11 July 2005
4 December 2013
20 September 2013
20 November 2013
Browne case: Pensions Ombudsman rules on liability for unauthorised payment charges resulting from payment of a death benefit
21 February 2014
6 January 2014
Defined benefit, or final salary, occupational pension schemes used to have a relatively low profile with the public. Most press articles related to the continuing incursion of successive governments in dealing with what were seen as necessary political interventions, such as improving the plight of the early leaver through legislation in the 1980s and 1990s; preventing companies squirreling away too much profit to avoid tax through the Finance Act 1986; and the introduction of personal pensions in 1988.
In the background were the trustees of these schemes, who were legally responsible for their overall governance. This included investing the assets prudently, ensuring contributions were paid on time and ensuring that benefits to members were paid correctly - this, of course, being what such schemes are there for.
Things began to change in the mid-1990s with two chains of events that placed the spotlight on the trustees themselves. The first can be attributed to Robert Maxwell and the concern that companies had too much influence over the running of schemes. Trustees needed more powers and clearer guidelines to meet their objectives. This led to the Pensions Act 1995.
The second started with Gordon Brown's furthering of Nigel Lawson's 'stealth tax', with a tax on pension scheme investment income, and continued with lower interest rates and poor stock market performance coupled with changes in corporate accounting requirements for pension schemes, not to mention an overall increase in life expectancy. Unfortunately, these economic factors all acted in the same direction and increased the cost of providing pensions. As a result of costs going up and asset values coming down, all schemes have seen reduced solvency levels and thus lower security for pensions previously perceived as 'guaranteed'. When schemes have been forced to wind-up, the consequences of members not receiving their benefits in full have been seen all too clearly.
Questions had to be asked. Why did the trustees not prevent this unfortunate outcome? Were the trustees too helpful in helping meet the accounting needs of the company? Why were the assets invested in the way they were? Are the issues so complex that the law needs changing? Do we need a new Pensions Act?
Well, we now have the Pensions Act 2004. With the Finance Act 2004 and various other initiatives, we now have a large amount of new or amended legislation coming into force between April 2005 and 2011.
There are new legal responsibilities on trustees and an ongoing debate on how much they need to know and to what extent they can rely on advice. If their lawyer, actuary or investment adviser gets it wrong, are they in breach of their legal responsibilities? If they are seen to make decisions that benefit the company at the expense of any group of beneficiaries, are they deemed responsible? The new Pensions Regulator has broad powers to deal with any such matters.
Increasingly, trustees who are also company directors will find they have conflicts of interest, such as in negotiating funding with the employer. Such trustees may wish to stand down.
There have been a number of high-profile instances of trustee bodies affecting potential corporate transactions, such as the purchase of Marks & Spencer by Philip Green. Indeed, there are a series of guiding principles from the Pensions Regulator which, where a scheme is in deficit, as most are, require the trustees to comment on such transactions.
There are 11 codes of practice either in place or to be in place by 5 April 2005. One of these, trustee knowledge and understanding (known fondly as TKU) contains nine areas of specialist knowledge with which trustees must be conversant. Where trustees are not sufficiently conversant (a term, together with others, left deliberately vague) in each of these, they will need to demonstrate the active steps they are taking to fill these gaps. Such gaps would be revealed through a training needs analysis, an example of good practice promoted by the regulator.
Another of the codes relates to the requirement for member-nominated trustees. At present, many companies are finding it difficult to persuade employees to take on trustee duties, and with most employees having more than enough to do in their own area of expertise, coupled with the above requirements, we can perhaps understand why.
However, there is a bright light at the end of the tunnel. If trustee bodies include expert professional trustees, then there is increased onus on these experts to have greater knowledge. The trustee body as a whole will be judged on how it carries out its responsibilities and decision-making. Individual responsibility will be weighted by the balance of expertise and the specialist roles held around the table.
In deciding whether to appoint such an 'independent' trustee, it is important to distinguish between two types emerging in the marketplace. The first of these is often an individual practitioner with experience in the pensions industry, who wishes to build up a portfolio of trusteeship cases. The second is a corporate trustee, which might be part of a law firm or a specialist trustee company with strength in depth and on-going expertise linked to a solid methodology and series of tools equipped to deal with all that the pensions regulator can throw at them. At this stage, emphasis on cost, and some confusion over the differences between these types, can come into play when appointments are made. This can store up problems for the future.
Companies looking at such an appointment should be encouraged to consider the balance of the following:
control of risk based on a sound understanding of governance issues;
dealing with conflicts of interest;
professional expertise, including the ability to challenge advisers positively;
cost control, which includes all costs, not just those of the new trustee;
reduction of management time spent on pensions; andimproved quality of communication to scheme members.
Brendan Brown is a senior independent trustee in the specialist independent trustee at Thomas Egger