How to prepare for the Pensions Act
3 November 1997
The provisions of the Pensions Act 1995 take effect on 6 April 1997. As this date draws closer, employers and trustees should be reviewing their schemes to establish whether they comply fully with the provisions of the Act and, if not, when they propose to do so.
The following is a review of the principal areas to be considered and provides comments on what action is appropriate, when it should be taken and any time limits.
As is widely known, the Act requires all schemes to have one third of the trustee body to be nominated and elected by the active membership. But if the employer considers this to be inappropriate, it has until 6 May 1997 to notify the trustees of its decision. It then has six months to obtain the approval of the membership for its proposals.
If the employer does not serve notice - or its proposals are rejected - the trustees have six months to put in place appropriate arrangements for the appointment of member-nominated trustees.
The trustees, in consultation with the employer, must draw up a statement of investment principles setting out their policies on a number of issues. The statement must be signed by 6 April 1997.
The statement should not be an excuse for a lengthy new investment management agreement. There are, in fact, only about eight topics which need to be covered. Therefore, the statement need only run to a couple of pages at most.
Again, by 6 April 1997, each scheme must establish a two-stage internal procedure for the resolution of disputes. The first stage is likely to direct the complainant to the scheme's pension manager. The second stage will require the complaint to be handled by the trustees themselves.
Although it is possible to delay replying if a proper explanation is given, complaints are supposed to be dealt with within two months. As trustees rarely meet as frequently as this, it will either be necessary to devise a standard letter indicating no decision will be taken until the next meeting of the trustee board, or to appoint a committee to handle complaints on behalf of that board.
The trustees must ensure that their actuary (who must be an individual, not a firm), auditor and investment manager have been formally appointed in line with the Pensions Act requirements by 6 April 1997. Any other professional adviser on whom they intend to rely - notably the lawyer - should also be formally appointed.
If the trustees already have agreements with their advisers, there may be no need for fresh agreements to be signed - all this does is lead to unnecessary time and money being spent.
If a new agreement is necessary - for the appointment of the actuary, for example - care should be taken to ensure the terms of the agreement are in the interests of the client, not the adviser. Some advisers are now seeking to limit their liability for negligent advice.
If the trustees are prepared to agree to such a limitation (which, in principle, it cannot be in their interests to do), the cap should be adequate and be reciprocal (that is, if the adviser's liability is to be limited, the client should not accept open-ended liability either).
The new disclosure regulations also take effect on 6 April 1997. They considerably extend the basic information which must be given to members and prospective members of the scheme. New members must receive the required information within two months of joining the scheme, so in practice a new booklet should be available no later than 5 June 1997. For existing members there is a 12-month period by which the new information must be given.
It is not widely appreciated that the regulations apply not just to active members, but to deferred members and pensioners as well.
The scheme booklet is unlikely to be an appropriate document to send to these groups, since much of the information it contains may be irrelevant to them. Also, if benefits have been improved since they ceased to accrue service in the scheme (a higher level of pension increases may, for example, have been granted), issuing the booklet could be divisive. Separate announcements will, therefore, need to be prepared to reach the last two groups no later than 5 April 1998.
Although the new legislation is overriding and so automatically takes effect on 6 April 1997, most employers and trustees will wish to turn to a single source to establish their powers and obligations. It will, therefore, be necessary to amend the scheme rules to reflect the new legislation.
A new, definitive, deed may also present the opportunity to simplify and update the scheme's existing provisions.
One area which will need careful thought is the priorities on winding up. The Act imposes a new priority order in respect of liabilities on the new minimum funding requirement (MFR) basis.
If the scheme has accepted transfer payments in the past - and the trustees have either agreed to ring-fence the assets received, or guaranteed that they would be used in a certain way - the new MFR priorities will cut across such agreements. The trustees will therefore need to consider whether - and if so, how - they can honour the agreements they have previously entered into.
In this article, I have deliberately not gone into the new penalties introduced by the Pensions Act for breach of its provisions and the myriad regulations it has introduced.
However, the fact remains that there are now a wide range of penalties to which trustees may be made subject and in respect of which it is unlawful to be indemnified out of the pension fund. Accordingly, by 6 April 1997 trustees should review the indemnity they are offered by the employer and seek to have this extended to cover penalties levied under the Act.
It may well be appropriate for indemnity insurance to be obtained. Certainly, it would be worth seeking to have the company's directors and officers liability policy extended. If they do nothing else, such action should mean that the trustees are able to sleep soundly in their beds from midnight on 5 April.