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Trust-based pension schemes and the trustees’ role

Your rights as a member of a pension scheme are valuable and important to you and your dependants. As your pension may not start for many years and may continue long after you retire, your scheme must be managed properly so it is able to pay your benefits when they are due. Occupational pension schemes are normally set up under trust. The scheme’s assets are looked after by trustees on behalf of members, their dependants and other beneficiaries.

A trust 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 dependants, and for the main purpose of providing income in retirement.

The main reason for separating the scheme’s assets from the employer’s business is to ensure that these assets will be available to pay members’ pensions whether or not the employer stays in business. Funding the pension entitlements as they build up also helps to spread the cost of providing pensions over the working life of the scheme members.

Under trust law and the Pensions Act, pension scheme trustees must ensure that schemes are run properly, and they must protect your rights as a scheme member. Trustees must put in place an effective system of governance and internal controls and take reasonable steps to ensure continuity and regularity in the performance of the scheme or trust retirement annuity contract (RAC) activities, including the development of contingency plans.

Trustees must be considered ‘fit and proper’ and they must collectively have adequate qualifications, knowledge and experience to run a pension scheme or trust RAC. Trustees are also responsible for ‘whistle-blowing’ to the Pensions Authority if they suspect that the pension scheme funds have been misused.