For this month’s article, the Brand Financial Training team dig into trust-based schemes, their differences and responsibilities.
Many of you will likely have heard reference made to trust and contract-based pension schemes. What might not always be immediately clear is the precise meaning of those terms, how a trust-based scheme differs from a contract-based one and the roles and responsibilities of those acting in a trustee capacity.
What are trust and contract-based schemes?
A personal pension scheme is classed as ‘contract-based’. This means that it is an individual contract created between the individual and the provider, which is usually an insurance company or a platform provider. Such contracts may be established directly by the member, or part of an arrangement such as a group personal pension created by their employer to comply with auto-enrolment obligations. In the latter case, the management of the scheme is effectively outsourced to the provider, which takes responsibility for all aspects of running it.
Workplace pension schemes, however, can also be created as trust-based schemes (known as ‘occupational schemes’). What this means is that the scheme is constituted under a formal trust deed. A board of trustees is therefore appointed by the sponsoring employer to run the scheme as opposed to an external provider being used for the purpose. Defined benefit schemes are always operated on a trust basis, however, defined contribution schemes may be operated in either way.
How common are trust-based schemes?
Trust-based defined contribution schemes in general are becoming less common in modern times. Data produced by the Department for Work and Pensions in 2023 indicated that there were around 1,200 active trust-based schemes at the time, compared to around 3,700 in 2012[1]. In many cases, employers are choosing to outsource this based on the time, cost and inconvenience involved in operating a trust-based scheme.
It should be noted that there are some advantages to operating a trust-based scheme. Many governance specialists consider that it fosters a better relationship between the employer and its staff by means of setting up a scheme specifically focused on the interests of the workforce. Whilst the appetite to structure a scheme in this manner may be declining, paraplanners will still come across a significant number of existing ones.
There is also the potential for a hybrid option in the form of what are known as ‘master-trust’ arrangements. These are trust-based occupational arrangements created in the aftermath of auto-enrolment. They are established to be used by multiple employers rather than being established by an individual employer for the exclusive benefit of its own staff. Whilst each employer has its own division within the scheme, there is only one legal trust and one trustee board.
This therefore offers a useful halfway-house for employers which would like to offer their staff the protection of the trustee arrangement without going to the expense of establishing and running their own scheme. Examples of master-trust schemes include the National Employment Savings Trust (NEST) and The People’s Pension (TPP).
How does a trust-based scheme work and what are the trustees’ duties?
The trust deed will typically convey powers to the trustees including to hold and apply the scheme assets for the benefit of the members, carry out transactions and to determine matters of doubt relating to the scheme. Where it is silent on a relevant point then any relevant trust law will apply.
So, what is the role and what are the responsibilities of a pension scheme trustee? These are numerous, however, their high-level responsibilities would typically include the following:
- to act and maintain the scheme at all times in the interests of the members;
- to act within the provisions of the trust deed;
- to understand the scheme and its provisions;
- to ensure that their personal knowledge meets the trustee knowledge requirements;
- to report specific notifiable events to The Pensions Regulator;
- not to rely on third-party advisers who they have not themselves appointed
Trustees are also required to undertake specific tasks and duties as part of their role, which would include:
- obtaining audited accounts for the trust;
- notifying any delay in payment of contributions of longer than 30 days to the regulator
In addition, where the scheme is a defined benefit one, additional duties would be likely to include:
- drawing up a schedule of contributions for the scheme;
- drawing up the scheme’s statement of investment principles;
- preparing a statement of funding principles outlining how the statutory funding objective will be met;
- preparing a recovery plan if the objective is not being met
Who is able to act as a trustee?
Potentially anyone can act as a trustee, however, the role requires the legal capacity to hold property. In reality, The Pensions Regulator would expect trustees to demonstrate sufficient knowledge, experience and judgement to competently carry out the role. This would include knowledge of pensions and trust law, scheme funding and investment.
Trustees are also required to familiarise themselves with the scheme documentation including the trust deed and rules and, where relevant, statements of funding and investment principles and the scheme’s funding and investment strategy. Appropriate persons would therefore typically include directors or senior executives and potentially appropriate external appointments.
It should be noted that there are some categories of persons who are prohibited from acting as a pension scheme trustee, which are as follows:
- minors;
- undischarged bankrupts;
- persons disqualified from acting as a company director;
- individuals lacking mental capacity;
- persons with certain unspent criminal convictions;
- those prohibited from acting as a trustee by The Pensions Regulator;
- those previously removed as a trustee by the courts due to conduct issues
Being able to describe the roles and duties of trustees within a pension scheme is a specific learning outcome within R04 and one which is regularly questioned. FA2 also specifically requires candidates to be able to describe the role and operation of trusts in pension administration and the relevant powers, rights and responsibilities of each party to a trust. Candidates for either would therefore be well advised to ensure that their knowledge of trustee arrangements, roles and responsibilities is up to standard.
[1] The Department for Work and Pensions: ‘Trends in the defined contribution trust-based pensions market’ https://www.gov.uk/government/publications/trends-in-the-defined-contribution-trust-based-pensions-market/trends-in-the-defined-contribution-trust-based-pensions-market
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