The roles and responsibilities of Pension Scheme Trustees

By Sam Hakakole

A Pension Trust or Pension Scheme is a legal arrangement under which Trustees hold the assets of the Pension scheme in a trust fund for the benefit of the members of the scheme and their dependents for the main purpose of providing income in retirement. Trustees stand in a position of trust or fiduciary relationship and therefore, must always act with integrity.

The role of a Pension Scheme Trustee is crucial to the delivery of good member outcomes at retirement. Pension Scheme Trustees play an important role in ensuring effective scheme governance in management of schemes. The Trustees hold the legal title of the pension scheme assets and are supposed to ensure that the assets are used to provide benefits for members. Trustees are legally required to be familiar with the pension scheme’s documentation and to have a good understanding of the legal, funding and investment obligations relating to the Pension Scheme in order to appropriately manage the assets of the scheme adequately.

According to the Pension Scheme Regulation Act No. 28 of 1996 (as amended by Act No.27 of 2005), Trustees have the management and control functions of the scheme and are appointed by both the employees and employers. They are responsible for the administration of the Pension Scheme and compliance requirement that apply to these schemes.

Some of the specific roles of Trustees include holding the scheme assets; investing the assets prudently; collecting member  contributions as required by the terms of the trust; and most important, to pay benefits in accordance with the terms of the trust.

When it comes to investing, Trustees are charged with the mandate of determining the investment strategy of the particular pension scheme they manage. Trustees are entrusted with the primary responsibility of ensuring that they maximize returns within an acceptable level of risk. They have to ensure that the assets they are mandated to oversee are sufficient to meet the pension payments without depending so much on the sponsoring employer of the pension scheme for anything more than the current level of contributions. In turn, the beneficiaries of the scheme hope that a maximum return will be made on assets so that they can have the prospect of improved pension benefits upon retirement.

Should the Trustees adopt a high-risk strategy with a probability of “hitting-it-big” -i.e. attaining high returns in order to meet the expectations of the members; they also risk making significant losses as such is the nature of assuming risks for any form of subsequent future benefit. Therefore, the task carried by the Trustees in executing their mandate, entrusted to them by the scheme members and the sponsoring employers is to find the right balance in growing the assets and managing the associated risks. Although, in the case of a Defined Benefit (DB) pension plan, the risk is somewhat mitigated as Trustees can rely on the obligation of the sponsoring employer to off-set any shortfall should the investment go wrong.

On the other hand, the cost of any losses suffered in the case of a Defined Contribution (DC) pension plan is ultimately shouldered by the participating members on that plan. A brief distinction of the two pension plans is that a DB pension plan is a type of plan in which the sponsoring employer promises a specified benefit on retirement that is predetermined by a formula based on the member’s earning history, tenure of service and age. On the other hand, a DC pension plan is a type of plan where the benefits on retirement are based on amounts credited to member accounts plus any investment earnings on the money in these accounts accrued over the length of the members’ participation on this plan.

In recent years, due to shifts in global economies and rising deficits, sponsoring employers of pension plans have favored a shift towards Defined Contribution pension plans from Defined Benefit pension plans.

Given that Trustees are not experts in pension management, they appoint expert pension service providers who include Pension Fund Administrators and Managers. These service providers are also licensed by the Pensions and Insurance Authority (PIA) and are expected to adhere to the Pensions Act. Some services offered by Pension Fund Administrators include putting appropriate processes in place to ensure proper record keeping and capturing and managing scheme information. Administrators may also provide member communication services such as sending out annual benefit statements and other member documentation. Trustees may also delegate the management of the scheme to look after the day-to-day administration of the scheme to Pension Fund Administrators. This may include adding new members and ensuring records are complete and accurate.

On the other hand, Pension Fund Managers are responsible for the actual investment of funds on behalf of the Trustees. They also advise Trustees on various investment options.

In conclusion, most Pension Scheme Members have little or no interest in their pension until they are close to retirement. It is therefore, the duty of the Trustees to spur this interest and keep the members engaged by providing accurate, clear and understandable information.

For comments, questions or clarifications, send us an email at pia@ or follow us on our facebook page, Pensions and Insurance Authority. You can also call us on 211 251 401/5  or 0977 335809 or 0965 255136.

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The Author of this article is an Inspector in the Pensions Market Conduct Unit, at the Pensions and Insurance Authority.