The Association of Consulting Actuaries (ACA) has urged the government to introduce a more formalised process for appointing and replacing professional trustees, warning that conflicts of interest could become more acute as trustees’ powers expand.

In its response to the Department for Work and Pensions' (DWP) consultation on trusteeship and governance in trust-based schemes, the ACA said that while “much of the current system works well”, there were targeted areas where additional safeguards may be appropriate.

A central theme of the ACA’s response was the potential for conflicts of interest within professional trustee models, particularly where firms appointed connected entities to provide advisory or other services.

The ACA noted that a professional trustee firm may appoint itself or a connected organisation to carry out work for a scheme, creating potential conflicts if problems later arose, such as errors or performance concerns.

While transparency could mitigate these risks, the ACA warned that conflicts may be harder to manage when a sole trustee structure is in place.

The body also highlighted a further conflict stemming from the employer’s power to appoint or replace a professional trustee.

It argued that this would become “increasingly relevant” if trustees were given greater powers to distribute surplus to employers under forthcoming legislation.

However, the ACA stopped short of calling for a rebalancing of powers between employers and trustees.

Instead, it recommended a more formalised appointment process, including notifying The Pensions Regulator (TPR) when a professional trustee or professional corporate sole trustee (PCST) was appointed or replaced.

At a minimum, it stated that TPR should be informed when a traditional trustee board was replaced by a PCST.

In addition, the ACA suggested that incoming PCSTs could be required to seek comments from outgoing trustees, with the communication copied to the regulator, or alternatively that TPR could contact former trustees directly to identify any significant concerns about the handover.

Meanwhile, the ACA also made clear that it did not support increasing requirements for lay trustees.

It argued that skills requirements should apply at board level rather than to individual trustees, warning that raising the bar for lay trustees could deter candidates and undermine diversity.

The response stated that diversity, including the presence of member-nominated trustees, reduced the risk of groupthink and improved the quality of decision-making.

It further confirmed that it did not believe lay trustees should be required to be accredited, again citing the risk of creating additional hurdles for recruitment.

The ACA praised the existing support and guidance provided by TPR and called for this to continue.

On whether there should be limits on the number of appointments held by professional trustees, the ACA said prescriptive caps may not be appropriate given differing business models and levels of back-office support.

Instead, it proposed a professional obligation not to take on more schemes than can be adequately supported, potentially backed by regulatory oversight if TPR was notified of appointments.

The body also addressed consolidation in the defined contribution market, noting that the emergence of a small number of very large 'megafunds' could introduce systemic risks if administration providers encounter difficulties.

It suggested that TPR should monitor the market closely and consider measures such as transition planning requirements or capital-type safeguards for administrators with significant market share.

On minimum standards for administrators, the ACA acknowledged potential benefits of raising service levels but warned that poorly designed standards could increase costs and complexity without meaningful gains for members.

Commenting on the response, ACA chair, Stewart Hastie, stressed that conflicts of interest remained a key concern.

“Our response highlights a few specific areas of concern, notably conflicts of interest can arise for professional trustee firms, both in terms of the appointment of connected firms and from the employer’s power to appoint or replace a professional trustee,” he continued.

“The latter will become increasingly relevant when trustees have increased powers to distribute surplus to the employer.

“We would not want to see a change to the balance of power impacting employer appointments of trustees.

"However, we suggest that consideration should be given to a more formal process for appointment - including notification to TPR where a professional trustee or PCST is being appointed and/or replaced.”

Meanwhile, ACA Pension Schemes Committee chair, Peter Williams, argued that maintaining accessible entry points for lay trustees was critical.

“We have a strong view that the requirements for lay trustees should not be raised, as this would make it even more difficult to attract candidates to these key positions,” he stated.

“It is the trustee board as a whole that needs to have the appropriate skills.

"We think diversity of trustee boards is very important and lay trustees, including member-nominated trustees, play an important role in bringing a range of experience and perspectives to trustee decision-making.”

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