB: Taking that one step further, as a trustee, there must be a way of categorising people so that an appropriate default strategy is deployed for each category. This will place more responsibility on a trustee. But it could be by taking this more pro-active approach they are better protected than with what is in place just now.

HWG: If you have one default fund that is risk-averse and one that is not risk-averse, but looking for reward. So you do not only have the one in reality, you're asking them to choose.

PM: What you could do is create four or five different investment mixes creating a default appropriate to their career/age profile, but you allow them to vote with their feet. That way you're providing a much more appropriate default and at the same time if they decide to leave it, you put them in a basket that helps them, rather than leaving them to choose a high equity exposure that eventually falls flat on its face.

Care
Chair: Do you feel the weight of the responsibility for the outcomes that members have at retirement?

HWG: It's not just default, it's the investment of any DC scheme is so crucial to the final result that the trustees of any scheme should always be a little nervous as to what they do and how they go about doing it.

AP: In a DC world we can really make a difference to the ordinary man or woman in the street; in the DB world, we have an important role, but as long as the employer doesn't go bust, it's there as an important backstop. We make a marginal difference there. In DC, the difference that we make is massive and that's why I like to do more DC work.

MA: If one wasn't concerned about the outcome for members then one shouldn't really be doing the job. On the other hand, you've got to have sufficient confidence to know that we are dealing with the unknown: risk. We cannot guarantee anything, but one must not be paralysed by fear or uncertainty, but equally one must not be overly cautious in the face of uncertainty. We've got to get the right balance. Trying to tread that path is difficult.

SB: And knowing how big that pot is going to be at retirement and then of course the annuities and OMO, and how do you steer the member to which one. What information do you give them so that they can make a reasonable choice?

AP: In DC it's more about human beings than technicalities and most trustees first came into trusteeship because they liked dealing with benefits of this sort, because their human experience could be brought to bear in those decisions in a way that it can't help in funding or recovery plans. I would hate us to frighten off salt of the earth people from becoming trustees. Yes, they need advice, they need to know their limits, but one thing they do know is their membership.

PM: People coming in now face an enormous learning curve. It's really difficult for MNTs to get up to speed now and participate properly.

Time, pay?
Chair: Should trustees have more time to do their job and train properly?

SB: Trustees don't generally have enough time off to do their trustee job. They don't get given any time off from the day job. It's always got to be on top.

AP: There is a scale issue as well. If the world is going to become DC-dominant, then we have to find trustee models that are fit for purpose and a governance model that recognises that there will always be a symmetry of knowledge between supplier and consumer. So you need people at the governance level who have self confidence and training to do the job. I'm not sure that you can find that in the context of every small business in Britain. So you're going to have to look for collectivised DC solutions involving groups of employers where you have that common membership to fish for people who can do that job.

SB: As far as training goes, I am aware of one scheme that had seven trustees and three trainee trustees. These trainees had expressed an interest to become a trustee so they go along to all the meetings and then when a vacancy arises they will be top of the list to become one.

Chair: Should trustees be paid for their role?

PM: It depends how the employer deals with them and how they are expected to work.

MA: There is a danger that if trustees are paid this might encourage the attitude that as the employee is being paid on top of their salary, therefore he or she should do their trustee work on top of their normal work. But we should seek a situation where it is seen as an important part of their day job. Ideally, one would want it recognised in terms of assessment and the overall remuneration package. There's a danger that paying separately could fight against that.

AP: There are line managers who view trusteeship as another form of absenteeism - that's something we really need to challenge. And you don't challenge that just by paying someone, you reward someone in their annual appraisal.

HWG: The amount of responsibility that a DC trustee takes, is, in my view, higher than that of a DB trustee. So there should be a distinction in recognition or appraisal. As to whether a trustee should be rewarded in addition to their salary, now that's a matter for the employer and I would have thought the trustees could help the firm decide what should be done there. But yes, trustees should be paid.

IB: If you get something for nothing then you don't value it. I genuinely believe that there are a number of employers (and employees) with trust-based schemes that don't know or understand the value of service the trustees are providing for them. So I reckon that there is a tremendous argument to pay trustees - and then start making demands of them.

AP: Two of my favourite words are 'scheme specific' and I don't think it's for us to tell schemes and employers whether they should pay or not pay, but the issue of payment should be taken much closer to the coal face.

SB: When an employee becomes a trustee and their line manager says 'yes of course you can have two days a month or whatever to do your trustee work', then they invariably find that their day job fills in those two days as well. So if you are paid for trustee work then their commitment to be a trustee could be more.

Charging, contract vs. trust
Chair: What about charging structures generally and the new FSA consultancy charging?

HWG: They need to keep it simple, with cross subsidy it can't be avoided to a degree.

PM: I don't think members understand the charges. People don't understand that we can get smaller charges than a personal pension due to bulk buying. We've got muscle and people don't understand what it is they're getting - it's going to be very hard to get cross-subsidies in.

AP: Charges are important but I don't think they're evil. It's for trustees or governance committees to try and get value for money. The per capita or cross-subsidy will differ from scheme to scheme. I just hate the way that charges in the financial services industry are treated differently to charges when I'm buying a suit or a loaf of bread. I'm paying charges there, but there's no-one in Whitehall telling what the maximum charge should be to a suit seller.

Chair: Do you think the generally cheaper option of contract-based schemes lets the member down?

MA: We have to recognise that contract-based schemes are popular and have a large share of the market and we need to work at making them work well. Having some sort of theological debate on whether they are better or worse is not helpful.

AP: Some advisers have recently gone around to firms saying that contract-based schemes are 'governance-free zones'. No contract-based solution should be governance-free, let alone this one, so once it's no longer publicly acceptable that it's governance-free then it should be up to the employer as to which one suits him best. But immediately moving from an engaged trustee environment to a contract one where all the decisions are made by employees is probably a jump too far.

IB: I sometimes get frustrated when I encounter organisations who automatically jump to contract thinking the grass is greener. In reality contract arrangements can require as much attention as trust arrangements.

PM: In the adviser market now, we have firms offering a governance layer for contract-based schemes because to be honest they see a business opportunity.

SB: Members feel more comfortable with a trust-based scheme because the trustees know their workers. They believe that those trustees have their interests at heart and when, for example, they introduce a new default fund, the member believes that the trustees have opted for something closer to their interests rather than what some massive contract-based body might do running their pension far away in the City.

Chair: Should we really have two regulators in DC?

HWG: If we're talking about DC, then TPR should be given an opportunity to bed down as a DC regulator. But I do get a bit concerned that the obligations of trustees are making it more difficult for employers to find MNTs and ones who have the time to become good trustees. It's easy enough for the professionals. I've come across firms where the employers find it very difficult to get MNTs on board.

AP: I don't think we should differentiate between company and member-nominated trustees. One of the problems is that we expect trustees to be lawyers, actuaries, accountants, auditors and be able to second guess everything the professionals say, whereas the role of a trustee should be a visionary one, not a secretarial one, so you just need enough knowledge to monitor the professionals.

SB: Trustees can represent members well and be able to judge that advice adequately, that's where they really bring a benefit to the scheme.

Chair: How can we simplify communication and get the regulators to think about the member first?

IB: I'm in a DC scheme and the information I get, which is so heavily FSA-influenced, is of little use to me whatsoever. It is a challenge to untangle the (few) useful items from all of the (huge number of) caveats. But although the industry seems to be in agreement that the current format is not working, it always comes back to "FSA requirements" that prevents us moving forward with this.

MA: There's a bit of overkill, I agree. There needs to be more flexibility in terms of what providers present and what follows on in terms of health warnings.

SB: What proportion of literature is actually in plain English in order to give the member a reasonable chance of being able to understand a rather complex subject, rather than just technical information?

HWG: Education of investment matters is very complicated, and comes down to risk and you really don't have an investment without risk. If you are in cash - you have the inflation risk, equities seem OK in the longer term, lifestyle funds are designed to offer some protection, but then you have what has happened in the last three years. Everything, no matter what the projection is made, is subject to all sorts of risks. Trying to educate members to appreciate all this requires a lot of complicated information to be imparted.

PM: We're forced to send out this very factual document every year - in DB we only do a valuation every three years; I wonder if there is a lesson to learn there and you do it tri-annually and free up some money. We're living in an age where people can log onto a website to check 'what ifs?' Too often people say 'I've got to do something'; well, you don't have to.

HWG: That's the problem isn't it; a lot of these statements are just a snapshot of something that is really a movie.

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