The Pension Trustee's Handbook

THE DEFINITIVE GUIDE TO THE TRUSTEE’S ROLE AND OBLIGATIONS ‘The most comprehensive yet readable review of this subject ...

Author: Robin Ellison

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THE DEFINITIVE GUIDE TO THE TRUSTEE’S ROLE AND OBLIGATIONS

‘The most comprehensive yet readable review of this subject on the market.’ BENEFITS AND COMPENSATION INTERNATIONAL

the

PENSION TRUSTEE’S handbook

5th edition ROBIN ELLISON

Endorsed by the Pensions Management Institute

The Pensions Management Institute RAISING STANDARDS FOR PENSION PROFESSIONALS AND TRUSTEES Professional membership Qualifications for staff at all levels Study support Conferences and seminars Trustee development Publications On line pensions jobs

www.pensions-pmi.org.uk

The Pensions Trustee’s Handbook 5th edition The new 5th edition of Robin Ellison’s definitive guide to the trustee’s role and obligations has been fully updated to take into account all changes to the law and regulations since the last edition. It is fully up to date as at autumn 2006. Crystal clear and jargon-free, it is designed to meet your needs as a trustee and to answer all your questions in a no-nonsense, practical manner. It is helpfully divided into three parts – I Trusteeship in Law, II Trusteeship in Practice and III The Bluffer’s Guide, an invaluable source of information. Both the Finance Act 2004 and the Pensions Act 2004 significantly increased the responsibilities and liabilities of trustees. There has never been a greater need for a book that is both expert and accessible. This book: • focuses on what the rules mean in practice • teaches the trustee to anticipate problems and how to solve them • contains no legalese and no jargon • ends each chapter with summary of points to remember • includes case studies, checklists and useful addresses PRAISE FOR THE PENSIONS TRUSTEE’S HANDBOOK ‘A very useful book – one for the shelves of all pension trustees.’ PERSONNEL TODAY

‘Written in a beautifully direct style… it clearly communicates what UK trustees need to know in order to do a good job… the most comprehensive yet readable review of this subject on the market.’ BENEFITS AND COMPENSATION INTERNATIONAL

‘Scores very highly… mandatory education for your trustee board.’ PENSIONS TODAY

‘Very straightforward and accessible… this is a useful and practical primer for trustees.’ PENSIONS NEWS

Robin Ellison is Head of Strategic Development, Pensions at leading law firm Pinsent Masons. He is a highly experienced speaker and writer, with many years’ experience of lecturing to pension fund trustees and sitting on boards of trustees, as well as acting as a solicitor. He is the author of many books including Sweet & Maxwell’s Pensions Law loose leaf service. Robin Ellison is currently Chairman of the NAPF.

www.pensions-pmi.org.uk

NEW TRUSTEE DEVELOPMENTS FROM THE PMI New PMI Awards in Pension Trusteeship PMI is very pleased to be able to offer two new Awards accredited by the Qualifications & Curriculum Authority

The Pensions Management Institute

PMI Trustee Group Seminars - putting trustees on track since 1998

(QCA) which will be of value to trustees and others interested in trusteeship.

These consistently successful one day seminars are organised twice a year by the

The Pensions Regulator has developed

PMI Trustee Group. Held in June and

an e-learning programme to meet its

November, these events help trustees to

Trustee Knowledge and Understanding

focus on areas of risk and provide them with

requirements, which provides a useful

the information and guidance they need in

resource for those preparing for the

order to ensure that their company’s scheme

Awards.

is running effectively.

To view the Awards titles and unit structure please visit the PMI website at www.pensions-pmi.org.uk/Trustees/ APT/index.asp

Trustees at all levels of experience, be they company or member nominated, and those charged with the responsibility of organising and managing trustee boards should definitely not miss out.

For further details please contact

For further details please contact

Gillian King on

Samantha Gaffney on

[email protected]

[email protected]

or phone 020 7392 7401.

or phone 020 7392 7425.

www.pensions-pmi.org.uk

PMI News revamped for trustee readers

The Pensions Management Institute

PMI has recently amalgamated two publications, PMI News and PMI Trustee Group News. Over the last 10 years, the pensions world has radically changed and the level of

technical content in both

publications has increased considerably. We see this opportunity to offer a

Independent Pension Trustee Group (IPTG)

combined publication covering technical

Independent Pension Trustees have

and topical pension issues as extremely

an increasingly important function

beneficial to both pensions professionals

with many of them acting as chairs of

and trustees.

trustee boards and the link between the board and the employer.

For further details please contact Holly Sheridan on

Under

[email protected]

independent trustees have joined

or phone 020 7392 7419 If you are a PMI member please visit www.pensioncareers.co.uk to download the latest issue.

the

auspices

of

PMI,

together to form a self-governing group. Members sign up to a Comprehensive Code of Guidance and are then part of a network which offers discussion forums, newsletters and support. For further details please contact Gillian King on [email protected] or visit www.pensions-pmi.org.uk

The Pensions Management Institute (PMI) Penny Green, President, The Pensions Management Institute The Pensions Management Institute (PMI) was one of the first organisations to recognise that pensions trustees needed greater knowledge and support in order to fulfil their legal and fiduciary responsibilities. In 1993 PMI introduced the Trustee Certificate of Essential Pensions Knowledge which quickly became the benchmark for trustees to obtain in order to give themselves insight and confidence that they were acting in the best possible interests of their pension scheme's members. More than 2,400 trustees around the UK have now passed the Certificate. This Certificate has evolved in line with regulatory and best practice changes over the past 13 years and has now been replaced by two separate Awards in Pension Trusteeship – one purely Defined Contribution (DC) based and one that is both DC and Defined Benefit (DB). These have been developed in line with the Pensions Regulator's Trustee Knowledge and Understanding (TKU) requirements and, we believe, offer the best possible independent assessment of a trustee’s knowledge. Even before Paul Myners made his recommendations about trustees needing to improve their levels of understanding, PMI had established the PMI Trustee Group offering regular newsletters and two annual seminars with leading pensions practitioners. PMI is now developing Trusteeweb as an even more effective communication forum for trustees to keep in contact with changes in legislation and exchange ideas on problems and solutions. More information on trustee support from the PMI is available from our website www.pensionspmi.org.uk As you can see therefore, PMI has been a leading crusader in the campaign to assist pension trustees, at all levels, come to terms with the growing complexities of the task in hand. We are delighted therefore to lend our support and endorsement to this new 5th edition of ‘The Pension Trustee‘s Handbook’ which Robin Ellison has produced in his usual clear and concise fashion. In an industry populated by ‘experts’ who actually make pension issues more difficult for the man in the street to comprehend, Robin has justly earned a reputation for clarity, vision and accessibility. PMI looks forward to the 5th edition becoming even more popular with trustee readers than its predecessors.

THE PENSION TRUSTEE’S HANDBOOK 5th edition

The definitive guide to the trustee’s role and obligations

Robin Ellison

5th edition published by Thorogood Publishing Ltd 2007 10-12 Rivington Street London EC2A 3DU Telephone: 020 7749 4748 Fax: 020 7729 6110 Email: [email protected] Web: www.thorogoodpublishing.co.uk Advertising sales negotiated by Petersham Publishing Ltd Petersham House 57A Hatton Garden London EC1N 8JG © Robin Ellison 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying, recording or otherwise, without the prior permission of the publisher. This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than in which it is published and without a similar condition including this condition being imposed upon the subsequent purchaser. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author or publisher. A catalogue record for this book is available from the British Library ISBN 1 85418 410 5 978-185418410-8 Book typeset and cover designed in the UK by Driftdesign Printed in the UK by Ashford Colour Press Ltd

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Reviewing the Employer’s Covenant Chantrey Vellacott DFK The Pensions Regulator requires trustees to perform a regular review of the financial strength of the sponsoring employer. This is referred to as an Employer Covenant Review. The main triggers for an employer covenant review are listed below:

Meeting trustee knowledge and understanding requirements The Regulator requires trustees to have a knowledge and understanding of the nature and strength of the employer’s covenant and the potential risks to the scheme.

Assessing the impact of ‘Events’ The Regulator defines Events as ‘all transactions, acts or failures to act, and in some cases circumstances which effect a company’. Trustees need to assess the impact of Events on the employer’s covenant.

Informing the technical provisions The Regulator requires that trustees take account of the employer’s covenant when negotiating the technical provisions.

Negotiation of the recovery plan Where an actuarial valuation reveals a funding deficit (i.e. a shortfall in assets compared to the funding target), the trustees and employer are required to agree a recovery plan to bring the scheme up to the target level of funding. Trustees need to take account of likely future cashflows generated by the employer and on alternative ways of protecting the scheme.

Dealing with an insolvent employer There will be occasions when the size of the pension deficit combined with the employer’s non-pension liabilities mean that there is no realistic prospect of the liabilities ever being repaid from future cashflows. Whenever trustees are concerned that the employer may be insolvent, they should review the employer’s financial position. Chantrey Vellacott DFK has considerable experience of assisting trustees fulfil their obligations in all these areas. We adopt a scheme specific approach to each assignment, matching the scope of the review to the needs of the trustees. This enables us to provide a very cost effective service.

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THE PENSION TRUSTEE’S HANDBOOK 5th ed

· xi

CONTENTS FOREWORD ...............................................................................................1 PREFACE ....................................................................................................7

PART I TRUSTEESHIP IN LAW 1

INTRODUCTION ..............................................................................17 Background.......................................................................................18 Why the law is involved ...................................................................20 What is not in this book ...................................................................21 What is in this book ..........................................................................26 How to use this book........................................................................26

2

WHY HAVE A TRUST? ......................................................................31 Why have a pension fund?................................................................32 Drawbacks to pension funds ............................................................34 Why have a trustee? ..........................................................................34 Why have a trust?..............................................................................36 Why is trust law so complicated? .....................................................37 Why were trusts invented? ...............................................................38 What is a trust?..................................................................................38 What is a trustee? ..............................................................................39 What kind of trustee am I?................................................................40 Who makes a trust and how?............................................................41 Trust law and other law....................................................................41 Jargon................................................................................................41 Why is trust law different from other law? .......................................42 Trust deed and rules .........................................................................43 The deed is king…............................................................................43

THE PENSION TRUSTEE’S HANDBOOK 5th ed

· xiii

…but what about the announcements?............................................45 Do I need to be ‘authorised’?............................................................45 Duties, discretions and powers .......................................................46 What kind of scheme am I trustee of? ..............................................46 3

TAKING OFFICE ...............................................................................51 Introduction......................................................................................51 The differences between powers, duties and discretions ................54 Duties................................................................................................54 Discretions ........................................................................................54 Powers .............................................................................................55 Delegation.........................................................................................55 Acts of Parliament and other laws ....................................................56 What to watch out for ......................................................................58 Conflicts of interest...........................................................................59 A trustees’ meeting ...........................................................................59

4

THE PAPERWORK ............................................................................65 Introduction......................................................................................66 The deed ...........................................................................................66 The rules ...........................................................................................67 The booklet.......................................................................................67 The actuarial valuation......................................................................68 The accounts.....................................................................................68 The trustee’s report ..........................................................................68 Investment documents .....................................................................69 The investment manager’s report.....................................................69 Drafting in English ............................................................................69

5

INVESTING THE ASSETS...................................................................73 Introduction......................................................................................74 Social and ethical investments .........................................................74 Choosing and controlling the investment manager .........................75 Authorisation ...................................................................................76 In-house investment management ...................................................76 Monitoring ........................................................................................77 The ‘customer agreement’ ...............................................................77 Corporate governance .....................................................................78 Self-investment and loanbacks .........................................................79

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THE PENSION TRUSTEE’S HANDBOOK 5th ed

· xv

Fashion: risk and reward ..................................................................79 Assets and liabilities ..........................................................................80 Tax ....................................................................................................81 Statement of investment principles ..................................................82 Investment performance measurement............................................82 6

PROVIDING INFORMATION............................................................87 Introduction......................................................................................87 Failure to comply ..............................................................................90 Policy ................................................................................................90 Communication ................................................................................90

7

PAYING BENEFITS............................................................................95 Introduction......................................................................................95 Eligibility ...........................................................................................96 Death benefits...................................................................................96 Winding-up .......................................................................................96 Divorce .............................................................................................97 Members and other beneficiaries .....................................................97 Discretions ........................................................................................98

8

TAKING ADVICE ............................................................................107 Introduction....................................................................................107 Lawyers ...........................................................................................109 Actuaries .........................................................................................110 Pension fund managers...................................................................111 Investment managers......................................................................112 Pensions consultants.......................................................................114 The accountant ...............................................................................114 Conflicts of interest.........................................................................115

9

TRUSTEES AND EMPLOYERS .........................................................117 Introduction....................................................................................118 The balance of power.....................................................................118 The legal relationship .....................................................................119 Training...........................................................................................120 Disputes with the employer and employment protection .............120 Payment ..........................................................................................121

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THE PENSION TRUSTEE’S HANDBOOK 5th ed

· xvii

10 PROTECTING YOURSELF...............................................................123 Introduction....................................................................................124 The deed .........................................................................................125 Insurance ........................................................................................126 The court ........................................................................................126 Taking advice ..................................................................................127 Criminal liability..............................................................................127 Corporate trustees ..........................................................................128 Appointing an independent professional trustee ...........................129 The other trustees...........................................................................129

PART II TRUSTEESHIP IN PRACTICE 11 FUNDING SURPLUSES AND DEFICITS ...........................................139 Introduction....................................................................................139 Schedule of contributions...............................................................140 The trustees’ role on surpluses and deficits ...................................141 The special case of insolvency........................................................142 Pension Protection Fund ................................................................145 Trustees and contributions .............................................................145 12 BENEFIT CHANGES ........................................................................149 Introduction....................................................................................149 Benefit improvements.....................................................................150 Benefit reductions...........................................................................151 Recovering overpayments ..............................................................151 13 TRADE UNIONS..............................................................................153 Introduction....................................................................................153 Representation and consultation ....................................................154 14 STATE PENSIONS............................................................................155 Introduction....................................................................................155 Contracting-out ...............................................................................156 NPSS................................................................................................157

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· xix

15 EQUAL TREATMENT ......................................................................161 Introduction....................................................................................162 Sex discrimination ..........................................................................163 Race discrimination ........................................................................164 Age discrimination ..........................................................................164 16 EARLY LEAVERS..............................................................................169 Preservation and what it means......................................................169 Transfers .........................................................................................170 The right to transfer........................................................................171 The value of transfers .....................................................................171 Information about transfers ............................................................171 Why transfer payments from one scheme don’t buy years of service in the next scheme .........................................................................172 Why the transfer won’t buy added years........................................174 The three transfer values ................................................................175 17 MERGERS AND ACQUISITIONS .....................................................177 Introduction....................................................................................178 Background.....................................................................................178 Existing surpluses ...........................................................................179 Expectations ...................................................................................179 Practice ..........................................................................................180 Requests for transfer payments ......................................................181 Corporate reconstructions..............................................................182 18 WINDING-UP THE SCHEME ...........................................................187 Introduction....................................................................................187 What winding-up means .................................................................188 The tontine .....................................................................................188 19 WHEN YOUR EMPLOYER GOES BUST...........................................189 Introduction....................................................................................190 Independent trustee .......................................................................190 Telling the members .......................................................................191 Deficits ............................................................................................191

Trustee Training TKU gap? Aries will help bridge it

Our convenient, interactive CD-ROM fully covers the PMI’s Trustee Certificate. For a free introductory pack, contact: www.ariespensions.co.uk/public/software/trt.htm [email protected] tel: 01536 763 352

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20 MEMBERS’ RIGHTS .........................................................................193 Introduction....................................................................................193 Membership ....................................................................................194 Information .....................................................................................194 Transfers .........................................................................................194 Equal treatment...............................................................................195 The members and the employer.....................................................195 21 GIVING ADVICE .............................................................................197 Introduction....................................................................................197 The state pension............................................................................200 22 REGULATION .................................................................................201 Introduction....................................................................................202 The Pensions Regulator ..................................................................203 HMRC..............................................................................................203 The Pensions Registry.....................................................................204 TPAS – the pensions advisory service.............................................204 The Pensions Ombudsman .............................................................205 The DWP – The Department of Work and Pensions ......................205 Financial Services Authority............................................................206 The Pension Protection Fund .........................................................206 23 DISPUTES ........................................................................................213 Introduction....................................................................................214 Internal dispute resolution .............................................................215 Alternative dispute resolution.........................................................215 The Pensions Ombudsman .............................................................216 The courts.......................................................................................217 Disputes with the employer ...........................................................218 Disputes with the members............................................................218 24 DIVORCE AND FAMILY MATTERS .................................................219 Introduction....................................................................................219 Gender reassignment ......................................................................220 Civil partnerships............................................................................220

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PART III THE BLUFFER’S GUIDE Appendices I

THE BLUFFER’S GUIDE...................................................................229 Abbreviations ..................................................................................233

II

THE BRITISH PENSIONS SYSTEM...................................................235 The system ......................................................................................235 State pension credit ........................................................................236 HMRC rules .....................................................................................237 Self-administered and insured .........................................................237 Money purchase and final salary.....................................................238 Unfunded schemes .........................................................................239 AVCs ...............................................................................................239

III PENSIONS BY NUMBERS ................................................................241 What tax relief is there on pensions?..............................................241 Can I live on the basic state pension?.............................................242 What will pensions cost the country?.............................................243 How important is grey power? .......................................................244 How long will I live? .......................................................................244 How important are workplace pensions?.......................................244 Are there enough people working to support me in my old age?..244 IV BLUFFER’S CASES ...........................................................................245 Investments.....................................................................................245 Surpluses – whose money is it? ......................................................246 Equal treatment...............................................................................248 Employers and trustees...................................................................249 V

ADDRESSES .....................................................................................251

VI FURTHER READING .......................................................................257 General............................................................................................257 Periodicals.......................................................................................258 Law .................................................................................................260

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THE PENSION TRUSTEE’S HANDBOOK 5th ed

· xxv

The pensions system.......................................................................261 Accounting......................................................................................262 Investment ......................................................................................263 Policy ..............................................................................................263 Statistics ..........................................................................................266 VII THE PENSIONS YEAR .....................................................................269 VIII QUALIFICATIONS AND TRAINING................................................273 IX THE NAPF CHECKLIST FOR PENSION FUND TRUSTEES ..............275 X

THE MYNERS PRINCIPLES .............................................................277 Defined Benefit Pension Schemes ..................................................277 Defined Contribution Pension Schemes .........................................281

XI US DEPARTMENT OF LABOR STATEMENT ON ACTIVISM ...........285 1) Proxy Voting ..............................................................................286 2) Statements of Investment Policy ...............................................288 3) Shareholder Activism .................................................................291 XII PENALTIES ......................................................................................293 OFFENCES AND CIVIL PENALTIES UNDER THE PENSIONS ACT 2004 ..............................................................293 OFFENCES.......................................................................................293 CIVIL PENALTIES ............................................................................296 CIVIL PENALTIES UNDER REGULATIONS UNDER THE PENSIONS ACT 2004 ..............................................................303 XIII THE PENSIONS REGULATOR TRUSTEE GUIDES ...........................305 Pensions Act 2004...........................................................................305 XIV CODE OF PRACTICE: TRUSTEE KNOWLEDGE AND UNDERSTANDING (TKU)......................................................309

INDEX OF ADVERTISERS.......................................................................351

Services for people of working age Combined Pensions Forcasting

Background – who are we? The Future Pensions Division, part of the Department for Work and Pensions (DWP), provides a range of information services to help working age people plan for their future financial security. Understanding your likely retirement income is vital when making informed choices about further pension provision, thus enabling individuals to consider whether current provision is adequate to meet their expectations in retirement. The services currently offered by The Future Pensions Division are:

Combined Pension Forecasts (CPFs) CPF is a Government scheme launched in October 2001 as part of the Government’s plans to encourage individuals to take responsibility for planning and saving for retirement. CPFs allow individuals to receive details of both their private pension and their State Pension forecast together. This provides them with an estimate of the income they may expect to receive at retirement from these two vital components of their retirement provision. Not only is the State Pension information available free of charge, but DWP also provides technical support, standard documentation and IT packages to support the process. Some employers issue CPFs to non-scheme members, showing their occupational pension as ‘nil’ alongside their State Pension forecast. Such forecasts are often accompanied by an invitation to join the company pension scheme and usually generate interest. Also, by providing an individual’s private and State Pension information together it can lead many to review their retirement planning and increase contributions. The CPF exercise also provides an opportunity to ensure personal details held by an employer or provider are consistent with information held by the DWP. Where key data does not match with the Department’s records, we will be unable to supply a State Pension forecast. This should prompt the individuals concerned to contact the DWP call centre to establish why they did not receive a State Pension forecast and correct their record, either with their employer, personal pension provider or DWP.

Recent independent research on the CPF service (DWP Research Report No 293) and a summary are available free from the DWP website: http://www.dwp.gov.uk/asd/asd5/rrs2005.asp#combined

Individual Pension Forecasts (IPFs) The IPF concentrates on providing information to support future planning for working age people. The IPF letter is detailed and high quality, tailored to the individual’s circumstances and based on additional personal information provided by the customer. This forecast shows: •

The amount of weekly State Pension the customer may get at State Pension Age, to the date of the forecast.

•

The amount of weekly State Pension the customer may get at State Pension Age, making assumptions about certain circumstances after the date of the forecast.

•

How future changes to working patterns and employment can impact on future State Pension provision, for example, deferral of State Pension.

•

What can be done to improve basic State Pension, for example, paying voluntary contributions for years that have a deficient record.

Automatic Pension Forecasts (APFs) Part of the Government’s Informed Choice initiative, the APFs were introduced in May 2003, providing an unsolicited State Pension Forecast to working age people who have not previously received an Individual Pension Forecast or a Combined Pension Forecast within the preceding 12 months. Issue of APFs has been approached in segments: •

Woman over 50;

•

Men over 50;

•

Women under 50;

•

Men under 50.

APFs, calculated using the individual’s own National Insurance record, provide an estimate of the State Pension they may receive at State Pension Age. These forecasts are designed to prompt consideration of the effectiveness of their retirement income position. The receipt of an APF often prompts an IPF request, which, as described earlier, is more detailed.

Pension Tracing Service (PTS) From April 2005, pension tracing became the responsibility of the Pension Tracing Service (PTS), which operates within The Pension Service. The Pension Tracing Service assist individuals to locate any pension pots they may have ’lost touch‘ with. The Pension Tracing Service has access to a database of over 200,000 occupational and personal pension schemes and can be used, free of charge to search for a scheme.

Pensions Reform in Relation to Forecasting At the moment forecasts are based on the current law and show how much State Pension an individual may get when they claim it. A forecast is designed to give someone an idea – it is not a guarantee. There is some important information that we would like people to bear in mind when they are reviewing their forecasts this year. The Government launched its White Paper on Pensions Reform ‘Security in retirement: towards a new pensions system’ on the 25 May 2006. It contains major proposals that set the direction for the long-term future of pensions and retirement savings. You can access further information about the White Paper or download a copy of the document at: www.dwp.gov.uk/pensionsreform A message intended for recipients of forecasts about the proposals can be found at: www.pensions.gov.uk/combinedpensionforecast/recipient/home.asp The proposals include changes designed to increase the number of people who receive a full basic State Pension. If Parliament agrees these proposals, State Pension would be worked out differently for people who reach State Pension age from 6th April 2010 – that is men born on or after 6th April 1945 and women born on or after 6th April 1950. For more information about CPFs: Contact: 0870 010 1684 Fax: 0191 218 2784 Email: [email protected] For more information about IPFs and APFs: Contact: 0845 3000 168 Text Phone: 0845 3000 169 For more information about PTS: Contact: 0845 6002 537 Text phone: 0845 3000 169 Alternatively, visit www.thepensionservice.gsi.gov.uk to find out more.

Implementing hedge funds in an institutional portfolio Stephen Oxley Managing Director, Pacific Alternative Asset Management Company Trustees are being encouraged by their consultants to diversify their investment policy to include alternative investments like hedge funds. There is a spectrum of implementation methods used by pension fund investors in hedge funds from fully external management to virtual do-it-yourself. It makes sense, when investing in hedge funds, to spread investments across a number of different styles and managers. Some institutional investors have outsourced the difficult business of hedge fund selection, portfolio construction and risk control to external funds of hedge fund managers. Others do this while also making direct investments in individual hedge funds. Some of the world’s largest pension funds have established an internal fund of funds to do the work themselves. Hedge funds are complex. There are a huge number of funds to choose from. Most, are small businesses with short track-records. They have opaque and sometimes exotic investment strategies and success is often dependent on the brilliance of one or two individuals rather than a “process”. They are also dynamic. The hedge fund world never stands still, which means what you buy now may not be what you end up with. All these aspects are what collectively make hedge fund investment attractive to trustees: high skill combined with low market exposure. But they also turn manager research and monitoring into a particularly demanding job. Most pension funds are initially making relatively small percentage allocations to hedge funds and, for these institutions, outsourcing to a fund of funds remains the best option. As the market develops, we can expect to see more of the core-satellite approach (core fund of funds with satellite direct investments). Investors may well look to their funds of hedge funds as they would their consultant, for strategic and specific advice.

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Contact: Von Hughes

Contact: Stephen Oxley

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www.paamco.com

Artemis Investment Management Ltd Background Established in 1997, Artemis Investment Management Ltd is a dedicated investment management house specialising in high performance active equity management. Artemis employs experienced people who share the same flair and enthusiasm for fund management. Artemis attracts clients looking for above average performance. We have established a reputation for strong investment performance in up as well as down markets. Artemis manages both segregated accounts and unit trusts specifically for institutional investors. Fund managers typically have an equity stake in the business and invest their own money in the funds they manage.

Investment Style and Philosophy Artemis’ philosophy for delivering outstanding investment returns is based on beating the markets. Fund managers are not restricted to a house style or process. We seek to exploit market inefficiencies with an absolute return mindset. In practice this means that we only buy a share if we believe that it is undervalued, be it through its capital growth potential or its income stream, and not because it represents a significant proportion of the index. Capital is allocated on the basis of perceived share price upside and conviction.

Key features of Investment Process When looking at larger cap stocks we use our in-house proprietary stock screening system, SmartGARP™, which analyses fundamental data in a systematic fashion and combines this with trends in market behaviour to identify the best opportunities. For mid and small cap stocks, fund managers generate, research and monitor investment ideas taking into account the long-term earnings prospects of a company in addition to other short term technical factors that may have a material impact on the share price. Fund managers conduct their own research.

Product and Services Institutional UK Alpha – bias to FTSE 350 stocks with at least 60% in FTSE 100 companies and no more than 10% in smaller companies. Stock selection favours growth characteristics, whilst taking into account free cash flow returns on invested capital.

Institutional UK Growth – this is a multi-cap fund looking for long term capital appreciation. Institutional Equity Income – this is a predominantly multi-cap fund that holds convertibles and fixed interest securities as well as European equities. It aims to produce a rising income stream combined with capital growth. Institutional UK Special Situations – this is a multi-cap fund and aims to provide long-term capital growth by exploiting special situations. Institutional Global Capital – the fund invests in constituents of the MSCI World Index. Whilst diversified across sectors and investment styles, the fund takes significant positions when compared to the benchmark. UK Smaller Companies – the fund aims to provide long-term growth in excess of the Hoare Govett Smaller Companies Index. European Equities – the fund invests in FTSE Europe (inc/ex UK) index constituents, and takes significant positions against the benchmark but is diversified across sectors and investment styles. Strategic Bond – invests across the whole range of fixed interest securities from government bonds through investment grade to high yield bonds.

Key Facts Total Assets Under Management– as at 29th September 2006 £11.2 billion. Total Institutional Assets – as at 29th September 2006 £3.6 billion. Geographical Distribution of Assets •

UK Equity

•

European Equity £3,267.9 million

£7,048.7 million

•

Global Equity

£172.8 million

•

Fixed Income

£696.5 million

Contact details Artemis Investment Management Ltd Cassini House, 57 St James’s Street, London SW1A 1LD Elaine Gordon – Head of Institutional Business Tel: 020 7399 6217 Email: [email protected] [email protected] Benita Kaur – Institutional Business Developer Tel: 020 7399 6207 Email: [email protected] [email protected]

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This advertisement is only intended for institutional investors and their professional advisers. Issued by Artemis Investment Management Limited which is authorised and regulated by the Financial Services Authority. For your protection, telephone calls are usually recorded. PTH/U

THE PENSION TRUSTEE’S HANDBOOK 5th ed

·1

FOREWORD Thousands of individuals still volunteer each year to become trustees and find it a worthwhile and interesting job. Yet being a trustee has never been more demanding. The 2004 Pensions and Finance Acts imposed over 100 sets of new rules and regulations on schemes, including scheme specific funding and tax simplification. Trustees must now be familiar with corporate finance issues in order to assess the strength of the scheme sponsor’s covenant; they are having to find new and innovative ways of funding pension scheme deficits such as contingent assets and escrow accounts; and they find themselves under pressure to be responsible investors. Meanwhile the new pro-active Pensions Regulator can impose heavy penalties on trustees who breach the law. In addition to all this change, trustees are now required to have the appropriate level of trustee knowledge and understanding - TKU. Whilst many will acquire their TKU through training courses, it’s always helpful to have access to a handy, up-to-date, practical guide. Based on the author’s years of experience providing advice to pension schemes and as a trustee, this fifth edition of Robin Ellison’s Pension Trustee’s Handbook provides an invaluable guide for trustees. Written in plain and accessible language, it covers every aspect of trusteeship from taking advice to investment and paying benefits. The NAPF is continuing to lobby for pensions simplification and a lighter regulatory burden for trustees. And we have suggested our own Code of Governance for scheme trust boards and management committees which would replace many of today’s regulations.

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

This handbook will help trustees carry out their day-to-day jobs more effectively. Joanne Segars Chief Executive, NAPF

National Association of Pension Funds 2007

gold market intelligence

Knowledge Expertise Research Statistics Gold has been hitting the headlines recently thanks to its spectacular performance. But the real value of gold to long run investors lies in its uncorrelated returns. To learn more about how an allocation to gold can reduce return volatility please contact [email protected], citing "NAPF 2007a" Visit www.gold.org/value

the facts: in black and white

Gold’s relevance to UK pension funds Katharine Pulvermacher, Managing Director of Investment Research and Marketing, World Gold Council Pension fund liabilities are bond-like in nature and the term Liability Driven Investment has become somewhat of an industry buzzword. However, the argument that the only or best way to achieve a goal of matching bond-like liabilities, by investing only in bond-like assets, is flawed. For even the most conservative schemes, most advisors would suggest that some level of diversification is a wise consideration. Despite this and until recently the majority of pension schemes have employed an asset allocation strategy that remains restricted to few asset classes. While gold, in particular, has investment properties that are more widely recognised in times of extreme events, its usefulness is not limited to times of crisis. Several long-term investors have begun to make an allocation to gold, not for reasons of price return, but because of the strategic role it can play in a portfolio. First, let us tackle the question of how assets perform relative to one another. The lack of correlation between commodities and other asset classes, and particularly the relationship between gold and inflation over the long term, provides pension funds seeking to match the returns on their assets to their liabilities, with an opportunity that should not be overlooked. A key investment characteristic of gold is its lack of correlation with other assets. This means that it offers a very reliable diversification of risk that is arguably more valuable to long term investors than price returns alone. On average correlation between gold and equities tends to hover around zero, meaning it offers protection from equity market falls. Moreover, when markets fail, historic data shows that this correlation actually falls. In other words, the diversification benefits of gold are maintained and may even increase in periods of severe equity market distress – a result not common to other assets pension funds may consider as diversifiers. Seemingly in sharper focus today, given the asset/liability shortfalls many schemes face, market volatility is an issue with which trustees continue to struggle. Some are surprised to learn that gold is generally slightly less volatile than the S&P 500; particularly impactful when one considers that a blue chip stock market index is, as a whole, generally less volatile than each of its components Its low volatility lies in the structure of the underlying market. It is worth mentioning that gold’s

volatility is generally linked to price increases, whereas equity volatility generally indicates a fall. Given the legacy focus on bond investments, the risk of rising inflation can be one of the largest exposures pension schemes face. Independently conducted research has recently been published which substantiates gold’s importance as a long-term hedge against inflation. The study found that real gold prices deviate in the short-term from the inflation hedge price, if denominated in and measured against the same currency. Much has been made, particularly by the media, about the boom in commodities. Gold has itself been in the news frequently over recent years, as it has flirted with price levels not seen since the 1980s. The price rally that the market has enjoyed since its low point in July 1999 has left some people concerned that gold might be overbought. But most long term investors look at real returns. When adjusted to take into account inflation, the gold price has actually increased modestly – but not with the impetuosity associated with some younger, giddier and significantly less liquid commodity markets. The price rally in gold has in fact been supported for the most part by simple economics. Supply has simply not managed to keep pace with a continuing strength in demand for gold. Global demand for gold has risen steadily over the past three years. Consumer and industrial demand has continued to grow. Since the first quarter of 2003, investment demand for gold has surged by 89%, but from a lower relative base. Over the same period, the quarterly average US$ price increased by 78%. A diverse set of reasons lie behind this trend. Geopolitical tension, particularly in the Middle East, has been a supportive factor for investors seeking the assurance of a safe haven asset. But the search for assets with uncorrelated returns has also attracted newcomers. Growing concern over the US economy and the related implications for the dollar have motivated some investors to make an allocation, on the basis that gold is a more effective hedge against dollar depreciation than other commodities. Inflationary expectations or nominal interest rate movements have been the tipping point for others. New ways of investing in gold have also stimulated demand because it has become as easy to trade gold as it is to trade any stock or share, now that it is listed on at least ten stock exchanges around the world (Australia, Mexico, Paris, Singapore, Switzerland, Turkey, Amex, NYSE, LSE, JSE). The information presented here is all rooted in historical data. What matters to most of us is confidence in what lies ahead, so it is important to understand the lack of correlation between risk and return on gold and that of other assets has its roots in the gold market’s fundamentals. Supply of gold is relatively constrained. This is partly due to long lead times associated with mining – up to ten years, but also because of

political constraints introduced through agreements that govern, or regulate, the stream of gold that comes onto the market each year. While investment demand has been growing rapidly, allocation to gold, and other commodities, remains relatively minor when calculated as a percentage of overall assets. Evidence shows that an optimal allocation to gold does not require a major shift. A small allocation to gold can improve the stability of an investment in more conventional assets. Quite simply, by understanding how alternative assets can complement more traditional investments, pension funds can proactively address some of the more acute risk exposures many funds face. For more information go to: www.pensions.gold.org

THE PENSION TRUSTEE’S HANDBOOK 5th ed

·7

PREFACE This book has been written to meet the practical needs of trustees of pension funds, especially following the requirements imposed by the Pensions Act 2004. It is based on many years of experience of teaching and lecturing to pension fund trustees, and sitting on the boards of trustees of pension funds, as well as advising as a solicitor. It tries to answer the questions most frequently asked by trustees coming fresh to the field, in a non-technical way. It has been read and commented on by colleagues in practice and by trustees both professional and lay, and by pension managers, for whose help and advice I am grateful. The book is also designed to respond to many of the questions relating to the role of trustees which have emerged following the introduction over the last ten years of firstly the Pensions Act 1995 (a response to the Maxwell Affair) and later the Pensions Act 2004 (a response to the perceived failures of pension funds in large part engendered by the Pensions Act 1995). That role has been markedly affected by a change in the ‘tone’ of the legislation, marking a transformation from the former co-operative and collective approaches adopted between trustee and employer to the more current (and hopefully short-lived) more confrontational approach now required by the authorities. There is also a perception that the requirements of the Pensions Regulator in relation to the knowledge and understanding of trustees are excessive, at least as interpreted by some observers. In fact its requirements are modest and almost all are catered for in this volume; whilst the formal requirements look intimidating, the Regulator has made it clear that a broad understanding is all that is called for. Finally, it aims to complement the codes of practice issued by The Pensions Regulator and the various pensions diplomas now offered

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

by the National Association of Pension Funds, the Pensions Management Institute and others. There are short-term future changes which are not covered here; these include the forthcoming Pensions Acts 2007 and 2008 which will add to the complexity of the trustee’s role. The additional legislation may however prove to be the last spasm of the regulatory expansion. Trustees should take comfort from the fact that the government has listened to voices from the pensions world and is now committed to try and reduce the quantity of regulation and enable the job of trustees to be simpler and easier. If you have any suggestions for improvement, please let us know and we will do our best to incorporate them in any future edition. Robin Ellison 2007

We can see investment potential where others can't. Our team’s ability to spot, act on and then maximise opportunities in the investment market sets us apart. We work to develop solutions that meet the needs of our clients’ schemes – and use our investment flair to deliver the best possible strategy for them.

If you want to find out more about how we could help your scheme please call Ominder Dhillon on 020 7203 3456 Email [email protected] Or visit www.swip.com

For professional use only - not to be relied upon by private investors. Scottish Widows Investment Partnership Limited, Company No. 794936. Registered Office in the United Kingdom at 10 Fleet Place, London, EC4M 7RH. Tel: 0131 655 8500. Scottish Widows Investment Partnership Limited is authorised and regulated by the Financial Services Authority and is entered on their register under number 193707 (www.fsa.gov.uk/register).

Custodians in the Pensions Industry Nigel Taylorson, head of client relationship management, UK & Ireland, ABN AMRO Mellon Global Securities Services Custodians play a vital supporting role to the pensions industry, and with the world of pensions in the throes of change – and rapid change at that – custodians too are evolving, looking to stay one step ahead of the industry to ensure they continue to meet both current and emerging servicing needs. The shift in the custody product set over the past decade has been immense, even fundamental. Traditionally custodians held investments for trustees, settled transactions, collected income and reclaimed tax. Today they have moved far beyond those ‘core’ offerings to embrace a broad range of new capabilities. These include, inter alia, fund accounting, performance measurement, short-term investment funds, securities lending, compliance monitoring, risk reporting, transaction cost analysis, commission recapture and transition management. In recent years, the pace of change within the UK pensions sector has only accelerated with the advent of the Pensions Act 2004, the 2004 Finance Act and the Myners Report. These have significantly increased the responsibilities of trustees, while raising the bar considerably as regards their need for information and reporting. At the same time low interest rates, combined with some adverse investment conditions, have over the past five years put a considerable financial strain on many schemes, forcing them to become ever more cost-conscious. In such an environment custody can be a significant cost centre to pension funds – not only in terms of direct costs, but also those indirect costs resulting from factors such as inefficient interfaces with fund managers or uncompetitive interest rates for cash deposits or foreign exchange. In the past few years, some of the key issues facing trustees, deficit reduction aside, have been related to compliance (“Are we compliant with our SIP? Are we Myners compliant?”) and corporate governance (“Are we being an active shareholder?”). Efficiency has also been high on the agenda (“Can we measure both the financial and operational performance of our fund managers?”), as has cost reduction (“Are we minimising withholding taxes? Are tax reclaims being made efficiently? Are we maximising our securities lending revenue? Can we lower costs through outsourcing functions such as funds accounting?”).

Located at the heart of a client’s dataflow, the custodian is ideally placed to assist pension plans to meet the myriad of new challenges they face, today and tomorrow. Going forward, as pension funds focus more on asset /liability matching and diversify their investment strategy into different and more complex asset classes – such as derivatives, private equity, hedge funds or commodities – the custodian will continue to move up the client’s value chain. In this brave new world, considerations such as asset safety and risk management take on a far more complex hue – and a far greater significance to a pension fund. Consequently the custodian’s role will grow yet more prominent as the complexity and timeliness of information reporting and delivery systems become critical to fund managers and their pension fund clients. In the future, higher degrees of complexity and efficiency look set to be the order of the day. Custodians must be able to migrate still further along the value chain if they are properly to assist pension funds with their data needs – for example, for the purposes of asset/liability matching or risk reporting, to name but two. Clients are already making increased use of swaps/futures to match liabilities; the challenge, however, will come when the different risk factors that come into play undergo change – such as a shift in inflation and/or interest rates. Both will affect a plan’s assets and liabilities, but probably not in the same way, giving rise to a disconnect that will have to be corrected. If custodians are to play their part in supporting clients, then they will have to provide the data required on the investment side of the equation to allow these emerging mismatches to be monitored and managed. Where custodians’ progression along the value chain ultimately takes them is open to debate, but one thing is for certain: the pensions world will continue to evolve at a rapid rate, and custodians will be matching the industry step for step as it ascends that evolutionary ladder.

For more information on ABN AMRO Mellon’s solutions for UK pension funds, please contact: Brian Leddy Head of Sales Tel: 020 7163 5907 Email: [email protected] Web: www.abnamromellon.com

A passion for results

Our business, your business: results are everything ABN AMRO Mellon – named Best Investor Services House in the Euromoney 2006 Awards for Excellence. Our success is founded on our innovative, high-quality tailored solutions and excellence in client relationship management. We are one of the leading providers of investment accounting reports for UK pension schemes. Not only does our web-based SORP and ONS reporting solution support clients’ bespoke business needs, it also handles all securities, including property, pooled and venture capital funds and derivatives.

Call us to discover how we can help you achieve the results you want in 2006 and beyond. For further information please contact: Brian Leddy Head of Sales +44 (0)20 7163 5907 [email protected] www.abnamromellon.com

THE PENSION TRUSTEE’S HANDBOOK 5th ed

PART I TRUSTEESHIP IN LAW

· 13

It needn’t be a tragedy Jamie Clark, Occupational Pensions Marketing Manager, Scottish Life Restructuring pension provision can be a nightmare for employers and trustees alike. There are so many things to sort out. It can be an expensive business too with all the actuarial advice, legal advice, member communications and administration that has to be done. And there’s really no easy option here – not going through the proper process can mean fines from the Regulator and putting member benefits in jeopardy. Thankfully, trustees don’t have to go it alone. For years now all but the largest of defined benefit schemes have been inexorably flaking their way to a dusty death. Lots have already wound-up completely or are closing the door on future accrual or new members. The good news is that Scottish Life has recognised this and are specialists in the management of such changes. We offer a range of innovative solutions to help trustees through the change process. Not only that, trustees pay only for what they actually need – a pick ‘n’ mix sort of thing. A few of the services we offer are: •

grass-roots bespoke member communications ranging from lowtech posters and payslip inserts to high-tech presentations on DVDs and internet pages

•

actuarial services – guidance to trustees on scheme funding, investment strategy and meeting regulatory standards

•

providing robust and efficient administration services – from the basics of collecting contributions to the complexity of preparing scheme accounts

•

trustee training to help them meet (and continue to meet) the Regulator’s knowledge and understanding requirements

•

appointing an implementation adviser who’s experienced in pension scheme change management

To find out more information about how we can help you, speak to your financial adviser or employee benefits consultant. You can find out more about us at www.scottishlife.co.uk.

Looking for a corporate pension specialist? We dance to your tune.

At Scottish Life we don’t just talk about pension issues – as specialists we build the solutions that you are looking for. Our groundbreaking Managed Strategies are a case in point. Whether your scheme is Defined Contribution or Defined Benefit – Managed Strategies provide intelligent pension investment solutions. As trustees, you want real returns and we believe that a real and open management process can deliver where traditional managed funds can’t. Managed Strategies is a range of investment portfolios with defined objectives and timing plans, using all of the major asset classes as required. At the heart of Managed Strategies lies a belief that asset allocation has the greatest impact on risk and returns over time – a view echoed by Myners and Sandler. Asset allocation should be balanced across property, bonds, and the stockmarket and be managed with a rigorous, methodical approach. Changes to portfolios are only made to ensure their objectives are met – they are not influenced by the “herd”.

On top of this, there’s governance too. The Investment Advisory Committee publishes its minutes on our website every quarter giving you, your advisers and your members full transparency - and confidence that you are meeting your requirements. But investment is only part of our service. Whether you’re concerned about deficit management, restructuring your scheme or simply controlling your costs, you can be confident that Scottish Life has the answer. We are pensions specialists and don’t let anything get in between you and the ideal solution for your scheme; a fact recognised when we recently retained the prestigious Gold Standard Award for Pensions. For more information on Scottish Life’s comprehensive range of corporate pension services speak to your adviser or employee benefit consultants. Because we believe independent advice is crucial, we only provide our services through advisers. You can find out more about us at www.scottishlife.co.uk.

www.scottishlife.co.uk Investment returns may fluctuate and are not guaranteed. The price of units may go down as well as up.

www.cobbetts.com Birmingham | Leeds | Manchester

We’re only human. Honest.* Some law firms like to appear cool and aloof. Not Cobbetts. We give great legal advice in a simple and friendly way that everyone can understand. So why don’t you pick up the phone, talk to us and hear the difference. Call Richard Shelton on 0845 404 1577 or Helen Davies-Williams on 0845 404 2262 * No dodgy small print or disclaimer.

think harder

Cobbetts LLP is a limited liability partnership

Pensions without the rocket science Pension documentation and legislation often appears complex and indecipherable. As the largest dedicated Pensions Department in the region, we are committed to deciphering the gobbledegook so that you can make the right decisions We advise both national and international companies on all pension issues and work closely with Employment Corporate and Litigation lawyers to provide a seamless service on all aspects of pensions law. Pitmans offers an independent trustee service through a wholly owned subsidiary, Pitmans Trustees Limited.

Understanding business Please contact: David Hosford Pitmans 47 Castle Street Reading RG1 7SR T: +44 (0) 118 958 0224 F: +44 (0) 118 957 0333 E: [email protected]

www.pitmans.com www.pitmanstrustees.com

THE PENSION TRUSTEE’S HANDBOOK 5th ed

· 17

1 INTRODUCTION The arguments against the non-contributory principle.... 1 The cost of non-contributory pensions would be enormous... The present British system of non-contributory pensions cost about $40,000,000 for the first year.... 2 The non-contributory scheme is unjust in principle. It involves taxation for the rich for the benefit of the poor. It is class legislation... 3 The effect on individual character would be debilitating; the non-contributory scheme puts a premium on thriftlessness. Its adoption would be disastrous to the voluntary agencies for the encouragement of saving... 4 The effect on the family would be disintegrating. It would cause children to withdraw the support which they now give to aged parents. There would follow a general loosening and breaking of family ties.... 5 The grant of gratuitous subsidies to aged members of the working class would tend to lower the rate of wages. This would follow not merely through the direct competition of pensioned workers, who would be able to underbid the prevailing rate in the occupations in which they were engaged, but through the indirect influence of the prospect of a subsidy in old age, which would lead workers to accept less in regular wages than they would otherwise be disposed to demand... Report of the Commission of Old Age Pensions, Annuities and Insurance, Massachusetts, 1910

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

Background You are a trustee. Responsible for a pension fund, perhaps worth quite a lot of money, the money which represents the security and peace of mind of people looking forward to retirement. To have so many other human beings resting their hopes and expectations on you could be intimidating. But in fact, most trustees just get on with it. In practice, despite portentous warnings from lawyers and others, the ever-present threat of litigation, the continual introduction of fresh trustee obligations sometimes backed by a raft of penalties for their breach and the apparent unimaginable complexity, the job is pretty simple – provided you know what the job is. And where difficulties do arise, you need not feel ashamed or embarrassed at being a little lost. Even the most professional of trustees find themselves in a quandary from time to time. The job of a trustee is a legal one, not actuarial, managerial or accounting. This book sets out the legal obligations – and how to deal with them in a relatively painless manner. Provided you are honest, sensible and take proper advice, you can do a lot of good – and come to very little harm. Yours is not a rare position. There are about a quarter of a million schemes, with perhaps a minimum of two trustees in each scheme – so there may be half-a-million pension scheme trustees. This book explains, simply and practically, just what you are expected to do – and almost as importantly, what not to do. The appendices contain information which you may need to find out the answer to particular problems. In sum, this book is intended as the ultimate bluffer’s guide to pension fund trusteeship.

“Discover a proven method that promises to reduce your pension deficit, and help you regain total control of your balance sheet, with minimum effort and outlay…” In today’s economic climate, employers are constantly reviewing their pension strategy, and in most cases have stopped offering a Final Salary pension arrangement for future pension provision. A closed Final Salary scheme is a significant overhead for any employer, in terms of funding, running costs, fiduciary responsibility and management time… And that’s where we come in! Heath Lambert Consulting is UK’s leading employee benefits consultancy. We’ve created Legacy - a proven fixed-fee service that helps employers and trustees manage these issues, and find the right solution.

What does the service include? •

Fixed-fee services for actuarial, consultancy and administration to cover your basic requirements.

•

Coordination of annual valuation updates for both employer accounting and trustee purposes.

•

Utilisation of “manager of managers” approach to investment.

•

Regular monitoring of pension costs and alignment with corporate finance strategy.

+44 (0)1245 293302 Or email [email protected] to find out more about this Call

innovative approach to managing legacy arrangements.

Surprisingly Different

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

Why the law is involved The object of a legal system is to give some form of remedy and protection to persons who would otherwise be adversely affected. This is particularly the case in pension funds, where: • obligations can last for many years, • complexity is such that few understand the detail, • the amounts involved are substantial, and • a few people hold a great deal of money on behalf of many other people. The value of a pension can, and often does, exceed the value of someone’s house, so the law needed to protect those interests can be seen to be highly necessary. But the law is not perfect in any field, and it has particular problems with pensions. First, since the growth of pension rights is a relatively recent phenomenon, so is the growth of pensions law. In recent years, a major problem has been to develop a legal system, and help the judges understand a legal structure, designed originally many years ago for very different purposes. The particular legal structure that applies to pension funds has had to cope with the rather odd, from a legal point of view, nature of pension funds. The reason is that the law (trust law) that looks after the interests of scheme members was developed for family trusts and not for pension trusts. Secondly, many Acts of Parliament apply to pension rights (involving social security, taxation, investment protection and other fields) – and these do not always relate properly to each other. Indeed in some cases they actually conflict. And thirdly, the sheer size of the current regulations and controls is immense – around 9,000 pages at the most recent count, and growing fast. The size of the system is often considered counter-productive and there is a general consensus that it needs radical reform – previous reforms have added to, rather than, resolved the issues.

THE PENSION TRUSTEE’S HANDBOOK 5th ed

· 21

What is not in this book This book does not tell you how to run a pension fund. Your job as trustee is non-executive, and is to ensure that the people who do run the fund (the managers, the investment house, the advisers) are doing their job properly. You are supposed to be more of a non-executive director than a ‘hands-on’ manager. Accordingly there is very little about: • Actuarial science, computerisation, management, the skills of communication and the rest. These are jobs which you can, and normally should, delegate. A pension fund trustee is not supposed to be an expert. • Ancient problems of trust law relating to the administration of family estates, dating back to the times when you could be expected to manage a duke’s estate. A pension fund trustee is not supposed to be a lawyer. • Abstruse details of pensions systems, such as contracting-out, preservation, and lower and higher earnings limits. These are properly the province of your advisers. A pension fund trustee is not expected to be an administrator or benefits consultant. • The complexity of a range of laws which were introduced partly in the decade following a major scandal in pensions known as the Maxwell Affair, and later scandals in the early years of the twenty-first century themselves occasioned largely by the impact of the Pensions Act 1995, and which were to be cured by the Pensions Act 2004. A pension fund trustee is not (with some exceptions) expected to comply personally with most of the legislation, but should ensure that his advisers do so on his behalf.

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

You are required, however, to have knowledge and understanding of three things: • the scheme deed and rules and certain other scheme documents, • the law of pensions and trusts, and • the principles of funding and investments of pension funds. The first is something only you and your advisers can supply; this book covers the other two elements. These requirements are not as frightening as they may look. A reasonable knowledge of this book, and the codes issued by the Pensions Regulator, is normally enough. The requirements follow a Treasury report issued in 2002 (called the Myners Report after its chairman) which thought that it was not only inappropriate for trustees not to know about investments, but that it was affecting the investment returns as well (although in a rare joke-footnote, the report suggests that if the trustees were as well trained as some investment houses, training might actually be counter-productive). The concept of trained trustees is a rather new one. Trustees, especially in pension funds, were not necessarily supposed to be expert in investments, pensions and trusts. Indeed, the concept of the member -nominated-trustee presupposes a non-expert. In any event, trust law – and more recently pensions law – has for generations insisted that trustees should hire lawyers, accountants and actuaries to be able to manage the scheme. Trustees have never been expected to be experts themselves – although they have been expected to hire the right experts, and take, or at least listen to, their advice. As long as trustees were honest, and used their judgment, they were immune to most complaints. The current law requires us to have ‘knowledge and understanding’ (a phrase unconsciously lifted from Proverbs – get wisdom, knowledge and understanding – language familiar to Mancunian students who find it inscribed around the dome of Manchester Central Library).

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

Full knowledge and understanding of pensions and trust law, and of investment matters, is something of a tall order for amateur trustees – and it’s not too easy for professional trustees. Few non-lawyer professional trustees have a true understanding of trust law – even specialist trust lawyers struggle with the application of trust law to pensions, witness the somewhat bewildered discussion in some of the leading textbooks about the operation of what are known these days as commercial trusts. And a knowledge of pensions law is something that some might argue takes a lifetime to acquire, certainly until the chimera of simplification of the system is achieved. The government is anxious not to impose too high a degree of expertise under these rules. The then Pensions Minister (Malcolm Wicks) said during one of the parliamentary debates leading to the enactment of the Pensions Act 2004 that: ‘The clauses do not mean that we expect all trustees to be expert in every aspect of pensions law and administration. Rather, we expect them to be able to demonstrate a good, solid understanding of the scheme rules, and a broad knowledge of the issues.’ (Hansard, Standing Committee B, 10th Sitting, 23 March 2004). Even this might be ambitious; but the good news is that there are no tests imposed to be a trustee – and that failure to comply with the law involves no penalty. And in real life, few expect many trustees to achieve that level of knowledge: the 80 hours set down to achieve the admirable pension trustees diploma issued by the NAPF would need about two months full-time study, coupled with a high level of educational attainment beforehand, which would exclude many member-nominated trustees. Such a level of education is not required by, for example, MPs. In the worst case the Pensions Regulator can require individuals to attend training sessions if he feels they need it – and if you do not want to do it, you can simply resign. Sadly the law does not require you to have wisdom (the third and most important of the three terms referred to in Proverbs).

Pensions Trustee? However

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stuff new

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All the information Pension Scheme Trustees need at their fingertips. Suddenly, everything clicks into place. Winner of “Best Commitment to Raising Standards of Trustee Education” at

Morley Fund Management is a business name of Morley Fund Management Limited, registered in England No.1151805. Registered Office: No.1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association. Morley Fund Management is also a business name of Morley Fund Services Limited and Morley Fund Management International Limited. All are Aviva companies. Contact us at Morley Fund Management, No.1 Poultry, London EC2R 8EJ. MFM/06/616

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

So while the legal and administrative details are important, in practice you will delegate most of them. But what you do need is enough knowledge and experience to enable you to ask the right questions of your adviser – and understand the answers.

What is in this book This book is intended as a handbook for pension fund trustees, probably the most numerous group of trustees today. You and your colleagues collectively manage around £1000B of assets – a sum which, even with stock market reverses and unhelpful taxation, is growing. This is despite attempts by political anarchists, at either end of the political spectrum, to disband one of the most effective, efficient and cost-effective forms of retirement provision ever invented. Nonetheless, pension schemes do have their imperfections, and the main ones are set out in the next chapter.

How to use this book The book is in three parts: • Part I gives a basic grounding in the duties of a pension fund trustee. This is considered essential reading; without this, or something like it, it is difficult to understand just what is expected of a trustee; • Part II looks at some everyday practical problems faced by trustees, and suggests some ideas for dealing with them; • Part III gives sources of further information. Throughout the book an attempt has been made to avoid jargon; unfortunately it has been sometimes unavoidable. There is a short guide to some of the common terms in Appendix I and a list of abbreviations used in this book is also set out there.

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The book is also designed to be used in conjunction with the Pension Regulator’s web-based training modules available on http://www.trusteetoolkit.com/arena/index.cfm. It does not always agree with its contents or approach of the Pensions Regulator’s website which is mildly idiosyncratic and you might find it useful to compare and contrast the differences. Finally, the best way to use this book is not to try to read it from cover to cover, but to dip into it from time to time. With this volume you should feel free from fear and intimidation, and have knowledge enough to manage the job of pension fund trustee. If you disagree, please write and say so.

Morley Fund Management Morley Fund Management (Morley) is the independently managed UKbased asset management business of Aviva plc, one of the world’s largest financial services groups. Investment firms within Morley Fund Management Group Limited have well-established capabilities in all major asset classes and manage £157bn (as at 30 June 2006) in segregated and pooled accounts for a wide and diverse range of clients. By employing in the region of 690 staff, including 220 dedicated investment managers, analysts and strategists, we uncover investment opportunities for our clients on a global scale. Morley offers specialist investment management services to UK and overseas clients offering a full spectrum of services covering the risk spectrum in all of the major asset classes. 5.2

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By asset class (£bn) Fixed income Equity Cash Property 54.7 Other * Assets managed by Morley Fund Management Group Limited as at 30 June 2006

Investment style and philosophy Our sole investment philosophy is to consistently meet our clients’ performance expectations. We believe that this is best achieved through an active approach to investing client assets. While financial markets are generally efficient, inefficiencies remain and are constantly changing. Morley’s investment process is clear, logical and consistent at every stage, benefiting from proprietary qualitative and quantitative systems and supported by disciplined, proactive risk management. We focus on Truly Active Management that takes meaningful positions in securities. Our multi-disciplinary in-house research allows us to identify and assess global opportunities.

Products and services Morley offers specialist investment management services to UK and overseas clients on a segregated and pooled fund basis. We offer a full spectrum of services covering the risk spectrum in all of the major asset classes: •

Our large team of fixed income specialists offers Government, Corporate and Global bond expertise catering for a wide range of risk/return profiles.

•

Our award winning Property Team offers clients opportunities in both direct and indirect property mandates with a wide range of specialist funds available.

•

Highly experienced team offering focused equity portfolio management capabilities with proven track records.

•

Market-leading strategic and tactical asset allocation and enjoy a proven record in utilising derivatives and new asset classes for our clients.

•

Our highly regarded SRI team works closely with all of our investment teams providing another dimension to the research process.

•

Our innovative internal multi-manager approach that draws upon a variety of asset management techniques and delivers tailored investment solutions for our clients.

Trustee Tutor Morley, in conjunction with industry experts, has developed TrusteeTutor, an holistic trustee education programme designed to assist trustees in meeting investment training requirements codified in the Trustee Knowledge and Understanding requirements of the Pensions Act 2004. Included in services offered are trustee education training courses certified by the Pensions Management Institute, access to our unrestricted trusteetutor.com website that contains a jargon-busting glossary and educational articles, and personalised investment training to our clients. In 2006, at the Engaged Investor Trustee Awards, our TrusteeTutor offering won ‘Best Commitment to Raising Standards of Trustee Education’. Our website was previously described as “a refreshingly unselfish asset manager website that really does have the trustee in mind, not extra sales of its own products. A benchmark among its peers”*. *Source: Engaged investor ‘2005 Trustee Training Guide’

Contact Details Should you have further queries, or wish to find out more about what Morley can do for you and your clients, please contact our institutional business team who will be happy to help, details below. Angus Scrace Head of Consultant Relations Telephone: 020 7809 6100 E-Mail: [email protected]

Paul Waters Head of Client Services Telephone: 020 7809 6734 E-Mail: [email protected]

James Tanner Managing Director, Distribution Telephone: 020 7809 8603 E-Mail: [email protected]

Important Information This article is intended for institutional investors and professional advisers only. Private investors or scheme members should seek professional advice before making a decision to invest. Except where stated as otherwise, the source of all information is Morley Fund Management as at 31 July 2006. Any future returns and opinions expressed are based on our internal forecasts and should not be relied upon as indicating any guarantee of return from an investment with Morley Fund Management. No part of this article is intended to constitute advice of any nature nor should any part be construed as a recommendation to purchase or sell stocks. Telephone calls to Morley Fund Management may be recorded for training or monitoring purposes. Morley Fund Management is a business name of Morley Fund Management Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association. Morley Fund Management is also a business name of Morley Fund Services Limited and Morley Fund Management International Limited. All are Aviva companies. Contact us at Morley Fund Management, No. 1 Poultry, London EC2R 8EJ.

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2 WHY HAVE A TRUST? Now that almost every soldier who enlisted in the armies of the Union and suffered even from a cold in his head has been pensioned, the Republican party are looking out for some fresh scheme for keeping the surplus under. They seem to have found a pretty substantial one in the Bill which will shortly be introduced into Congress by Mr Connell, of Nebraska. His plan is to pension the emancipated Negroes. Mr Frederick Douglas, the most prominent person of Negro blood in the States, has written a letter warmly supporting the plan. He declares that “the nation has sinned against the Negro, robbed him of the rewards of his labour for a period of two hundred years, and its repentance will not be genuine or complete until, according to the measure of its ability, it shall have made retribution.” “There never was,” he continues, “and never can be a proposal more just and more beneficent than that contained in your Pension Bill.” Apparently, Mr Douglas holds that the Negroes, instead of being merely emancipated, should have been endowed with the means of subsistence, as was the Russian serf, who received three acres of land and farming tools: and he now wants to set this wrong right. The proposal is of course utterly absurd and fantastic, and is not meant to be carried out. If it were it would entirely deprave the Negroes, whose only hope of moral improvement lies in hard work. It may, however, have a considerable effect on the Presidential election. Hitherto, the Negroes have been content not to vote, or to vote, as the Whites direct. It is possible that the hope of a pension may make them break away from the control of the Democrats, and vote the Republican ticket. The Spectator, 22 August 1891

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Why have a pension fund? A pension fund seems to have an immensely complicated structure. It is governed by deeds, booklets and legislation. It has to take account of the needs (sometimes conflicting) of employers, members and trustees. The calculations which need to be undertaken seem to be understandable only by an Einstein. Its advisers and managers have to worry about transfer values, equal treatment and HMRC APSS rules. Why bother with all the expense of administration, and with the fees of lawyers, actuaries and accountants? Would it not be simpler for the employer simply to pay the employees a little more money each week that they can use to save for their old age – or just put them on a reduced pay scale after retirement? That is, in fact, just what used to happen in the nineteenth century – and in practice what happens to civil servants and the higher-paid even today. But there are major problems with the simple approach: • The difficulty with people making their own provision for their own old age is simply that in practice most do not. There are always more pressing needs – housing, food, holidays – and by the time old age becomes a worry, and the urgency to save increases, it is a little late. Just before the turn of the century a social reformer called Charles Booth discovered that the main cause of poverty was simply old age – and that exhorting people to save for their old age was fruitless; most people simply could not afford to save. For example, to save enough to provide simply a state pension would cost around £200,000, and if you include other old age benefits, very much more. Few employers want their longer-serving employees coming back to them in years to come looking for financial support. • The drawback with an employer simply promising to look after an employee in old age is that (unless he is the government) there is no certainty that he will still be there to meet his promise when it falls due, or even if he is there that he can afford to. In any event, few employees now work for their entire career

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with one employer. It is more sensible for funds to be set aside each working year to meet the employer’s promise, as a guarantee fund. • Finally, whatever the administrative costs of most company pension schemes, they are a major bargain compared with the extreme costs of personal pensions. And they invariably offer immensely better value-for-money. Many progressive employers have established pension schemes using a system which is (or was until recently) the envy of much of the rest of the world. Even the French, who have a very different and much praised system are still planning to copy the UK arrangements just as the UK system paradoxically declines largely because of inappropriate regulation.

Pension Scheme Members

10.7

10.3

10.1

9.8

1991 1995 2000 2005

NB Private sector active members declined (in both defined benefit and defined contribution schemes) from 6.5M in 1991 to 4.8M in 2005

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Drawbacks to pension funds Pension funds are not perfect – and they do not suit everybody: • a final salary workplace scheme (see below, p40) may not be appropriate, for example, for a young person who expects to stay only a year or two with the company; • transfer values offered by most schemes, while they are immeasurably superior to those offered only a few years ago, will not necessarily be adequate to buy the corresponding length of service with the new employer; • sometimes communications are not all they should be; • sometimes, fortunately very rarely, assets can be fraudulently removed from the scheme, as they can from any other form of savings arrangements, or investment returns may be less than expected; • the intentions of by the employer in a defined benefit scheme, or the expectations in a defined contribution scheme, can be frustrated by unexpected changes in the value of the underlying assets, the continued viability of the employer, and tax and law policy changes. But for most people, in most circumstances, workplace (formerly known as company or occupational) pension funds offer better value for money, greater security and greater peace of mind than the alternatives. This applies to the employer as well as the employee.

Why have a trustee? The relationship between the employer, the employee and the pension fund is a useful one to understand; in most pension arrangements: • the employer undertakes to provide not only pay but also a pension (often dependent on years of employment and salary levels) in exchange for which the employee promises to work;

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• both employer and employee agree to make contributions to the scheme. Even where it is a ‘non-contributory scheme’, ie the employee makes no actual contributions, the courts consider that for some purposes the employer’s contributions can be seen as the employee’s deferred pay. As a trustee you hold the money on behalf of the employees (and employer) to make sure it is properly looked after. In most cases, it is not your job to interfere with the bargaining between employer and employee; you are merely a guardian of the pot. In exceptional circumstances, such as where an employer seeks a refund of a pension fund surplus, you may have a duty to bargain with the employer to ensure that members get a fair deal, and if there is insufficient money in the scheme you may have to explore ways of improving the funding position.

Who’s Who In a Trust

Employer

Employee £

£

(Watchdog)

£

£ £

£

£

£

£

£

Trustees

Pension Fund

£ Members

£ Employees

£ ‘Beneficiaries’

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Why have a trust? Trusts seem odd animals; would it not be simpler – or at least more familiar – to use a company instead to run a pension scheme? There are three reasons why trusts are used: • First, it is essential to put the money which represents the pensions intentions made by the employer, in a separate pot. In that way, if the employer becomes insolvent, or is unable to fulfil his pensions promise, at least some money is there to meet at least some of the promise. • Secondly, a trust is almost tailor-made (unlike a company) to cope with the problems of managing money on behalf of other people (the employer and employees). In some cases (especially money-purchase schemes, see below) it is the employees’ money, but they may not touch it (for tax reasons) for many years yet. • Thirdly, there are tax benefits by putting contributions in a trust. Because trust law seems complicated, and there are costs and potential liabilities involved, it is sometimes suggested that pensions run under trust are unnecessarily complex; it might be better simply to have a contract with a provider – an insurer or asset manager. In some cases this is very sensible, but contract arrangements often lack the humanity and flexibility that are critical in running a pension scheme. It is sometimes forgotten that a pension arrangement is more akin to some form of private social security rather than a savings plan, and that human discretion is a very sensible thing to factor into the system, leading to savings in costs and improved employee relations.

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Why is trust law so complicated? Trust law is a special concept, now being copied throughout the developed world. It is special because it recognises that the same property can have two owners at the same time. In the case of pension schemes the legal ownership of the assets of the pension fund is held by the trustees. They can buy and sell the assets, or mortgage them. But there are other owners – the members of the scheme (and their survivors and dependants), and the employer. They, however, can only touch their money in special circumstances (set down in the trust documents), eg on retirement or death. The law recognises their rights, and enforces them not through the ordinary legal system (which regulates the trustees), but through a special legal system, invented in the Middle Ages, called equity, since it is based less on strict law (contained for example in Acts of Parliament) than on fair play as the judges see it. There are therefore two kinds of owners of the assets in the pension fund: • the trustees who own the assets ‘legally’, and • the members and other beneficiaries (ie people who may benefit), who own the assets ‘equitably’. When enforcing the rights of beneficiaries the court applies general principles of fairness, rather than statutory guidelines (ie set down by Act of Parliament). The court therefore plays a crucial role in the development of trust law – which is changing continually to meet changing social circumstances. It also depends significantly on trustees using their discretion to make many decisions. But with this great advantage of flexibility, comes a problem – the fluidity of ownership can cause as many difficulties as it solves. One, for example, is the (now diminishing) debate on deciding who owns the surplus in a pension fund.

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Why were trusts invented? Being a trustee is a legal position. Trustees own property on behalf of someone else, because the real owners cannot be trusted. It’s an old custom – it is said (without much evidence) that it started with the Crusades, when knights entrusted their property to men of repute in case they never returned, until their children were old enough to control their inheritance. This lack of trust was normally because the real owners were too young, too female (married women had few property rights at that time) or too foolish to manage on their own. Managing property on behalf of others expanded when ownership was separated from control for tax purposes. The person who looks after the property is the trustee; the person on whose behalf the property is owned is called the beneficiary. Beneficiaries of course are not only the members of the scheme – they include anyone else who could benefit including survivors (‘widows and widowers’ is a bit of a mouthful, and this is an equal opportunity book), dependent children and other dependants, and possibly the employer as well. Trust law has a slightly chequered history – it developed mightily in the time of Henry VIII as a device to help avoid tax. The system, however, was found to be useful in many other areas – and today is used to regulate charities, unit trusts and international securities such as Eurobonds. Its principles are applied to many other fields such as the duties of directors in companies.

What is a trust? A trust is a little like an elephant – most lawyers at least can recognise it when they see it, but defining it has always been a problem.

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A simple definition…

WHAT IS A TRUST? A Legal Definition “An equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property) for the benefit of persons (who are called the beneficiaries or cestuis que trust) of whom he may himself be one and any one of whom may enforce the obligation.” Underhill & Hayton on Trusts

What is a trustee? A trustee is simply a person who looks after a trust. He can be an individual, a group of individuals or even a company. His job is to ensure the assets of the trust are well looked after. Over the years the courts have set down the way in which a trustee should work, and have defined: • some duties • some discretions • some liabilities. Each of these is discussed later. You have been appointed as a trustee not to be an expert, but to apply your common sense, experience of the world, and integrity, to the care of other people’s money.

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What kind of trustee am I? A trustee is usually a person, an individual (normally, there is more than one). Sometimes the trustee is a company, or ‘corporate trustee’ which offers advantages of continuity (you don’t need to keep changing the deed every time someone retires or is appointed) and gives some additional protection against liability. In those cases you will be a director of the trustee company. You might be a trustee of a self-administered fund, ie where the investment management and administration is dealt with in-house – or of an insured fund, where all that taken care of by an insurance company. You might be elected by your colleagues in the workforce – or appointed by the employer. But whatever your origins, and however big your head, you can only wear one hat around the trustees’ table – that of trustee. All your other obligations and interests must be set aside in favour of the members of the scheme and the other beneficiaries (which can include the employer as well). There is talk occasionally of independent trustees. All trustees are supposed to be independent – you are supposed to represent the interests of the beneficiaries, if necessary at the expense of the interests of the employer, the trade union or any other group you may also represent the interests of. An independent trustee normally means in fact a trustee who does not have a conflict of interest – or, where an employer has become insolvent, a trustee appointed to help safeguard the interests of members. Independent trustees are often useful to give a lead where the ordinary trustees are a little bemused, and to bring external experience to the table. They need to be chosen carefully; some of them can create rather than diminish friction.

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Who makes a trust and how? Anyone can make a trust. In a pension scheme, normally it is the employer who signs a document (called a trust deed) which simply declares: • that a trust shall exist; • who the trustees are who will look after it; • how it will get its income (contributions from employer and employees); and • how it will be administered. Trust law and other law Trust law is only one part of the law that affects pension plans; other sources of regulation include Acts of Parliament, the discretions of government departments and the trust document itself, not to mention the contracts of employment. The sources that need to be checked when determining a problem are therefore widespread. The law is normally applied, if necessary by lawyers and if the problem has to go to court, by judges. While many people quite rightly have the view that the law is an ass, and that judges, not to mention solicitors, do not have minds that think like the rest of us, it should also be noted that they are also human. In practice, many decisions are made not so much on the basis of the law but in accordance with common sense – although not always.

Jargon Jargon is one of the drawbacks to pensions – and when coupled with trust law jargon, can make life highly confusing. But in fact, in trust

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law there are only a few buzz-words, and it helps to sort them out at the beginning: • the settlor – means the person who creates the trust and in a pensions trust is usually the employer; • the trust property – means the assets of the fund; • the beneficiaries – means not only the members, but also their family and dependants, and anyone else who may take a benefit from the trust – including sometimes the employer. Why is trust law different from other law? Trust law was invented to cope with the fact that the ordinary law clearly resulted in some injustice; it had become obsolete and oppressive. Trust law was designed to be flexible, to change with the times, and to use general principles of fairness and justice (not just strict rules of law) that would apply to a range of situations. In time it developed its own arthritic tendencies, but several government inquiries into pensions law have concluded that the flexibility and equity performed by trust law has some major advantages. Few informed people now suggest that pension funds should be governed by anything else, such as an Act of Parliament, although there are occasional calls for change. It does, however, have its drawbacks. As it is based on principles of fairness and equity, it is not always possible to say with certainty what the outcome of any question might be. But the alternative of certainty, theoretically possible under an Act of Parliament, is now much less popular. Acts of Parliament (statutes) can create as many, if not more, problems than they solve. The Financial Services and Markets Act 2000, for example, which is designed to protect the investments of people has created a large infrastructure, and involved a great deal of regulation and paperwork, but it and its predecessors failed to prevent such scandals, for example, as the Maxwell Affair and a host of other financial market failures.

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Trust deed and rules The most important document is the trust deed. Usually it is in two parts: • the deed itself, which is the constitution of the trust, dealing with appointment and removal, investment powers and winding-up the trust; and • the rules, which set out the benefits, the contributions, the HMRC requirements and the ‘contracting-out rules’ (see below). The deed and rules can also be changed from time to time – and how the changes are to be made will also set out be set out in the deed.

The deed is king… The first duty of a pension fund trustee, in theory, is to read the deed. This can be hard work, even with a modern so-called ‘plain English’ deed. However, it is your duty as a trustee to administer the trusts, and in order to do this you must know what is in it. In practice, the deed will allow you (and indeed expect you) to appoint ‘delegates’, ie other people to do much of your work on your behalf. These people, including managers and advisers, are appointed to administer the terms of the deed – but there are some jobs that you have to do yourself and cannot delegate. The trust deed now contains huge quantities of information (much of which is rarely referred to in practice, such as the contracting-out rules) and you can safely skip these. In any case, as model rules, ie standards produced by the authorities, come into fashion, the content of the guidelines of the HMRC APSS, the Department of Work and Pensions and the Pensions Regulator becomes less important. In practice, therefore, reading the entire deed is a counsel of perfection. But there are some clauses of the deed that you really should

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed

look at, and you should acquaint yourself with these points if nothing else (see What to check is in the deed, below).

WHAT TO CHECK IS IN THE DEED • The Delegation Power – that you as a trustee can give your work to professionals to do • Power to Resign – that you have a power to resign, perhaps in writing, to avoid having to apply to the court for the right to resign • The Indemnity Provisions – that you as a trustee in most cases should be excluded from liability for acting as an honest trustee and that the employer will indemnify you against any costs or liabilities – and if necessary insure them. The problem with indemnities is that if the employer goes into liquidation they are worthless • Effect of Wind-up – that the rules are clear on what happens if the scheme has to be wound up, and in particular what happens if there are any deficits, and who owns any surpluses • The Trustee’s Powers – where does the balance of power in making decisions lie between you and the employer? Sometimes in practice, trustees have few discretions or powers • The Amendment Clause – how the scheme can be changed, and whether you have a part to play – and that you do not need to apply to the Pensions Regulator or the Court to keep the documents up to date

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The document also describes how trustees are appointed, how the trust is administered, and invested, and of course sets out the benefits and contributions. How many trustees? In pension funds the trust deed does not usually lay down a minimum or maximum number of trustees; in practice there should be at least two and probably (except in the larger schemes) not more than half a dozen to avoid the decision-taking becoming unwieldy.

…but what about the announcements? Nowadays the announcements to members about their benefits are also regarded as legal documents – despite any statement in them to the contrary. You need to make sure that the employer is not making pension promises through contracts of employment or benefit statements that may affect the solvency of the fund.

Do I need to be ‘authorised’? Anyone can be a trustee – and that includes the employer, a trust company, individuals, and employee representatives. Nor do you (usually) need the permission of anyone in authority to be a trustee. But there are exceptions to this general principle: • if you carry out ‘day-to-day’ management of investments (ie you give orders to buy and sell stocks and shares or other securities on a day-to-day basis) you need to be authorised under the Financial Services and Markets Act 2000, and regulated by the Financial Services Authority; • if you have been ‘black-listed’ by the The Pensions Regulator or have become bankrupt or convicted of a criminal offence, you may be disqualified.

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For most trustees, the hassle and expense of being authorised, and the continual reporting requirements do not make it worthwhile, which is why in almost all cases, investment management is delegated to someone who is authorised. The fact that you are not authorised however does not mean that you cannot make decisions on ‘strategic’ investment matters, eg how much of the fund should be in gilts, or whether you should adopt ethical investment principles (see below, page 62).

Duties, discretions and powers Trustees of pension funds have three jobs; they have to exercise duties, discretions and powers: • A duty is a specific obligation to do something. One example is to look after the funds. • A discretion is a power to make a choice. One example is to decide whether to pay a death benefit to a wife or a mistress. • A power is a right to do something. One example is a power to appoint a fund manager. Sometimes powers, discretions and duties are mixed up; but there are separate rules applying to each function. The next chapter looks at just what those rules are.

What kind of scheme am I trustee of? There are many kinds of workplace pension scheme offering different kinds of benefits to members. Falling in popularity with employers (though not with employees) is the salary related, or defined benefit scheme. This promises a pension related to the level of salary and years of service with the employer. For example, it may offer 1/60th of your final salary for every year

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you have worked for the company. If you work for the company for 20 years, you would be entitled to 20/60ths, ie a third of your salary when you retire. Because of legal, taxation and accounting changes in recent years, such benefits are increasingly hard for employers to offer. These schemes remain common in the public sector. Other workplace pension arrangements offer no anticipated level of pension, but merely arrange for contributions to be made by both employer and employee, and then see how much there is in the kitty at retirement age and then use the money to buy a pension (either internally or externally). This is a risk for scheme members: there is no knowing how the contributions which are invested will perform, or what pension or annuity rates will be at retirement. For trustees there is slightly less to worry about, although if they manage the investments badly, the members will not be happy. There are varieties of pension scheme which offer elements of one method or another, and some schemes incorporate a variety of pension arrangements.

Trustees Need ‘Business’ Not Pension Advisers Andrew Cawley Partner for Pensions, KPMG LLP (UK) Being a trustee of a pension scheme has in the past been a rewarding, if unremunerated, role for many employees. This has been true for trustees appointed by the sponsoring company because of their role in the sponsor’s business. It has also been true for individuals nominated by colleagues and from the wider pension scheme membership. However, the changes to pension regulation over the last three years have now made the trustee role much more demanding and challenging. This is certainly the case for trustees of defined benefit schemes in the UK. This article examines this new environment in which trustees need to operate and asks two key questions: •

Who would be a pension scheme trustee?

•

What should trustees expect of their advisers in this new environment?

Defined benefit schemes have now assumed an even greater financial importance to the sponsoring company. The materiality to employers of the value of the benefit liabilities has increased significantly. This has occurred despite the closure of pension schemes to new members by many sponsoring companies. Funding deficits have now attained levels which genuinely present cash flow issues for the business of sponsoring companies. The pension scheme deficit has also assumed a wider importance to the corporate sponsor. The deficit is now included on the sponsoring company’s balance sheet, impacting reserves and becoming visible for external stakeholders, such as banks, credit insurers and investors. Not surprisingly trustees are in the spotlight and under close examination by the sponsoring company, other stakeholders and by the Pensions Regulator. Where are the principal pressure points for trustees? The funding of pension schemes under the new funding regulations has increased the focus on trustees and, some might say, exacerbated conflicts with sponsoring companies. The guidance from the Pensions Regulator for trustees and advisers is unequivocal – adopt a more prudent approach in valuing liabilities and in recovering pension scheme deficits. This is resulting in actuarial valuations showing increased deficits, despite substantial additional funding from employers over the last three years.

Trustees are also now required to examine closely the affordability of pension funding for the sponsoring company. This involves trustees making an informed judgement of whether the company can manage to increase cash funding for the pension scheme. Is the financial position of the underlying business secure, and sufficiently secure to allow a longer recovery period for the deficit? Will the sponsoring company be able to support the current investment strategy if expected returns fail to materialise? These are questions which push trustees into differences of view with the scheme sponsor and will often see the trustees commission independent financial reviews of the business. The moral hazard framework constructed under the Pensions Act 2004 is intended to create a new regime for protecting pension schemes and allow trustees and the Pensions Regulator to monitor the changing financial circumstances of a business. In practice, some of the new framework is sensible, early warning radar, but the wider repercussions of moral hazard pose a real challenge for trustees, as well as scheme sponsors and shareholders. Trustees are now increasingly alert to mainstream business and financial transactions, which a few years ago may have gone largely unnoticed. Now, business acquisitions and disposals, corporate restructuring and refinancing by sponsoring companies are leading to trustee attention and involvement. Trustees, supported by the thinking of the Pensions Regulator, are viewing their pension schemes in deficit as creditors, albeit unsecured creditors, of the sponsoring company and associated companies within a group. Trustees need to take action to secure their financial position if circumstances change within a business. This brings trustees, many of whom do not have commercial or corporate experience, into Board level discussions with the sponsoring company, and potentially into conflict with shareholders and banks. With many trustees still active members and employed by the scheme sponsor, such circumstances are extremely difficult to manage. Employers, as scheme sponsors, of course, are becoming more proactive. Pensions are now a Board level issue for many employers. Employers are seeking to reduce the level of future benefits and in some cases, ceasing all defined benefit pension provision in order to control cost increases. These are cost increases which are driven by the new funding regulations and the Pensions Regulator who ranks funding the deficit as a priority ahead of providing future benefits. Such changes to pension schemes often, but not always, propel trustees into direct negotiations with employers – negotiations intended to ‘get the best deal’ for the pension scheme and which inevitably pushes the sponsoring company to find more funding. This negotiation could go even further when pension scheme rationalisations allow employers, with trustee agreement, to change accrued past service benefits. Unsurprisingly trustees need ‘knowledge and understanding’ and not simply about the pension schemes they manage. Trustee Knowledge

and Understanding is sensibly being driven by the Pensions Regulator. But in many respects the remit for trustees under this heading is insufficient and does not help trustees where they have greatest need. Pensions knowledge and understanding will be seen as the foundation level. In future, trustees will need to understand better the commercial and financial position of the sponsoring company, as well as the impact of banking covenants, acquisition bids and financing structures. So in this challenging environment for trustees, what should they be seeking from their advisers? First, you need pension advisers who have a broad understanding of business and the commercial world in which trustees will increasingly have to operate. Firms of pension advisers will need to have experience not only in actuarial and investment matters, but also in banking, debt management, corporate restructuring, corporate finance and tax. Very few firms of advisers will be genuinely able to offer such a breadth of experience. Second, more than ever before, trustees need advisers who are proactive. What does this mean? If your advisers alert you promptly to issues which could affect your scheme, or may offer opportunities for your scheme or members, then you have a proactive adviser. If advisers are not meeting this standard, then as trustees you may find it difficult to keep pace with the speed of changes in pensions, and you are unlikely to be able to respond to the challenges highlighted above. Finally, costs and fees are relevant, but value for money is more important. And if trustees are receiving advice and services which are commercial and proactive, and professional costs are controlled, trustees can obtain real value for the fees they pay. In this new and challenging pension environment, trustees need and should demand such advisers. © 2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG LLP operates from 22 offices across the UK with over 9,000 partners and staff. KPMG recorded a UK turnover of £1.28 billion in the year ended September 2005. KPMG LLP, a UK limited liability partnership, is the UK member firm of KPMG International, a Swiss cooperative. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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3 TAKING OFFICE

Sir – In your interesting article on “Old-Age Pension,” in the Spectator of July 16th [1898] you suggest that, if practicable, 7s a week for every one would be deliverance out of his present distress. Are you prepared to put Englishmen into leading-strings and dole the pittance out daily? Otherwise privation and misery will again triumph. At our Guardians’ Board meeting last week an army pensioner was before us “starving and destitute”. He had 7s 7d a week, but it is paid once a quarter in advance. It was paid on July 1st, and on July 14th he appealed for admittance into our workhouse. “What will you do with me, I am starving?” Can any scheme cure drinking and recklessness? I am Sir, &c. The Spectator, July 1898

Introduction You may be appointed trustee by the employer, or by the other trustees, or perhaps by an election of the membership. Whichever way you are appointed, there are a number of initial tasks to complete, and some things to check out. In a perfect world you might have checked some major items before appointment, but in practice things do not work out like that.

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CHECKLIST ON APPOINTMENT Have you seen the trust deed and rules? • • • • •

Does it have an indemnity clause? Does it have an exoneration clause? Does it allow you to retire without going to court? Can it be altered or amended easily? What is the balance of power between the employer and the trustees?

Do you have a full house of advisers? • • • •

Actuary? Solicitor? Accountant? Investment Manager?

Is the scheme registered? • By the HMRC (inspect the letter)? • By IRNICO (if contracted-out)? Are there any outstanding potential legal claims? Have you got copies of: • • • •

The annual trustees report? The last actuarial report? The accounts? The last investment manager’s report?

Is there a training programme for trustees? How often do the trustees meet? • Where are the previous minutes? What do they say? • What is the reporting structure of the pensions manager, investment adviser, pension consultant and others? See also the NAPF Checklist for Pension Fund Trustees (appendix ix)

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The first things to do are to: • inspect the documents (see Chapters 2 & 4), and • find out when you and the other trustees meet in order to exercise your duties, discretions and powers. The art of good trusteeship is efficient and competent delegation of most of your functions. This chapter looks at what your functions are, what can be delegated, and what cannot. As a trustee you already know that you have certain: • duties • discretions, and • powers. This chapter sets out what they are, and how best to perform them. In law, there are complex rules laid down as to how you should exercise these duties, discretions and powers. But in practice, common sense should usually suffice, dosed with a little outside advice when perplexed. The first issue is managing any conflicts of interest or suggestions of conflict. Pension fund trustees are particularly susceptible to that charge, since they may wear several hats at once: trustee, member, employer and even adviser. Properly documented decisions, proper accounting and actuarial systems, and solid legal support are all essential to avoid falling into obvious traps. The job of pension fund trustees especially is not, in the normal course of events, to bargain for benefits, but merely to safeguard the assets supporting the anticipated benefits – a principle which some union-appointed and elected trustees in the past have not always found easy to follow.

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The differences between powers, duties and discretions It is important to distinguish the powers, duties and discretions, which you are given when you become a trustee. They can all be found either in the deed or from the general law.

Duties Duties of trustees include: • checking the documents • investing the money • giving information • paying the benefits • not making profits out of managing the trust, eg by doing deals with trust property • preparing accounts. A duty is a job which you have to ensure is carried out – though not necessarily yourself. But they are the basic obligations of the trustee, the obligations which are necessary to ensure that a pension fund is run as a pension fund.

Discretions Discretions of trustees involve both questions of principle and matters affecting individuals; they could include for example: • choosing investments (if this has not been delegated) • deciding who shall get certain benefits on the death of a member • deciding whether (subject to the employer’s permission) there shall be pension increases

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• deciding whether to change the terms of the deed (subject to certain constraints) • deciding (on advice) whether you should break the terms of the trust • deciding whether and when to take advice • deciding when and how to receive transfers into the scheme, and on what terms, and similarly • deciding when and how and at what level transfers out of the scheme should be paid. The point of a discretion is simply to allow more flexible management of the trust. There are many decisions that have to be taken that cannot be fully catered for in any document that need personal knowledge, careful judgment and simple common sense to take. And there are some problems that simply cannot be foreseen. These discretions cannot be delegated to anyone else; unless the deed says so, it is your function as a trustee to take these decisions yourself – using advice if necessary.

Powers The deed will give you, and the other trustees, certain powers. There may be a power to increase benefits (subject to the approval of the employer). There will always (in a properly drafted deed) be a power to delegate. These powers are not absolute; they must be exercised reasonably – and in the interests of the beneficiaries.

Delegation In practice many of your duties are delegated: day-to-day investment management (such as choosing which shares to buy) you would normally hand over to an investment manager. And you would not

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yourself normally check that pensions claims are valid, or personally collect the contributions – although you would expect to be informed if they were not collected. Nor would you on a daily basis keep the immensely complicated records that now seem to be needed. But, as mentioned, discretions, for example, cannot be delegated, and in some cases you have to make your own decisions – that is what you are there for. Even where you have delegated, although you can rely on those you have appointed to carry out your wishes (one of your duties is to examine that they are reputable and competent) it is still your job to supervise them, and to disagree with them if you think they are going wrong or giving wrong advice. You cannot delegate blindly.

STANDARDS OF BEHAVIOUR When managing the trust: to act with reasonable care and in good faith When investing the assets: to act as a reasonable prudent man of business when investing other people’s money

Acts of Parliament and other laws Your primary guide is the trust deed and rules; but they do not work in isolation, and pension funds are subject to a mountain of law. You do not need to know it intimately, but in brief you may need to know about the following areas: • The fiscal law, being HMRC constraints on benefits, contributions and funding. HMRC registration is crucial t the operation of most schemes, and their rules may limit your actions. Many

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of the rules are set out in Acts of Parliament (such as Finance Acts); others are set out in an immense ‘Registered Pension Schemes Manual’ (nearly 4000 pages) issued by HMRC. • The social security and employment law, which covers amongst other things – contracting-out of the state second pension – what happens on corporate insolvency – equal treatment • The pensions law, which covers amongst other things: – Preservation – Transfers – Revaluation – Solvency – Disclosure of information – Member-nominated trustees and many other matters. The general trust law, contained in statutes (Acts of Parliament) and in decisions of the judges made largely over the last 100 years. Whilst valiant attempts have been made by lawyers and others to apply the principles laid down in these cases to the problems of pension funds, most are relevant more to family trusts, and much of this kind of law is dated and not applicable. Other law, which only indirectly applies to pension fund trustees, such as the Data Protection Act, which will require you to register if the pension records are held on computer (usually) or requires you to be authorised if you give investment advice (under the Financial Services and Markets Act). In almost all cases, this legislation is not a matter for you to worry about – your managers will make sure that you have delegated your functions. In 2005 the European Pensions Directive also affected UK pension schemes.

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At one time, there was very little statute law to worry trustees. There were the tax statutes and that was about it. Now there are acres of social security rules, contracting-out details, preservation law, transfer rules, disclosure regulations, rules about accounting, more rules about mergers and takeovers not to mention the Pensions Ombudsman, the Pensions Registry and the Pensions Regulator. There is also the seemingly impenetrable law about equal treatment for men and women, which involves European law mostly. And for defined benefit schemes there are extra rules controlling the funding levels, ie how much money needs to be in the scheme. No one expects trustees to know all this, despite the Pensions Act 2004 (see p20) even though you must comply with it. What you are expected to do is to listen to advice (not necessarily to take it) and to ensure that others, ie the managers and advisers, comply with it. There are some things that you have to check yourself, such as some details of the company law provisions; but by and large, sleepless nights can be avoided. Contents of statutes ‘Statutes’, in this chapter, also includes statutory instruments – regulations the making of which is delegated to one of the government departments. Between them these two forms of laws comprise some of the most difficult and complex ever invented, and the interpretation of which often defeats trained experts. Whether their standard will improve is another matter; but as ever much can be overcome by using advice, the trustee’s security blanket.

What to watch out for There are one or two traps for the unwary in being a trustee. The most common include: • conflicts of interest • inadequate trustee protection • obsolete documentation, especially deeds which contain no power to resign or amend the documentation.

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Most of these are discussed later in the book; at this stage it is sufficient to be aware of the existence of these traps, and take the necessary safeguards. The checklist should help.

Conflicts of interest There are particular problems facing trustees, especially: • those of conflict of interest, where they occupy different positions • payment, where trustees are professional trustees You should be careful to check the deed gives you power to be paid (if you are paid) and to get benefits from the scheme despite the fact you are a trustee. There is nothing wrong in itself about having a conflict; most trustees are all the better for having knowledge and understanding of the concerns of the employer, the members or a director. The main concern is to be able to judge when a conflict has become so great that independent advice is needed. Just because there is a conflict of interest is no reason (provided it is declared, and anyway it will normally be obvious to co-trustees and others) to leave the board or even to leave the room.

A trustees’ meeting Sometimes the deed itself will lay down how often you need to meet; more often you will just decide when and how to meet. Small schemes could meet as infrequently as once a year; very large schemes might meet monthly. All but the smallest schemes will delegate most of the more trivial decisions to others. The point of most meetings is: • to supervise the administrators and others; and • to exercise the discretions, which cannot be delegated.

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It is crucial to keep proper minutes (not necessarily full ones), and to make sure the formalities are observed. Before the meeting takes place it is as well to check: • who will be the chairman • how decisions are taken, eg by majority vote – or do you have a veto • how many trustees are needed to make a quorum • whether resolutions have to be in writing.

AGENDA 1 Minutes of the previous meeting – to approve 2 Investment manager’s report – to approve 3 Scheme manager’s report – to approve 4 Scheme accounts – to approve 5 Trustees’ report – to approve 6 Actuarial report – to commission 7 Appointment of solicitors – beauty parade 8 Current developments – examination of impact on scheme of changes in the law and practice 9 Member communications – to approve 10 Scheme rule amendments – to approve 11 Individual discretions: early retirement; death-inservice payments; augmentations (improvements) 12 Any other business 13 Date of next meeting

Pensions Administration – What should Trustees expect? Ken Edis, Chairman, Edis Partnerships In the forty years I have spent in the pensions arena Pension Funds and their administration have changed out of all recognition and I doubt that the revolution will end with ‘A’ day. The role of pension fund trustee has rarely been so complex, demanding, or necessary. Employers, members and regulators are looking to the Trustees to steer a steady course, avoid collisions and arrive at their chosen port with a full crew and no loss of cargo or passengers. A major challenge to scheme sponsors and trustees is the quality, efficiency and cost effectiveness of the pensions administration function. Pensions administration has often been viewed as a backwater with minimal staffing and little if any investment in staff training or support systems. A greater sin however has been the neglect of data. This has created a legacy of poor, incomplete, incorrect, missing and irretrievable data. This of course makes it difficult if not impossible to deliver timely correct benefits to members. Furthermore it raises concerns on the validity of data used in actuarial valuations and data supplied to other third parties. The good news is that we are entering a new era and facing a rapid change in the whole approach to pensions administration. This change will come in several areas of administration. The use of technology, the type and scope of data held to exploit the potential of technology and not least, and perhaps more importantly, the way administration offices are organised. Pensions Departments have traditionally been organised in one of two principal ways. Either staff are organised in groups, each group being responsible for a particular function such as processing just joiners or transfers or retirements – Process driven or the alternative approach based on teams looking after all aspects of a particular scheme or in the case of large schemes, a particular group of members – Administrator Led. I do not see either of these methods as being wholly appropriate in a future based on member web access, straight through processing and ever more effective and efficient technology. DC does not only mean monthly processing of contributions, it challenges the very way we work. The need for accuracy and instant answers makes administrators more and more dependant on technology and calls for an accountancy and constant reconciliations mindset.

My own firm recognises this and is in the process of moving to a new model where teams are based on the four principal skill sets we see as being needed in the future. We call it ‘right-skilling’. These are people skills, pension technical knowledge, accounting and database administration. Firstly, we have the Member Services Department whose principal role is to become the warm, caring and friendly interface with members on a daily basis. employing those with the best people skills. They can confirm tax code changes, new addresses, provide provisional quotations for those seeking retirement and, with tact and skill, comfort the distressed widow or widower reporting the death of a member. Then we have the Benefit Services Department. Here we are gathering together those with a natural skill for the technical niceties of scheme rules and legislation. They are charged with knowing everything there is to know about every scheme the firm administers. Further, all final benefit quotations have to be approved by them before they become payable. The growth in DC schemes has put new demands on administrators. With many clients having as many as thirty payrolls, this is demanding work with very short timescales. This has led us to move the responsibility for collecting, investing and reconciling the new and larger monthly returns to an enlarged Accounting Services Department. Accounting services now keep the accounts, produce quarterly and annual reports and pay the clients member’s pensions. Absolutely key to successful administration now and in the future, be it a DB or DC scheme, is the quality of the member database. This has therefore become the responsibility of a new Registrar Services Department working particularly closely with accounting services. With DC schemes member records take on a new significance. Without comprehensive, reconciled and complete records we cannot get the full benefit of member web access and automated answers to all their questions, so vital in driving down on going administration costs. And so we come to the subject of DATA. As stated earlier, over the past few years it has become alarmingly obvious that many administrators have over the last thirty years maintained very incomplete records. Finally, we must look at the role of Technology and the vital part it has to play. Information Technology can and will continue to play an increasingly vital role in delivering cost effective, timely, accurate administration. Investment houses are beginning to recognise the advantages of Straight Through Processing (STP) which, if implemented properly will revolutionise the way DC administration works. It is however a big ‘IF’.

Looking forward we must change our ways and embrace and harness new methodologies and technologies to ensure that we can deliver timely accurate affordable administration services. If we do not change our thinking on the way we go about providing administration, we can expect a steady rise in costs to such a level that the only pension provision employers will get involved in will be that provided by the State. Pensions as we know them will be a thing of the past, a concept that we can no longer afford. Thus, apart from the state pension, an ISA will become the only tax efficient way of saving and providing for retirement. Now that would make Gordon Brown a happy man indeed!

Administration Outsourcing Accounts Mortality Screening Trustee & Secretarial Pensioner Payroll Administration Consultancy PensionsOffice Solutions Data Cleansing Electronic Document Management Member Communications Training Member Web Access Business Continuity Planning Testing

INVESTOR IN PEOPLE

Edis Partnerships The Talbot 2 Victoria Street Bristol BS1 6BB 0870 830 8300 [email protected]

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4 THE PAPERWORK In the little town of Sanary-sur-Mer in the Var lived, so their neighbours thought, two devoted spinster daughters. Although their mother was over 90 and too ill to go out, they both stayed at home to look after her. This week, however, they found out just how the two sisters were looking after their mother. the discovery followed the attempt by a local town hall official to deliver a letter addressed to the mother, Mme Helene Barbaroux. No matter how hard he tried he found he could not get past the two daughters, Jeanne and Genevieve, who told him through the barely open door that their mother was too ill to see him and was in fact being treated by the doctor. The town hall official became suspicious. The doctor they mentioned had been dead to his certain knowledge for the past six years. he went to the police who obtained a warrant and went to call on Mme Barbaroux. The two sisters would not let the police in. Eventually they called the fire brigade and the door was forced open. Inside they found Mme Barbaroux wrapped in a coat. She had been dead for the past three or four years. It was impossible to tell exactly how long. For all that time the sisters had kept their mother’s death a secret and used to move her about the house wrapped in the coat whenever it was necessary to hide her from a visitor. The elder sister, aged 63, usually slept with her mother’s body on the bed beside her. By keeping the death a secret the two sisters were able to continue to draw their mother’s pension, which although small, made a great difference to their meagre incomes. The Times, 14 August 1980

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Introduction Pension funds seem to breed paper, and if you are not a paper person, the quantity and length of documentation can be a little overwhelming. Documents can prove difficult to understand; many of them are very long, many of them are written in ‘pension-ese’. It is not sensible to attempt to read them all word-for-word. But there are things you should look for when you first become a trustee. For example, there should be power in the deed to take independent advice on the implications of the deed. If the deed is not satisfactory or exposes you too greatly to risks which you are not prepared to take, either have the document changed, or refuse to act as trustee. Most deeds can be changed, even to reduce benefits, and most documents need continual revision to bring them into line with current law and practice.

The deed In a way the deed is the constitution of the scheme. Even ‘plain English’ deeds can be very long, and that is not unreasonable. They have to cope with foreseeing many eventualities, some of which may never happen. While the law says you have to familiarise yourself with the deed (and other documents) this is in modern terms not a sensible or practical requirement. It was in the days when there were short family trusts. Nowadays pension deeds are technical documents; but while no-one really expects you to read them, you should know what is in them – and if necessary where to look something up if you have a problem. So while it may prove to be a waste of time to read the document, you should make sure that there is an index or a list of contents, and get a feel of what is in it. It will contain the usual terms: • How the trust is formed

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• How it is changed • How the trustees are appointed and removed – and who they should be • How the trust is wound up. The rules The rules normally are in a separate section of the deed and contain information about the pension scheme itself, such as • who can join • what contributions there are and who pays them • what the benefits should be • what happens if the scheme is wound up. The booklet The booklet, (which includes ‘announcements’, ‘notices’ and any other similar communications about the scheme), must, under Department of Work and Pension rules, be given to members of the scheme. There are guidelines set down in regulations as to what should be in them – but not how they should be expressed. With PCs and desktop publishing around these days there is little excuse for them not being in English or set out so that readers with modest ability can understand them. The employer, of course, sometimes sees the scheme as less of a benefit than as an expense. Therefore he will spend at least a little time and money explaining the advantages of an in-house scheme to the employees. The cost of communication is much less than the cost of an unhappy, worried or insecure workforce – which is what it may become if the pensions are inadequate or, more importantly, perceived to be inadequate.

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The actuarial valuation The actuarial valuation, required by law usually at least every three years (for defined benefit schemes) gives a picture of how the scheme is doing. It will tell you if the scheme is in surplus or deficit – though it won’t tell you what those terms mean. There is no cause for celebration for a surplus – equally there will not necessarily be a cause for gloom if there is a deficit. All depends on the assumptions used by the actuary in doing his calculations. What you are looking for is a simple explanation of any problems of the fund as the actuary sees it.

The accounts The accounts of a pension fund are very simple: money in and money out. The only reason for them is to tell you how much the administration has cost – and whether there has been any theft from, or mismanagement of, the scheme. The accounts will only give a picture of the fund as at their date; they do not in themselves ensure that the funds are secure, or that problems do not arise after their completion. Any pension liabilities of the employer must be reflected in the company accounts, which are nothing to do with you. But if the scheme has not performed well, any shortfall must be shown in the company accounts, which can cause anguish for the employer.

The trustee’s report This is a report which you have to prepare each year for the use of the members and others, setting out very simply who the managers are, who are the advisers and how they can get in touch with you. It is normally prepared by your advisers.

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Investment documents The law requires that every so often the trustees approve both a ‘statement of investment principles’ and a ‘statement of funding objectives’. The statement of investment principles sets out how the funds are to be invested. Some are very long (over 30 pages); others can be a page or two. They should reflect the particular needs and philosophy of the scheme, its appetite for risk, and the maturity of its liabilities for example (how long it has to go before much of its assets have to be used in paying benefits). It must also say whether it is intended to adopt any ethical or social considerations when investing – and how any votes which attach to shares are to be exercised. The statement of funding objectives looks at how quickly and in what way the assets of the scheme can be built up to meet the liabilities to pay pensions and other benefits.

The investment manager’s report Investment managers’ reports, for even modest pension funds, are these days, thanks to the computer, of a size which requires the devastation of a small Amazonian forest. And it is often difficult to see the wood for the trees. You are really looking for comparative performance against the market – has your fund done as well as others in the marketplace? If not ask him why not. The other thing to check is whether the investments reflect the objectives of the scheme – and whether there is sufficient diversification. It is sensible to check whether they comply with certain legal requirements (see Chapter 5).

Drafting in English It is becoming very fashionable for lawyers and others to suggest you might like documents drafted in Plain English. The aim is a very proper one; but in practice the documents that emerge can cause more

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problems than they solve. There is no excuse nowadays for documents to have arcane English such as ‘heretofore’, or ‘the said’, or the innumerable tautologies like ‘it is hereby agreed and understood’. If they are in your deed ask your lawyer to take them out; or ask the insurance company to redraft it. You do not have to accept substandard documents from either of them. There is, however, a place for jargon. For example, in a car manual, it would be difficult to find a replacement for the word carburettor or manifold, and most car drivers would be hard pushed to recognise one or the other when they saw it. But they still know how to drive the car – and are responsible for it. The documents should be as short as possible, as simple as possible and as readable as possible; but that is not to say they should or could be as readable as Frederick Forsyth or as simple as Jeffrey Archer. Pensions are not like that.

Partnership

Results

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5 INVESTING THE ASSETS Once the Prudential Corporation was the epitome of everything good in English business: patience, sobriety, responsibility and, of course, prudence. Times have changed. The company has just lost £300 million on a catastrophically timed foray into the estate agency business, which cannot be covered even by its charging 14.6 per cent on many of its home loans. So the Pru for the first time in half a century has cut its reversionary bonuses to pensioners, by 8 per cent. But its chief executive, Mr Mick Newmarch, almost simultaneously has been awarded a pay increase of 43 per cent, or £3,000 a week, from £380,190 to £543,673 a year. Mr Newmarch is not a man with a nose for irony. He writes in the Prudential’s annual report for the financial year just ended: ‘1990 had been a difficult year. For me, it was also a rewarding one.......’ The organisations who should become active in the matter of top people’s pay in the private sector are the big institutional shareholders: it is after all their money that is being spent, or to be more precise, the money of the pensioners and future pensioners they represent. In America, this has started to happen. Recently one fund worth $60 billion voted against the re-election of directors at the multinational company ITT, because the pay of ITT’s chairman had risen 63 per cent, even as the company’s profits had stagnated. No such protest has yet occurred on this side of the Atlantic. If it did of course, the action would have to come from the biggest shareholder of all, the large insurance companies – such as Norwich Union and the Prudential. But, somehow, it is hard to imagine Mr Bridgewater of Norwich Union or Mr Newmarch of the Pru doing any such thing. Humanity can stand only so much irony. The Spectator, The Limits of Prudence, 18 May 1991

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Introduction One of your major obligations is, not surprisingly, to ensure proper investment of the funds. Good performance can make an astonishing difference either to the contributions that have to be made, or the benefits that can be given. A 1% difference in the return can over a period of time make a 25% difference in benefits, for example. You must (or ensure your managers do): • diversify; • choose appropriate investments, ie appropriate for your needs; • follow the terms of the deed (which will usually override the Trustee Act 2000 which otherwise tells you how to invest the money); • appoint investment managers (or otherwise be subjected to the Financial Services and Markets Act 2000); • make money for the beneficiaries; • invest the money, rather than speculate with it, or leave it in the bank, or use it for purposes other than the provision of retirement benefits; • determine investment strategy, rather than specific investments; • apply the ‘prudent man’ rule. Social and ethical investments You must at least consider whether you wish to adopt social or ethical criteria when deciding investment policy – but trustees have to beware of becoming involved with non-trust objectives. The fund is set up to provide retirement benefits, not to pursue economic, political or ethical objectives. In a law case well-known in the pensions field, the Scargill case, the then leader of the coal miners suggested that the mineworkers’ pension fund should not be used to invest

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overseas (in the States) or in competing energy industries (such as oil). The court decided that pension scheme money should not be invested in line with the economic policy of the union, but to make as much as possible for the members. You could still decide not to invest in an ‘axis of evil’ country (say) because of investment worries (civil turmoil, affecting investment returns) or in defence industries (because of the end of the Cold War). And you might think that green investments (industries cleaning up the environment) would be a good investment bet for the future.

Choosing and controlling the investment manager One major problem is choosing, and then controlling, the investment manager. This could be the insurance company, or a specialist investment manager, or a merchant bank. They all seem to offer: • spectacular returns; • impressive security; and • splendid lunches. The first two are items which you as trustee must take seriously: security and return are the basic criteria. Pension funds should adopt lower risk investments than you might personally be prepared to take, and the returns might therefore not be quite so high. It is your job to ensure that the investment manager is doing his job – complying with the terms of the deed, your investment strategy, and producing returns competitive with the market. But you can still enjoy the lunches.

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Authorisation If you get too involved with day-to-day investment decisions, you may need to be authorised (see below). Pension fund trustees are not expected to be investment wizards – there are plenty around to choose from. But you do have to • monitor the investments; • see that they have been properly invested by others in accordance with the deed; • ensure that the investments do not disappear; • see that they have performed at least adequately. In many cases, outstanding performance might cause you to raise an eyebrow, since often good performance may be as a consequence of taking a few risks. While risks might be acceptable in a young pension fund, where you have a mature fund, ie with a lot of pensioners and relatively few contributors, you might prefer to seek a lower risk strategy; • ensure that it follows the strategy you have laid down; • trust and like your investment advisers. In-house investment management In many larger pension funds it is customary for the funds to be managed by staff employed by the fund or the employer. It can often result in substantial savings, and in some cases the department can itself be a profit centre rather than a cost. It will also have to be authorised, of course, and you can be confident that the regulatory supervision is adequate. Nonetheless, as the Maxwell Affair demonstrated, things can go wrong, and the degree of supervision needed is slightly higher.

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‘Low risk and high risk strategies’, ‘ethical investment strategies’, and ‘beauty parades’ are terms you need to become familiar with – but if you never know the difference between longs and shorts, or get a bit muddled about just what a derivative is, do not worry. Your advisers should explain to you – and if they do not or cannot, ask again or change your adviser. It is nothing to be ashamed of to be ignorant – but you should never be ashamed to ask. A useful rule of thumb is to refuse to invest in anything you do not understand.

Monitoring You should also decide if you know whether your fund is performing well or poorly or as important, as you expect or hope. Investment monitoring services can help with this for larger funds; smaller funds are often at the mercy of an insurer who will blind you with science. Outside advice might be helpful. Poor results over the last few years may mean it is time to change investment manager or insurance company. On the other hand, it may be just the wrong time to change – one fund in the United States changes its fund managers each year to the worst performing fund manager the year before on the assumption he could not do worse this year.

The ‘customer agreement’ By law your investment manager has to sign an agreement which sets out the terms under which he manages the fund’s assets. The law was designed to protect the trustees of pension funds and others; however, most such contracts protect the investment manager from

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almost everything short of nuclear war. These agreements should always be vetted by your lawyers; points to look out for are: • whether the contract is an industry-standard one (the IMA (Investment Management Association) standard is mostly fair) or whether it is custom built and must be carefully checked; • whether he has the power to engage in ‘alternative investments’, in particular assets such as futures, options and swaps (often called ‘derivatives’). Unless you are a trustee of a highly sophisticated fund, it is most unlikely you should want to do this; • whether he can engage in ‘stock-lending’, that is use the shares of the fund to lend to other investment people for a fee. There is nothing wrong with it, but you should be aware of the risks involved; • whether he has read your deed, which may contain special investment rules. Corporate governance Trustees nowadays are encouraged to be involved in the companies they invest in. There is a balance between being an ‘absentee landlord’ (and letting companies do what they want, your only sanction being to sell their shares if you are unhappy) and interfering on a daily basis (which you have neither the time nor inclination to do – and anyway you are not there to run other people’s companies). There are occasions, such as where there are huge increases in the chief executive’s pay, or there is some hanky-panky alleged in the press, where you should use the votes that shareholders have (usually called ‘proxies’). With the investment manager, you should agree beforehand how you use your votes; in most cases you will not need to bother.

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Self-investment and loanbacks Sometimes your employer might suggest it would be a good idea for your fund to either lend the company some money, buy one of its factories, buy a few company shares to ‘show willing’, or engage in a joint venture. Today, such ‘self-investment’ is strictly controlled, and you should take expert legal advice.

Fashion: risk and reward You may feel, as you are dealing with what used to be called ‘widows and orphans’ funds, that you should be very cautious in the nature of investments and the choice of manager. Avoiding risk, however, has a cost. Thirty years ago pension funds restricted their investments to government bonds and mortgages. But while safe, the low returns meant that contributions had to be much higher. So, over the years, pension funds have moved progressively into more risky investments: stocks and shares (the ’50s), property (the ’60s), overseas assets (the ’70s), venture capital (the ‘80s) and derivatives (the ‘90s). Some feel that future decades will see a move into hedge funds and private equity. Each change of investment policy has involved accepting a higher degree of risk. In almost all cases the risk has paid off – but there can be a price to pay, as the Maxwell Affair demonstrated in the 1990s, and the changes in investment taxation and the fall in the stock markets have done more recently. You could avoid a great deal of risk arising in your fund. But you would have to remove all discretion from your fund managers, invest solely in government securities, and devote (in the case of a larger scheme) very much more time to supervision. There would be no guarantee that all risk had been removed – and you would probably have diminished the return to the fund, for which your members will not thank you. As in all these matters, you are expected to make a

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balanced judgment between risk and reward –and sometimes, fortunately very rarely, it will go wrong or not be quite as good as you hoped or expected.

Assets and liabilities For many years conventional wisdom had it that there were separate assets classes for the different liabilities that the fund was underwriting. For example, if the fund was mature and many of its members were drawing pensions and other benefits, it was thought that it would be better to have more of the investments in less volatile investments that would be sure to keep their value over the years, even if their return was more modest. Such investments were usually thought to be bonds (ie government loans, where the government promised to pay the interest for a number of years, and then repay the capital) and more recently company equivalents (known as ‘corporate bonds’ or ‘credit’). But where benefits may have to be paid for over 30 years, in fact bonds may not be appropriate since it is hard to find an ideal match between the kind of bond that is around to buy, and the liability of the pension fund to members. Many pension funds over the last 50 years have found investing in company shares (‘equities’) very useful; they offer a flow of income (‘dividends’) and with luck some capital appreciation. In fact for most pension funds in most years, equities have been a very successful choice. But they are risky (companies can go bust or perform badly) and their value can fluctuate wildly in the Stock Market – they might be at a low value, for example, just when you need cash to pay benefits. Other investments have similar pros and cons. Property was very popular in the ‘70s, but the depreciation in buildings can be high, and they can be hard to sell (ie have ‘poor liquidity’) when you need the cash. ‘Alternative investments’ are now becoming more popular,

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but while they may offer higher returns, they may be more risky or difficult to sell when the time comes. Such investments can include: • property; • ‘venture capital’ or ‘private equity’, investments in companies which are not quoted on a stock market; • forestry, the ultimate green investment; • farmland, also green; • hedge funds, where the managers invest the money in a more speculative way, guessing that the stock market, or particular share, will fall or rise within a period. They can in theory make money equally well in a falling or rising market, and are sometimes known as ‘absolute return’ investments. Each one of these classes has particular pros and cons.

Tax One of the major advantages of a pension fund is that it does not pay tax on its investment income – unless: • there is a surplus (as defined by the HMRC, not your actuary) which is not otherwise dealt with, or • you do something which the trust shouldn’t do, such as pay benefits over the HMRC limits, or • you do something which is not an investment, ie something which is regarded by the HMRC as ‘trading’. In practice that is not your problem, but that of the investment manager. One of your duties is to ensure that nothing is done to prejudice the tax status of the fund. Nowadays, however, pension funds do pay a variety of taxes, including VAT on bills, stamp duties on the purchase of shares or property, and tax on dividend income.

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Statement of investment principles The point and content of the statement of investment principles is discussed above (p62): it does need to be discussed by your investment managers to make sure they can meet its objectives.

Investment performance measurement It is important for trustees to have a feel for how their investment is doing; one of the ways in which this has been done in recent years is by appointing specialist measurement firms who can report on the investment manager’s performance. But much of the performance will depend on the instructions he has been given, and different funds will give different instructions (take more risk, take less risk, have more overseas, have less overseas and so on). It is therefore difficult to see how you are performing compared with other similar funds – and recent government guidelines suggest that such ‘benchmarks’ should be individually constructed against your own objectives, rather than against other ‘peer (similar) funds’.

Solicitors specialising in pensions law

Sacker & Partners LLP is the largest law firm in the UK specialising exclusively in advising pension schemes. We have forty five dedicated lawyers who deliver practical, solution-driven, user-friendly advice on the legal issues which impact on pension schemes. • Sackers act for over 1000 pension schemes of all sizes and advise over 20 pension schemes of FTSE-100 companies • Ranked in the top tier for pensions work by the Legal 500 and Chambers and Partners directories • Pensions Law Firm of the Year 2006 • Expert teams that focus on specialist areas of pensions including investment issues, dispute resolution and preparing clearance submissions to the Pensions Regulator For further information on the services offered to trustees of pension schemes by Sackers please visit our website www.sackers.com

Conflicts and investments Claire Altman, Sacker & Partners Why are conflicts of interests suddenly a hot topic for lawyers? This is one area where there hasn’t been a whole raft of new legislation – but it is a topic that increasingly causes difficulty and needs consideration. Unlike the old days, employers can’t now walk away from their scheme without attracting a debt possibly greater than their market cap – arguably trustees now have the upper hand. The Pensions Regulator is asking trustees to behave more like bankers. The new funding regime is ripe for differences of opinion between trustees and employers. Add into the mix that pensions is now one of the key issues of the day and as a society we are increasingly likely to sue. Conflicts do not just become more important, but are subject to greater scrutiny. So how does this apply to one of the trustees’ key functions – that of investment? A fully mismatched investment policy with the whole fund invested in equities is no longer considered to be an option. Trustees are now thinking about their ‘risk budget’, hedge funds, currency overlay, the importance of asset allocation, Liability Driven Investment (LDI) to name but a few. We are increasingly being asked to look at conflicts that arise when making these decisions and how to manage them. Conflicts arise here where the differing duties of trustees and companies lead to different investment objectives. Trustees have to act prudently in the best (financial) interests of beneficiaries. Company directors have fiduciary responsibilities to shareholders and want to minimise cost. They are encouraged by FRS 17 and IAS 19 to minimise volatility. (Trustees also have a fiduciary obligation to disclose information relevant to trustee decisions to fellow trustees – even where that information was learned in a non-trustee capacity and even where it is confidential. This in itself may create conflict situations for company representatives, although this problem is more likely to rear its head in a funding debate.) So when considering asset allocation for example, a trustee who is also a company director may with his trustee hat on want to look at the long term and be content with short term ups and downs, whilst with his company hat on this will not necessarily be attractive when considering the balance sheet. Or if he is thinking about reviewing investments, the company director side of him may be concerned at the cost and timing of the review whereas the trustee side simply at its importance. On the other hand, objectives may well be aligned. For example, LDI from a trustee point of view is a prudent investment that can offer diversity and from a company view point reduces volatility.

But where objectives are not aligned, how should conflicts be dealt with? Unfortunately the head in the sand approach can cause problems as decisions taken by a trustee who has a conflict of interest can be challenged. There is good reason, therefore, for ensuring that conflicts do not affect decision making. It is possible to include wording in the trust deed to provide that trustee decisions cannot be invalidated or questioned on the basis of a conflict of interests or duties, but this will still not absolve the conflicted trustee where decisions are so difficult that he should not act anyway – for example where he has to negotiate with himself. If a trustee feels that it is likely that investment decisions are going to raise frequent conflicts of interest, the trustee board may wish to delegate these decisions to a sub-committee of which the trustee is not a member – but the desirability and practicality of this would need to be considered. In any event this would not absolve the trustee from his duty to disclose information (although the trust deed could provide for this where the decision has been delegated away from the conflicted trustee). Other possibilities include: •

abstain from any vote; or

•

absent themselves from the relevant discussion / decision making; or

•

stand down as a trustee if the conflict cannot be managed. If the other trustees nevertheless valued his input and ability to keep the trustees up to date with the company's thinking, he could, after resigning as a trustee, continue to attend meetings in his company role and contribute to discussions on that basis.

The conflicted trustee may want to take legal advice about his position. Whichever way forward is chosen, it will be important to document the steps that are taken so that it can be seen from the paper trail that all was done that needed to be done. Conflicts are better dealt with sooner rather than later – and to ensure a smooth process there are steps that can be taken now. Trustee training helps trustees’ awareness and trustees might like to have a protocol setting out how they will deal with conflicts if they arise – whether in the arena of investment decision making or generally. In summary, if a trustee is finding that he is inhibited about sharing information that he knows that the other trustees would find useful when making a decision, or finds that he is negotiating with himself, he is conflicted and in trouble! It is useful to think about the problem before it arises so that it is less likely to create difficulties. Claire Altman, Associate, Sacker & Partners 29 Ludgate Hill, London EC4M 7NX Tel: 020 7329 6699

DBC Pension Services Limited C O R P O R AT E A D M I N I S T R AT I O N S P E C I A L I S T S

Thorough… ﬂexible… efﬁcient Born out of a combined 50 years pension administration experience, DBC Pension Services Ltd, is an independent company providing specialist third party administration services. Founded in 1996, its core activities are: • Pension scheme administration • Scheme accounts • Pensioner payrolls It has in excess of 60 group schemes, DC and DB with multiple rates and accrual factors, salary definitions and historic beneﬁts – some dating back nearly 50 years. Up-to-date systems that have the capability to hold and calculate as many different

beneﬁt structures as needed. It uses the latest IT software – the main admin system P3, is both ﬂexible and sophisticated and: • Carries out routine calculations (e.g. retirement calculations) • Automatically produces letters as a result of the calculations requested • Output can be individually tailored to meet the clients speciﬁc requirements • Has in depth record keeping facilities Linked in with other software, it allows DBC’s management to continually monitor the amount of work being processed thus enabling them to ensure that resources to meet their turnaround time are always available.

Professional pensions administration on a personal basis CONTACT Ralph Meller • Paul Witcomb • Sue Dosell Vesey House, High Street, Sutton Coldﬁeld, West Midlands B72 1XH TEL 0121 321 3544

FAX 0121 321 3566

E-MAIL [email protected]

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6 PROVIDING INFORMATION

A Guardian survey (22 October) reveals that state pensions in Britain are one-third of those in Germany. And one of those British legal quirks which give such charm to our lives lets companies raid the employees’ pension fund when they need a bit more cash to buy this year’s Porsches for the directors. Yes, the KGB in Russia is worse than the British government in Britain. But what damage has the KGB ever done in Britain compared to that done by the British Authorities? Rather it was the spectre of Communism which made our rulers pretend to be a bit civilised and, now that it is dead, we will soon lament the good old days when our pensions were as much as a third of Germany’s. George Stern, Incompetent Buffoons, review of Inside the KGB: Myth and Reality by Vladimir Kuzichkin, in Literary Review, December 1990

Introduction Trustees and employers usually, though not always, know more about pensions and the pension fund, than the members and their dependents. Scheme members therefore rely on trustees for a great deal of information and advice. The question of advice is dealt with in Chapter 21; information is looked at here.

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WHAT MEMBERS ARE ENTITLED TO AUTOMATICALLY • New members, scheme details within 13 weeks of joining scheme • Leavers, rights and options as soon as possible • Beneficiaries, any change of address for enquiries within one month • Members, (in money purchase scheme) annual benefit statements • Everyone, changes in scheme details • Everyone, if winding-up begins • Combined pension forecasts (eventually)

Trustees have always had to provide information to beneficiaries – and pension fund trustees are no exception. Over the last 20 years there have been special rules for pension fund trustees (in addition to the general trust law) and these are known in the industry as ‘disclosure regulations’. The information must be made available to a wide range of people – not only the members – including spouses, dependants and others (including sometimes trade unions) who are entitled to a range of information. Some of the information must be provided automatically; some of it must be provided on request.

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WHAT MEMBERS ARE ENTITLED TO ON REQUEST • Refunds available • Transfers and leaving service rights, no more than once a year • A copy of the deed and rules, on payment of a reasonable fee • A copy of the actuarial valuation, on payment of a reasonable fee • Benefit statements, no more than once a year • Scheme details (non members) no more than every three years • Trustees annual report

WHO IS ENTITLED TO INFORMATION? • Members • Spouses • Dependants • Trade Unions

Whether there is a claim under the regulations or the general law, it is prudent to ensure that members do not receive trustees’ minutes, which may relate to personal matters affecting an individual. In principle, however, members are entitled to a copy of the trustees’ deliberations – so it is as well to make them fairly broad – but you do not want members complaining that your decisions were unreasonable or failed to take certain information into account. Drafting

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minutes, especially trustee minutes, is a skilled task, and should be delegated to an experienced scriptwriter.

Failure to comply If you fail to comply with the regulations, there are no penalties specified (with some exceptions). Anyone who is aggrieved can complain to the Pensions Ombudsman, or to the County Court. So far as is known, no trustee has yet been convicted of a failure to supply information under the regulations, and even if you do fail for some reason or another, a good excuse, such as the managers or administrators have let you down, will probably suffice. The main answer is to find a good administrator.

Policy There should be no reason why anyone should not have any information, provided they do not ask too often, or are prepared to pay copying charges where a large volume is in demand. The only time you need to refuse to assist is where personal confidential information is sought, or where a trustee’s discretion is questioned, in which case hunt for the nearest lawyer.

Communication There is no law that says that the way in which you inform your members and others should be clear, simple and helpful. But good communication can often be the valve that lets out the steam from people’s ears, and reduces the pressure on you. A little bit of communication goes a long way, and there are now many organisations that specialise in pensions communication.

Pension Administration – The Shape of Things to Come Geraldine Brassett Head of Client Management at MNPA The shape of retirement is currently fairly predictable, you work, you stop work and then you retire on your (hopefully) adequate pension. But what happens when retirement starts to come in different shapes and sizes and, at the extreme, is like an amoeba with no defined shape at all. So why might the shape of retirement change and what might potentially drive the need to change? Many factors could influence this; changing mortality, lower pension provision resulting in the need to work longer and future legislative change (the effects of age discrimination are still to be felt). The number of factors is likely to be more than equalled by the number of possible solutions, but one which has been vexing pension administration providers for a while now is flexible retirement. In reality it is not the concept of flexible retirement that is giving cause for concern but how schemes will respond to it and how easy it will be to develop the capability to deliver scheme and member requirements. At this point it is worth stressing that, in all scenarios, the administrative issues are always simpler for pure DC arrangements (excluding hybrid schemes) although these are not without complications of their own.

A square deal Many schemes are already operating flexible retirement in its simplest form, allowing members to retire and take all their accrued benefits and then to either join another scheme of the same employer (e.g. a stakeholder arrangement) or rejoin the scheme as a new member, or simply to carry on working but arrange their own pension provision outside of the schemes offered by their employer. Rejoining the same scheme presents no administrative complexities as the member can effectively be treated as having two periods of service and they would appear twice in the membership statistics. Even the most basic systems should be able to support this type of scheme design.

A rough diamond More complex flexible retirement offers are not much in evidence at the moment with many schemes waiting to see how the market will respond to the opportunities presented by phasing in retirement, what this might mean in terms of an older workforce and the actual impact of age discrimination legislation before deciding on the shape of their offer. Where however, schemes are allowing greater flexibility than the ‘all or nothing’ approach mentioned earlier, they are tending to define parameters for, or apply constraints to, some features of the scheme design. These might include: •

Whether future accrual is allowed and, if so, in what arrangement

•

How many times a member can ‘retire’

•

Limits on the minimum or maximum amount that can be taken on each retirement

•

For DB schemes whether the member can select an amount of pension, an amount of accrual or a percentage of benefit and in all cases in which order the pension will be taken, e.g. in relation to LPI whether the benefit taken is pre 97, 97-2005, 2005 onwards or an equal slice from all tranches

•

What rules apply to contracted out rights, e.g. can GMP be taken as part of flexible retirement or not until the final crystallisation

Members also need to be made aware that some protections available to them under simplification, for example, protected pre A day cash, will be lost to them if they go down the flexible retirement route. This list is not exhaustive but all have implications for the scheme administrator and how they design their systems. Consideration needs to be given to: •

How will the ‘debit’ of the benefit taken be recorded to ensure future calculations are carried out correctly

•

What status is the member – active, pensioner, both? And how will this translate through to the membership reconciliation

•

How will the scheme ensure that any GMP liability is covered, if applicable

•

Can multiple lifestyle matrixes be applied where, in a DC arrangement a member wants to operate a retirement strategy potentially targeting several different retirement ages

•

Is record keeping clear enough to ensure pension increases can always be correctly calculated, where different increases might apply to different retirements?

Again the issues and challenges will be specific to each scheme and their provider’s systems and processes. What this does highlight is that to design a flexible retirement scheme of even moderate complexity without input from the administrator would significantly reduce the chances of success both in terms of implementation and ongoing servicing.

Retirement ‘amoeba-style’ Now imagine all of the above, but without parameters. No constraints on the number of times a member can retire and no restrictions on how much or which elements of a pension a member can take. Slightly frightening isn’t it? If, however, as a result of either legislation or employer demand, flexible retirement truly becomes fully flexible, as administrators we will need to be sure we have the systems, processes, calculations and communications in place to deal with that. It is possible to foresee a time in the future when not only do administration systems need to have the functionality to deliver flexible retirement to members but to communicate it via the web and allow members to model various retirement scenarios online, thus enabling them to plan their retirement strategy. At this point no one is truly sure of the shape of things to come. Administrators should however be analysing their capabilities now and considering what might be required in the short, medium and long term to ensure that, whatever the shape, the solution is a good fit.

What’s in a name? In our case, a range of integrated solutions for closed defined benefit schemes.

To meet the challenges of the changing financial world, AEGON has created a family of four core business areas in the UK – offering a breadth of long-term financial solutions that covers everything from investments and protection to advice and pensions. AEGON Trustee Solutions is a key part of this new structure, providing fully integrated solutions for the ever-increasing number of closed defined benefit schemes, offering trustees a ‘one-stop shop’ that provides a range of different investment partners to help them meet their objectives as well as the option of integrating deferred annuities into their funding plan.

The AEGON Group – one of the largest insurance companies in the world, with assets under management of around £240 billion – provides a combination of global expertise and local knowledge, together with a huge investment in technology, that will allow AEGON Trustee Solutions to break new ground. So, now you have a clear vision of the future. From a company with a refreshingly different attitude to financial services.

aegonts.co.uk 0131 549 6065

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7 PAYING BENEFITS ‘Why Elsie! You must be a rich woman,’ said Mr Earlforward. ‘What with your wages and your pension!’ He spoke without looking at her, in a rather dreamy tone, but certainly interested. ‘Well sir,’ Elsie replied, ‘it’s like this. I give my pension to my mother. She’s a widow, same as me, and she can’t fend for herself.’ ‘All of it? Your mother?’ ‘Yes sir.’ ‘How much is your pension?’ ‘Twenty-eight shillings and eleven pence a week sir.’ ‘Well, well.’ Mr Earlforward said no more. He had often thought about her war pension, but never about any possible mother or other relative. He had never heard mention of her mother. He thought how odd it was that for years she had been giving away a whole pension and nobody knew about it in Riceyman Steps. Arnold Bennett, Riceyman Steps, 1923

Introduction With all the issues over trustees’ governance and investments and deficits it sometimes gets overlooked that the main point of the pension scheme is to try and ensure that when the time comes, members get the benefits they expect.

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Eligibility Who can join the scheme is set down in the deed, and is usually a matter only for the employer to decide. You should not let anyone in who is not eligible; you should not exclude those who can join. There are grey areas, however. Suppose your fund has a surplus, but the employer wants a whole new factory full of employees to join and pay in a miserable transfer value. Do you have to accept them? It will depend on the deed. You should be aware though that you should not discriminate on the grounds of sex, race, sexual orientation, disability, part-time employment, fixed contract ‘employment’, belief or religion – and there are now complicated rules about discrimination on the grounds of age. Given that the purpose of a pension scheme is to discriminate on the grounds of age (ie pay benefits when a member reaches a certain age) the paradoxes are evident.

Death benefits Death benefits are not strictly a pension, but a ‘retirement benefit’ akin to an insurance benefit. How you pay and to whom you pay is often at your discretion (see below).

Winding-up Winding-up a scheme can be a traumatic event. It can happen if the employer goes bust, or decides for other reasons to close the scheme. If that happens special rules fall into play which allocate how the benefits are to be split up; if there is not enough money in the fund, benefits may have to be reduced all round. If there is too much you may be able to enhance them. Further details are set out in Chapter 18.

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Divorce Divorce is one of those problems with which pension funds struggle. Once the member is divorced, his former wife or husband can no longer be a survivor and can therefore no longer receive survivor’s benefits – all that he or she may be eligible for is dependant’s benefits in certain circumstances. Over the last decade new remedies have been offered to divorcing couples, such as ‘attachment’ or ‘sharing’, and pension funds are required to comply with these court orders. Further details are set out in Chapter 24.

Members and other beneficiaries When making decisions, you should take all the beneficiaries into account – not just current employees. Beneficiaries include the spouses and dependents of members, former members (deferred pensioners – which may include people who have left the company) and in some cases the company itself, since if there is a surplus, it might in some cases expect to have an interest in the return of some of the surplus. If there is a deficit, it would be prudent to pay lower transfer values to people who leave the scheme early. In any case, in most instances the company will have an interest in keeping contributions down – and returns on the investments high. It is the job of a trustee not to discriminate between any of the groups of members and other beneficiaries. This does not mean that you have to split any extra funds equally between them – you can decide in certain cases that one group, or in some cases even one individual, is more deserving of attention that others – but you must consider them all.

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Discretions Exercising discretions is one of the great joys – and bugbears – of being a trustee; some trustees hate it and try to obtain clearance from all sorts of other people before doing so. This is a mistake. One of the reasons you are a trustee is because some people think you are a reasonable kind of a person well able to make common sense judgments. You do not have to get the judgments right; by definition many such decisions will, with hindsight, be wrong. But provided on balance you get more decisions right than wrong, you will be loved, or at least appreciated, by your members. Neither can anyone criticise your decisions, provided they are made honestly, reasonably and when in possession of sufficient information – and the court and the Pensions Ombudsman will be very reluctant indeed to interfere with your decisions unless they are clearly crazy – in which case you will have no objection to being overruled. There are few recorded cases in which a court has changed a decision of pension fund trustees on the grounds it was improper, although occasionally they may send a matter back for the trustees to reconsider. The kinds of problems in which your discretion is needed are relatively few. • Choosing advisers – a problem which is discussed below (see Chapter 8). • Deciding who gets the ‘death-in-service’ benefit. If one of your members dies whilst working, it is likely that his life is insured for anything up to four times his salary. In order to avoid inheritance tax on that money, you have been given the discretion as to whom that money can go to. Normally the dead member will have left a letter saying who he wants it to go to – but sometimes other people come out of the woodwork, such as an undiscovered mistress, or hidden children – who feel they have a claim. What you do is up to you and your colleagues, although you must ensure that the beneficiary you choose is

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within the class of people defined in the rules. Take as much information as you can get, if necessary take some advice – but the buck stops with you, and you can either decide to follow the instructions of the dead member, or split it in some other way. The only guardian is your conscience. • Deciding how to split the investment portfolio between say a series of investment managers. • Deciding to give a pension to a dependant, and deciding whether someone is truly dependant. • Deciding whether someone is ill enough to enjoy an ill-health pension. Many of these decisions are hard, and will affect the financial security and well-being of someone you may know quite well. Some of the decisions you make may be uncomfortable and difficult ones. But that is what you are there for. The purpose of discretionary benefits Using discretions in paying benefits needs a brief understanding of why you have been given those discretions. You may already know that you are given a discretion as to whom to pay any death-in-service benefit to. Most schemes contain this benefit, which provides a substantial sum in cash if the member dies while working. To avoid it falling into the estate of the dead member (and thereby possibly subject to inheritance tax) the trustees can decide who to pay it to. This makes the payment tax free. But in practice the member will have filled in a ‘nomination letter’ telling you who he would like to money to go to. The big question is – do you follow up the letter? For example, if there is £100,000 to dispose of, and the letter tells you to pay the money to his girlfriend, but you know that there is a wife and six grieving children to support, what do you do? Follow the dead man’s wishes? Or follow your own conscience? Some trustees take the view that the reason for their having the discretion is only to avoid the tax; others take the view that if they have the discretion they should exercise it. There is no ‘proper’ answer.

Why pension trustees now need dedicated corporate finance advice Paul Thornton and Donald Fleming, Gazelle Trustees as stakeholders Pension scheme trustees and their professional advisers have in the past not tended to focus on the underlying financial strength of the sponsor company, its financial structure or its business strategy; indeed, in some cases attempts to do so have been rebuffed by the employer company as unwelcome. That approach is no longer tenable following the Pensions Act. Trustees are expected by The Pensions Regulator to have a “seat at the table” alongside the Company’s other major stakeholders and to be treated accordingly. What does this mean for the way trustees will have to act or the type of advice they will need to receive? The clarion call that “trustees must now act as bankers” (presumably only in deficit situations) should be treated with care, but it does indicate the need for trustees to engage with the company management, alert to credit and risk exposure. It also indicates the need for trustees to be alive to the subtleties of how the Company interacts with its other providers of capital. However, the governance and advisory practice to enable trustees to do this is still in a state of transition: while the regulatory trend is towards an increase in the proportion of member-nominated trustees, the trustee board is expected now to be “conversant” not only as previously with its Scheme, the law and investment and funding principles, but also with the financial and commercial prospects of the Company. This presents some trustee boards with challenges where those on the board who are most likely to have considerable experience of such matters (typically the finance director, treasurer, company secretary, HR and pensions officers) feel they must stand aside from potentially contentious discussions with the employer company over scheme funding because of conflicts of interest. Of course, prudent trusteeship, even in the new regulatory environment, does not require every trustee to be an expert in pensions and trusts law, fund management, accounting, actuarial analysis and corporate finance; but it does look for the trustee body to seek appropriate independent advice where necessary. Even where there is particular expertise within the board, trustees often feel more comfortable in using that expertise to challenge an external adviser than to rely on a fellow trustee to provide the appropriate comfort on a specific area. Nonetheless it is crucial that all the trustees have the confidence to ask the right questions of their advisers – and of the Company and its advisers.

Trustees are now faced with a wider set of decisions to make The new regulatory regime requires the trustees to address issues and ask questions that, in many cases, have not been raised before, such as: •

how strong is the Company’s ability and willingness to fund the pension Scheme and what can it afford?

•

what is the trustee board’s position on a proposed major corporate disposal?

•

how should the trustees react to a credit downgrading of the Company?

•

what should the trustees’ position be towards a bank refinancing?

•

how does the Company’s financial, business and operational strategy impact on the pension Scheme?

•

how do the trustees react to an offer for the company by a private equity consortium?

A proper assessment of the sponsor company’s ability and willingness to fund, of its capital structure and its interaction with the capital markets now requires a different, market-based, type of advice to complement the actuarial, legal and accounting advice already available to trustees. Indeed the Pensions Regulator itself has stressed the need for independent financial advice on such matters.

...and trustees need an additional advisory tool: independent corporate finance advice The Pensions Regulator has indicated that trustees need to assess both the ability and the willingness of the company to fund the pension Scheme. This requires the trustees to have looked into the ability of the company to generate cash as well as the other claims on its cash flow such as necessary capital investment or financing needs. Such judgement requires the trustees to look beyond narrow financial / accounting analysis and also to take into account the wider competitive environment and impact of the capital markets in which companies often operate and the competing claims on cash – for instance, judgements about the strength of the pressure on management to maintain dividends. The analysis also needs to incorporate management’s strategic plans for the future and the impact of other corporate events. A point on labels – the terms “corporate finance advice” and “financial advice” and even “investment banking advice” mean much the same in this context: this type of advice looks at the overall financing and business of an entity (whether that is a company or a fund) as it is and as its board wants it to be – then helps the board to achieve its objectives. Assessment of the financial strength and value of an entity is a key part of the corporate financier’s skills but so is the recognition that boards need to go further and look for solutions. So an adviser from this

background will help to set objectives, to project manage, to negotiate as required, and to give straightforward advice and recommendations (both orally and in writing). The Pensions Regulator expects trustee boards to bring banking and capital markets experience to bear on pension funding. What is interesting is how both the Regulator and the Pension Protection Fund are espousing market driven solutions and pragmatic negotiation. Trustees therefore now require financial advice which is grounded in experience of the wider capital markets, which is pragmatic and which provides clear recommendations. A detailed report on the sponsor Company’s operations and a purely quantitative assessment of the strength of the sponsor Company’s covenant is not helpful unless it: 1. provides clear advice on the key financial and operational risks to the pension Scheme and its ongoing financing, 2. identifies the trustees’ negotiating position, and 3. makes clear recommendations as to the appropriate course of action. The trustees need to assess and establish their tactical and negotiating position from time to time in a variety of situations such as proposed sales of businesses and scheme recovery plans. Direct negotiations between the trustees and the company management over funding can sometimes be made more difficult because of personalities or lack of knowledge or experience; the independent specialist can depersonalise matters and reinforce the trustees’ experience. Negotiation and planning can be extremely time-consuming and intensive and the project management of the process should not be underestimated.

Advice needs to be dynamic not static Trustees and their professional advisers are increasingly recognising that, even were there to be a single right answer or solution to scheme funding, it could soon be superseded. Few businesses remain unchanged over years, never mind decades; so it is a mistake to assume the profile of their obligations and the dynamic relationship between the Company, banks, shareholders, bond and pension creditors and other parties will not change. The new legal and accounting framework highlights the simple point that trustees need to address the Company’s and the Scheme’s position on a dynamic basis, reacting to and being prepared for changes in circumstances. This impacts the trustees’ relationships with all their professional advisers. So what represents a good model for pension schemes in receiving financial advice? Helpfully there are existing analogies: it is best practice both for the boards of quoted companies and (an even closer analogy)

quoted investment companies to take financial advice on a regular basis from investment banks and their relationship corporate brokers. Pension scheme trustees, who have fiduciary responsibility for assets which, in many cases, significantly exceed the Company’s quoted market value, need to operate on a level playing field with the Company and its various advisers – not just when there are delicate negotiations but also on a routine basis (such as the regular results announcements) when they need to be up to speed on company and market related issues which could affect the Scheme itself. The Pensions Regulator is seeking to improve the quality of pension scheme governance and administration and has stressed the importance of trustee boards taking appropriate independent advice, particularly in relation to the assessment of the sponsor covenant. So what does this mean in the real world? …a case study: Gazelle is retained as ongoing financial adviser to a large UK pension scheme in deficit whose asset-liability profile is significant in relation to the size of the sponsoring employer. Major changes are proposed by the Company to the business and its financing structure …how do we help in these contexts?

Ongoing financial adviser to the Scheme Our objective as ongoing financial adviser is to ensure the trustees are informed and prepared for events which may impact on the Scheme through ongoing monitoring of the Company’s performance and prospects. We regularly meet Company management and trustees and consider information provided to us under confidentiality agreements. On a regular basis: •

we produce periodic review papers on the Company, its business environment, strategy, financial position and interaction with the Scheme and other stakeholders (including shareholders and lenders);

•

we give briefings at trustee board meetings on events which impact on the Scheme, such as the Company’s latest results and market reactions to them;

•

we provide briefings on unscheduled events such as changes in operational or financial strategy or changes in the balance sheet structure.

This ongoing role also ensures that Gazelle is informed and aware of relevant issues such that it can advise and assist the trustees to respond in timely fashion when events occur which require the negotiation of agreed positions with the Company.

Corporate Finance advice in a transactional situation Following a strategic review, the Company board decided to dispose of certain significant but mature businesses in order to focus on activities with potentially greater growth prospects. As part of this repositioning, the Company wished to refinance its existing banking arrangements. The pension Scheme trustees needed within a very short timescale to assess the impact of these major events on the sponsor covenant and to establish their position as the major creditor alongside the lending banks towards allocation of disposal proceeds. Having done so, the trustees entered into intensive negotiations which culminated in an agreed clearance application to The Pensions Regulator. All of this required a complex interplay of security and repayment stream analysis within a market driven timetable. This was made more challenging because the trustees were located at some distance from each other and much had to be achieved through conference calls and meetings convened outside the regular schedule of trustee meetings. Gazelle worked closely with the trustees and their legal and actuarial advisers in order to assess the impact of the Company’s proposals on the Scheme and its members and to reach a constructive agreement with the Company on terms providing appropriate protection. Gazelle’s role for the trustees included: •

Information and communication: ensuring that the trustees and their other advisers received the information necessary for them to form judgements;

•

Review: of the financial impact of the Company’s proposals and the likely consequences for the strength of its covenant;

•

Assessment of the assumptions underlying the Company’s proposed disposals

•

Identification of key objectives and appropriate negotiating tactics: helping the trustees to establish and articulate formal positions on the proposals;

•

Negotiation on behalf of the trustees: within pre-agreed parameters, Gazelle led negotiations with the Company, its banks and their advisers;

•

Project management: ensuring that the trustees and their advisers maintained constructive discussions with the Company and its advisers and provided timely responses which enabled the Company to meet its own timetable deadlines;

•

Clearance: in conjunction with relevant legal advisers, in obtaining clearance from The Pensions Regulator for the proposed arrangements.

The new environment therefore presents challenges to trustees and advisers, but also opportunities to secure the future of company pension schemes in ways which accommodate the realistic needs of the different constituencies involved.

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Pensions without the rocket science Pension documentation and legislation often appears complex and indecipherable. As the largest dedicated Pensions Department in the region, we are committed to deciphering the gobbledegook so that you can make the right decisions We advise both national and international companies on all pension issues and work closely with Employment Corporate and Litigation lawyers to provide a seamless service on all aspects of pensions law. Pitmans also offers an independent trustee service through a wholly owned subsidiary, Pitmans Trustees Limited.

Understanding business Please contact: David Hosford Pitmans 47 Castle Street Reading RG1 7SR T: +44 (0) 118 958 0224 F: +44 (0) 118 957 0333 E: [email protected]

www.pitmans.com www.pitmanstrustees.com

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8 TAKING ADVICE

Initially, Hoffa had employed hoods much as employers had done. Bosses hired the Mob to break strikes. Hoffa used goons to beat strikebreakers and to bomb and burn the property of recalcitrant employers. The price he paid was high. Mobsters were allowed to take control of a number of union locals which were used to run protection rackets. The pickings became far richer when multi-billion dollar pension funds were established in the Fifties. The payments came from employers but the funds were controlled by the union. The Mob insisted that investments were made in mafia-controlled businesses. Yet analysis indicates that Teamster funds out-performed similar funds run on more orthodox lines by other unions. John Torode, The dirty workhorse dumped by the Mob, The Independent, 15 October 1991

Introduction As mentioned, trustees are not supposed to know everything themselves – or even very much despite the Pension Regulator’s knowledge requirements (see Appendix XIV). They are, however, supposed to take advice, although they are not required follow it (indeed they must not) if they are unhappy with it. But they must use their advisers to the full, especially their legal advisers, if they

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are to avoid suggestions that they acted improperly in coming to their various decisions. With the increasing tendency to litigation, following similar trends in the United States, trustees now need protection more than ever – and advice is one of the best protections. There is a wide range of advisers involved in pensions matters, not all of whom will be appropriate to your scheme, and some of whom will provide more than one element of advice. In principle, most schemes will need one or more of the following: • lawyers • actuaries • accountants • pensions consultants • pensions managers • investment managers • investment consultants. In practice many advisers are chosen not by you, but by the employer. There is nothing wrong with this – and in many cases the advisers will already be advising the company on other matters and will therefore be aware of the particular nature of the business. Whoever does the choosing, most advisers have to sign contracts making it clear that even if they work for the employer, their primary duty is to you. In most cases there is nothing wrong either with an adviser acting for both: most times any conflict of interest is manageable and indeed it might be sensible to have the same adviser. It can save time and costs. But of course there are times when the conflicts of interest become unmanageable; that is, the adviser (and you) finds it unsatisfactory that the same adviser advises both the employer and the trustees. Therefore as a trustee you will sometimes need to engage separate advisers for the scheme – either where no such adviser is in place, or where existing advisers find themselves unable to continue to act. Additionally, you will continually need to review your relationship with all the advisers.

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Lawyers Choosing a good pensions lawyer can put ten years on your lifespan. The relief is immense. How to choose one is not easy. A list of pensions lawyers is printed in the back of Pension funds and their advisers see Appendix VI, and on a good day the Association of Pensions Lawyers may let you have its membership list. All those do, however, is give you a list – not tell you who is good – or, more importantly, good for you, because lawyers are like cheeses. There are lots of good ones, but not everybody likes the taste of some or can afford the best of others.

TEN QUESTIONS TO ASK YOUR LAWYER 1

Does he specialise in pensions work, or is it a sideline?

2

How many pension schemes of your nature does he act for?

3

Can he cope with both drafting documents – and being involved in merger negotiations?

4

How does he charge, and how much?

5

If there is something to complain about, who is in charge?

6

What is his view on Plain English drafting?

7

How does he keep up to date with legal developments?

8

Does he respond to queries, or play a pro-active role in advising?

9

Who does he think he is acting for: the trustees or the employer?

10 To whom does he think surpluses belong and how should deficits be paid?

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The only answer is to meet a few, invite them to present to you, explain what they do and how they do it – and insist on meeting the person who is going to do the work, not just the senior partner. You may not need a high powered expensive partner for much of your work – on the other hand you need to know that there is an experienced partner available to handle the tricky problems if they arise.

Actuaries There are two kinds of actuary. Consulting actuaries should be on your side, looking at the problems from your point of view (or that of the employer). Insurance company actuaries are a very different breed entirely – and mostly have the interests of their employers (the insurance companies) at heart. Remember whose side the actuary is on and half the battle is won.

TEN QUESTIONS TO ASK YOUR ACTUARY 1

What is his view on normal actuarial assumptions?

2

Is he a consulting actuary or not?

3

How does he charge?

4

What experience does he have of your kind of fund?

5

What kind of report does he produce? Actuarial or English?

6

Will he advise you – or the employer?

7

Is he planning to run a surplus – or a deficit? And how are such actuarial anomalies to be dealt with as they arise?

8

How will he handle the data – himself or through a bureau?

9

Will he prepare the trustees’ report?

10 How will he deal with the accountants on FRS 17?

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Secondly, can your actuary speak English? Most nowadays are very good, and can speak to ordinary mortals in something approximating to the vernacular. (A lawyer who speaks English is an added bonus, but don’t expect too much.)

Pension fund managers Pension fund managers should be distinguished from investment managers. Pension fund managers look after the day-to-day administration of the fund. In the old days it was a job for old Jimmy who was too imbecilic to do anything else. Nowadays it is a highly skilled and technical job, needing knowledge of computer systems, law, administration, human resources, finance and some basic actuarial principles.

TEN QUESTIONS TO ASK YOUR PENSIONS MANAGER 1

Is he a Fellow or Associate of the Pensions Management Institute?

2

Is he computerising your administration – or buying in a package – or keeping it manual?

3

Will he arrange for the production of annual reports, benefit statements, accounts – and if he will not, who will?

4

Is he responsible for trustee training?

5

Is he authorised to manage investments?

6

Has he laid-off the insurance obligations – and with whom?

7

How many staff will he need?

8

Who does he feel his responsibility is to – the employer or the trustees?

9

How does he keep up to date?

10 What future developments is he anticipating with the fund?

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You should be aware of the special problems that pension scheme managers are faced with. Most scheme managers are employed by the employer, and may have a career with the employer. At the same time they have to comply with the trustees’ instructions. For most of the time this dual role poses no problem. But there are occasions when the pension scheme manager is placed in an impossible position, with a conflict of loyalty between his employer and his duty to the trustees. You need to be aware of, and sympathetic to, his difficulties, and be prepared to help him – perhaps by taking outside advice. Some are now qualified as Fellows or Associates of the Pensions Management Institute.

Investment managers Male investment managers are usually beautifully dressed, with shirts and ties from a secret source in the City not available to ordinary people. Some trustees judge between managers on the cut of their suit – which is not the most sensible criterion. Women investment managers are particularly adept at power dressing.

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TEN QUESTIONS TO ASK YOUR INVESTMENT MANAGER 1

How much do they manage?

2

How long have they been in business?

3

What is their top decile record over the last ten years?

4

Is the man on the beauty parade actually going to manage your money?

5

Can you see a sample of their quarterly reports – do you understand it?

6

Do they take soft commission?

7

What are their charges?

8

Do they use in-house unit trusts – and is there an additional charge?

9

What do they think will happen to the stock market over the next year – and why are they no more in cash?

10 What is their strategy?

You need to ensure: • that they are properly authorised by the Financial Services Authority and you can check that by looking on the FSA website; • that the customer agreement (ie the investment management agreement) that they propose is a fair one; • that they have some form of ‘fidelity-bond’ or insurance against fraud or mismanagement. Trustees will be aware that special, unrepeatable deals with spectacular returns have an awful history.

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You should enquire whether the manager is part of an investment monitoring service, so that you can judge how they are doing in comparison with other investment managers.

Pensions consultants Pensions consultants cover a wide variety of advisers from the specialist pensions consultants with thousands of employees, to the one-man band working from home. The key to a good consultant is not necessarily his size, but his expertise. Checking expertise is extremely difficult; sometimes the only way to judge is either to jump in and try him – or to ask around for experience of his track record from some other trustees. A major problem is that many of them work on a commission-based system, rather than a fee-based system – in which case you need to check whether the advice is prompted by commission. At the same time some of the largest advisers, which charge by fees rather than commission, can be let down by their administrative systems.

The accountant Accountants for pension schemes do not need to be specially skilled – pension fund accounts are some of the simplest to prepare. All they really need to record is money out and in, and whether the investments actually exist. The only problem for a trustee is whether the accountant has a conflict of interest with the employer. It is becoming increasingly conventional to appoint separate accountants for the pension fund.

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Conflicts of interest In many cases the same lawyer, actuary, or accountant can act for both you as trustee and the employer. This can save costs and shorten lines of communication. But there are cases where there are conflicts of interest – in which case your adviser should immediately suggest separate advisers on both sides. The advice need not thereafter be conflicting or contentious – but it will be independent, and perceived to be independent. The practice of using separate offices of the same adviser, or separate partners in the same firm, is not to be recommended.

Unique alternative to the Big Four Our award-winning National Pensions Group: Offers a highly partner-led service working with trustees throughout the year Employer’s covenant reviews and regulatory clearance Risk assessment and governance facilitation Internal control reviews Investment transition reviews A dedicated team for smaller schemes With 300 pension scheme clients including eight schemes with assets in excess of £1billion, we audit more schemes in the top 250 than any other firm outside the Big Four (based on publicly available information). For further information contact: Zahir Fazal, Head of Pensions Tel: 020 7842 7100 E: [email protected] www.horwathcw.com

Trustee Risk Management Jonathan Bull, Executive Director Trustee Risk Management Limited & The Occupational Pensions Defence Union Limited The current trend is for a greater emphasis to be placed on risk in relation to occupational pension funds including strategic, operational, financial and regulatory risks. These are all issues for which trustees have ultimate responsibility. The Pensions Act 2004 necessitates trustees reviewing their existing practices and implementing new procedures to ensure compliance. Wide-ranging proactive powers have also been given to the new Pensions Regulator. The Act imposes a duty upon trustees and directors of trustee companies to be conversant with their own scheme documents and to have ‘knowledge and understanding’ of funding and investment principles. In addition, trustees and trustee directors must also have knowledge and understanding of the law relating to pensions and trusts. Trustees have a duty to monitor the management and administration of their scheme to make sure those providing services to them carry out their responsibilities properly. Trustees should therefore ensure that objectives and procedures that are appropriate to their scheme are identified and implemented with the required internal controls in place. Managing risk also gives trustees the opportunity to embrace best practice and review external standards. Effective risk management procedures can also play a significant role in minimising liabilities which should be favourably taken into consideration by insurers. Potential candidates for trusteeship should not be deterred from fulfilling such a vital function if the above measures are adopted and they have the safety net of insurance. opdu and trm have undertaken a major initiative to promote the raising of trustee awareness on how to tackle risks to which pension schemes are exposed in a cost effective manner. This is being achieved by the distribution of a complimentary risk management model (on CD) for trustees. trm also holds interactive trustee workshops in conjunction with the Pensions Regulator and other leading pension practitioners to assist ‘knowledge and understanding’ in the new regulatory and legislative environment. The workshops provide an opportunity for trustees and pension managers to develop practical measures for compliance. www.opdu.com

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9 TRUSTEES AND EMPLOYERS Prostitutes who have been infected with the Aids virus should be given a pension by the government so they no longer need to work, a leading British doctor says. Such a scheme, already instituted in Vienna, could help to prevent the spread of Aids. The idea has been suggested by Dr Frank Hull, senior lecturer in general practice at Birmingham University, who said “Maybe the idea will stick in many a moral craw but it makes medical, and ultimately financial, sense.” The plan would decrease the spread of Aids by prostitutes and so reduce the numbers of men and women and contract the disease and eventually require expensive treatment. Aids patients will increasingly compete with other patients for expensive drugs and hospital treatment in the National Health Service. Dr Hull’s idea came from meeting a Viennese doctor.... “Prostitutes in Vienna have been inspected for at least 150 years,” Dr Kopp said. “But in June 1985 we started to test them for Aids. So far we have examined 150 women and found eight who are positive. We told the women about our findings and that we could not renew their licence because Aids cannot be cured. We gave them the possibility of a pension from the social welfare fund so that they would not be involved in illegal prostitution.” The women were all offered a pension of about 5,000 schillings (about £250) a month. Oliver Gillie, The Independent, 11 January 1988

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Introduction The employer usually feels that the pension fund is his baby. After all, he has established it, and in most cases he will have paid for it. At the same time, the employees and members (and their unions) have a different approach. It is they who have worked for it, foregone pay increases to ensure contributions are made to it, and have the greater expectations from it. Meanwhile the trustees are watched by both elements: the members are determined that it shall perform up to scratch to provide their benefits; and the employer is concerned that it performs well so as to reduce his contributions in the future.

The balance of power So it is not surprising that there are sometimes different interests involved in running the scheme. Accordingly, the deed sets down who shall be in charge of certain decisions. For example, the trustee may have the freedom to improve certain benefits, but subject to the approval of the employer since it is he who will have to pay for any such improvement. Since some decisions are made by the employer ‘with the consent of the trustees’ and some decisions are made by the trustees ‘with the consent of the employer’, the deed contains certain ‘balance of powers’. These balance of powers come into play especially where either the application of surpluses or the payment of deficits are concerned, and it is reasonable, for example, for the employer to reserve certain powers for his approval to contain costs. But a series of cases has decided that where an employer uses his power in this way he must do so, not necessarily in the best interests of the members, but at least in a fair and reasonable manner. Proving what is fair and reasonable is of course a very different matter. And changes in the law have also given increased power to trustees, especially in deciding how much the contributions should be from the employer.

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This poses a dilemma for trustees; in one way they need to ensure that the fund is satisfactorily funded to protect the members’ interests. On the other hand they do not want to pursue the employer for so much money that it would affect his ability to trade or even drive him into insolvency. Trying to maintain that balance is not easy but most advisers will be able to help; the main thing is to be aware of the dilemma. The modern Pensions Regulator understands the issues and will not treat trustees unfairly if they have thought about the problem, even though the decision, with hindsight, is found to have been the wrong one. The Pensions Regulator can also act (with reluctance) as a referee where the trustees and the employer cannot agree on how to deal with any deficiency, for example.

The legal relationship The usual arrangement is that the employer and employee make a pensions arrangement between them (a contract) and the trustees hold the funds as independent security. The trustees do not usually promise the members any benefits, for example, they undertake merely to look after the beneficiaries’ interests and their assets. There is also no contractual relationship between the trustees and the employer in relation to the management of the fund. This can be a problem, for example, where the employer sells part of the business, promises the purchaser a share of the fund in respect of the employees who are moving across – but does not attempt to obtain your consent first. If your actuary considers you would be paying too much to the purchaser’s scheme, you may not be able to pay over what the employer wishes – what can you do? A similar position arises where the employer fails to pay the contributions he should to the pension scheme. Are you supposed to sue him for the contributions? Or report him to the Pensions Regulator? In practice that may not be easy if you are to keep on good terms as an employee. In any event the trustee may himself be the employer. There is no single solution in any of these cases – just find the best outside advice. There are complex rules for employers to comply

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with when companies are bought and sold, and the adviser’s job is to guide you through the complexity.

Training There is as mentioned in Chapter 1 a legal obligation (Pensions Act 2004 s247) for a trustee to acquire knowledge and understanding of certain investment and trust principles. You are entitled to time off for training if you wish. Some of the expectations suggested by the Pensions Regulator and others are probably excessive, and a day’s training is probably enough, at least in the early days – but there is nothing wrong in wishing to learn ever more. You are entitled to ‘reasonable’ time off work both to perform your duty and also for training. ‘Reasonable’ is something of a ‘weasel’ word, but you need to take account of how much training is needed, how much time is taken off for training generally, the circumstances of the employer’s business and how crucial your day-to-day presence is.

Disputes with the employer and employment protection Recent changes to the law have made it more difficult for trustees to act non-confrontationally with employers, although this is always the preferred style. If there is a concern that discussions with an employer may lead to a threat to your job, then maybe being a trustee is not for you. You will always need to have an independent mind while dealing with the employer – but that does not mean that discussions and negotiations about, for example, the reduction of deficits should be argumentative or frictional. Few employers will give you a hard time because you disagree with them – if only because an employment tribunal would take a dim and expensive view of his behaviour.

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Payment There is occasional debate about whether trustees should be paid, and if so how much. Of course, professional trustees will need paying (£20,000pa seems to be the going rate, as their liability expands) but few funds pay trustees who spend most of their working life in the company’s employment. Most of their time is company time, and most trustees are happy to act in a helpful manner without pay – provided they are protected as far as possible from liability.

HSBC Actuaries and Consultants Limited HSBC Actuaries and Consultants Limited, a wholly owned subsidiary of the HSBC Group, is a leading UK consultancy providing independent advice for pensions and business. Our core business is the provision of actuarial, consultancy and administration services. This involves advising trustees and providing expert advice to employers on all aspects of employee benefit matters as well as financial advice to individuals. We appreciate the importance of providing advice that recognises the complex issues that can sometimes occur between pension scheme trustees and employers. The services we offer are available as a whole or, separately, depending on your needs. Contact Simon Hazeldine on 01727 775000 or email [email protected] HSBC Actuaries and Consultants Limited, 36 Ridgmont Road, St Albans, Hertfordshire AL1 3AB For more information, please visit our web site www.hacl.hsbc.com We are an equal opportunities employer and seek to employ a workforce which reflects the diverse community at large.

Issued by HSBC Actuaries and Consultants Ltd

trm

opdu Protecting Pension Funds opdu protects pension funds by providing unique insurance cover to trustees, administrators and sponsoring employers. Pension funds holding total combined assets in excess of £115 billion have joined opdu. The membership ranges from large funds to small. opdu’s members can readily purchase limits of cover between £1 million and £30 million. opdu’s cover has been developed for the special insurance needs of pension funds, but can be varied to meet the specific requirements of individual schemes. opdu affords a valuable external resource for reimbursing losses suffered by pension funds. The asset protection thereby given is ultimately of benefit to pension fund members.

Key Benefits opdu provides a unique combination of risk management and comprehensive insurance

Trustee “knowledge and understanding” A topical one-day seminar and workshop for trustees & administrators adding value to knowledge and understanding.

The Challenge The Pensions Act 2004 imposes a duty upon trustees and directors of trustee companies to be conversant with their own scheme documents and to have “knowledge and understanding” of funding and investment principles. Codes of Practice are b eing issue d to give practical guidance on the levels of knowle dge, training, experience and qualifications that trustees will be required to attain.

The Solution

Personal • Problem solving • representation Working with your on • own • Guidance advisers minimising liabilities

trustee risk management is holding a series of combine d seminars and interactive workshops in conjunction with The Pensions Regulator and other leading pension practitioners to assist “knowledge and understanding” in the new regulatory/legislative environment. The programme: the new regulatory approach; the legal implications; understanding the strength of the employer’s covenant; ensuring the Investment Committee is properly resourced; a risk-based approach focusing on the key risks requiring internal controls; a discussion session will follow. The seminar and workshop provide an opportunity for truste es and pension managers to develop practical measures for compliance. Comprehensive handouts, including trm’s risk management model for trustees, will be available.

Litigation Costs Extension is also available to give increased protection to pension fund assets. The cover is able to pay the legal costs and expenses incurred by trustees or ordered to be paid out of the pension fund in seeking a declaration or directions from the court.

“An excellent programme – very informative and a good mix of speakers and subjects. I would certainly commend this course to all trustees.”

To

• Trustees trustees • Corporate Directors of • corporate trustees Sponsoring • employers pension fund • The Internal • administrators advisers • Internal Internal dispute • managers

For

and omissions • Errors TPR civil • penalties fines and Ombudsman • complaints costs • Defence indemnities • Employer losses • Exonerated Litigation costs • Retirement cover • 12 years

Advisory Service

For further details please contact Lisa Howard Te l 02 0 72 0 4 2 5 3 0 Fa x 02 0 72 0 4 2 477 Email [email protected]

www.opdu.com TH E OCCU PATIONAL PENSIONS DEFENCE U N ION LI M ITED / TRUSTEE RISK MANAGEM ENT LI M ITED

International House

26 Cre e church Lane

London E C3A 5BA

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10 PROTECTING YOURSELF Old-age pensioner Stanley Dobek, 74, killed a cyclist with his car on Christmas Eve, switched off his lights and drove six miles home with the body sticking through the windscreen, state police said yesterday. On the way back, he drove on the wrong side of the road in Lantana Florida, hit a truck and then careered into another vehicle. It was being driven by an off-duty sheriff’s deputy who chased him, joined by other motorists, shocked at the grim sight. They watched as the retired company executive pulled the corpse the rest of the way through the windscreen and tried to stuff it completely under the car. “I know nothing about the accident,” he said when interviewed. “I’ve been to church.” Dobek, of Lake Worth, will be charged with either the manslaughter of 42-year-old John Davis, which carries a 15-year maximum jail sentence; or vehicular homicide which carries a possible five years’ imprisonment. The problem of ‘white tops,’ old folks with failing reflexes, impaired faculties or the effects of prescription drugs, let loose on the highways, is causing concern in Florida. Several fatal accidents have been caused by stooped old ladies behind the wheels of big cars. It is not helped by the fact that, in what is supposed to be paradise for retirees, there is little public transport. Cyclist’s body driven 6 miles, Daily Telegraph, 31 December 1988

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Introduction In theory, being a trustee involves a great deal of responsibility – and potential liability. But in practice, you will normally be well protected against liability – and you should check that some of the protective devices, if not all, cover you. No one wants to be sued for a large sum of money because they tried to be helpful. You will, of course, already have: • taken and used professional advice • followed the documents • ensured protection is built into the documents • been reasonable • ensured that employers and trustees have no conflict of interest – and, if they have, obtained independent advice • kept your eye on the main principles, and avoided being distracted by technical details. With all this, it is unlikely you will have done anything too terrible (ie committed a ‘breach of trust’) unless you have really been looking for trouble.

PROTECTION CHECKLIST • Professional advice • Delegate functions • Trustee Act 1925 • Indemnity clause • Exoneration clause • Insurance • Corporate trustees

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LOOKING FOR TROUBLE – THE SCARGILL CASE Arthur Scargill the miners’ leader, and one of the trustees of the Mineworkers’ pension fund, had attempted to frustrate the investment plan of the Mineworkers’ Pension Fund. He objected to the fund planning to invest in property in the United States (rather than in the UK) and in the oil industry (rather than in coal). The court considered that his views reflected those of his union rather than those he could be expected to hold as a trustee having the best financial interests of the members at heart. Although he defended the case himself, rather than through lawyers, the expenses were considerable. The deed provided that such legal expenses would be reimbursed to trustees unless they resulted from ‘wilful default’ by the trustee. On an application for expenses to be paid by the fund, the court held that Mr Scargill had behaved with wilful default, and was refused his costs.

The deed In most cases the deed will contain two vital clauses: • an indemnity clause, which says that if you are sued, the employer will pick up the tab. Such a clause is only useful provided the employer stays in business; and • an exoneration clause which exempts you from liability unless you have actually stolen the money. Most modern deeds will contain these clauses, but some of the older documents may be deficient. The Pensions Ombudsman somehow

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thinks that these clauses is unfair (especially for professional trustees) though rather shamelessly claiming equivalent immunity for his own actions.

Insurance Many schemes now take out insurance against trustees’ liability. It can be expensive, but insurance at least against legal costs, and to cover you for the time when you have left your trusteeship and are no longer protected by the pension fund itself, is a very sensible thing to think about. Modern pension trustee insurance policies are much better than before, and organisations such as the Occupational Pensions Defence Union offer specialist cover over and above insurance. For example, they try to help you avoid getting into trouble in the first place. But to take insurance against losing all the fund would be difficult to find, expensive to pay for, and probably not worth while anyway. Unless you are very rich, in most cases you are not worth suing, but anyone in the mood can issue legal proceedings and you could lose your house if you have to pay heavy legal costs, and the fund for one reason or another does not pay for those costs.

The court If a matter ever came to court the chances are it would excuse the trustees for errors which are reasonable. (Professional trustees, eg solicitors and actuaries, have higher standards of responsibility). In practice, the main problem for trustees is paying the legal costs. In most deeds, trustees are indemnified by the trust for legal costs. If not, trustees can ask the court, in a preliminary application, to allow their costs to be paid by the fund. It is highly unusual for the court to refuse; the only reported case is the Scargill case (see above).

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Taking advice The point of having advisers – investment managers, actuaries, pension fund managers, insurance companies, pensions consultants, accountants and administrators – is: • first, because you cannot be expected to be an expert on everything – or even anything, and equally importantly, • secondly, to have someone to blame if things go wrong. Trust law expects pension fund trustees to have advisers, and judges will be a little sniffy if you do not. Passing the buck is one thing that pension fund trustees should specialise in. The problem is that you should not blindly take the word of an adviser. If you genuinely feel it is wrong or inappropriate, either decline it (having thought carefully about it first) or find fresh advice. Blindly following advice will not excuse you. Most advisers (certainly the actuaries, the accountants, the lawyers and the investment managers and advisers) nowadays need by law to have proper contracts with you (letters of appointment). These will usually specialise in excluding their liability for anything short of nuclear war, but in most cases you will not have the bargaining power to insist on extensive liability clauses. Nonetheless you, or at least your lawyers, should have a look at them just to see how liable they are. One well-known investment manager even now puts in the investment management contract that it is not liable for its contractual obligations, which is probably taking it a bit far.

Criminal liability Of course, if you were a criminal in the real sense you would not be reading this. But recent developments in the law mean that you may be committing criminal offences unwittingly, and in many of these cases, ignorance is no excuse. With the increasing belligerence of the

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Serious Fraud Office it might be very useful and sensible if your pension fund provided some form of criminal legal aid to help you defend yourself without you having to sell your house, against something you never even knew about. And you need to bear in mind that any criminal fines (and even civil fines) that you may have to pay will have to come out of your own pocket – the fund cannot pay them (although the employer usually can), and you cannot even insure against the payment of criminal fines.

Corporate trustees One of the objects of pension fund design is to mitigate (reduce) the exposure of the trustees to legal liabilities. One way of doing this is to have a company as a trustee, rather than individual people. This way any aggrieved member would have to sue the company, not a person. If he succeeded, any victory would by Pyrrhic, since the assets of the company would only be say £2. Some legal opinion says that a trust company does not protect the directors of the company (ie you), certainly against complaints of fraud. But any protection, however modest, is useful, and while litigation is on the increase it is a course of action you should seriously think of taking. There are other advantages to having a company as trustee as well: • it is easier to resign; • there is no need to have repeated trust deeds every time a trustee changes. The drawbacks, however, include: • you have to file accounts every year; • you acquire the responsibilities of directors under the Companies Acts; and • you must comply with the other statutory requirements for companies.

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Appointing an independent professional trustee Having a professional trustee on board can be a comfort. They do need paying, which is an added expense, and some of them can cause more trouble than they are worth, being more concerned about protecting themselves from liability than the efficient running of the fund. But larger funds should certainly consider appointing them. You could also consider whether the skills you are light on would benefit from having a specialist trustee who is a lawyer, actuary or investment adviser.

The other trustees You have to keep an eye on the other trustees – they can land you in it, and even if you had had nothing to do with what they did, the buck will stop with you. If you do not trust your other trustees, or have some other reason for being uncomfortable with their decisionmaking, either they or you should go. It is not a matter in which to be a wimp.

Insurance Protection Jonathan Bull, Executive Director, The Occupational Pensions Defence Union The Pensions Act 2004 is intended to simplify the operation of occupational pension schemes while at the same time increasing the protection for members. However, the Act, which substantively came into force in April 2005, has significantly increased the potential liabilities of pension trustees and company directors and officers. In the past, most trustees relied upon exoneration and indemnity clauses to shield them from personal liability and some viewed insurance with a degree of scepticism. However, this position has dramatically reversed and many trustees and sponsoring employers now appreciate the financial comfort that an appropriately structured insurance policy can provide. Insurance should be considered by all schemes and will play an increasingly important role in protecting pension funds as evidenced by the recent experience of claims. Furthermore, trustees’ exposure does not cease when they retire and their post retirement situation may make them particularly vulnerable. Accordingly, it is important to check that the position of retired trustees is properly protected. The solution is for retired trustees to have independent cover in the event that the scheme ceases to be insured. They can then rest assured that they have cover personal to them, irrespective of what the employer or trustees have done (or not done) about insurance since they retired. The period of cover for retired trustees should be checked – opdu provides 12 year cover at no additional cost. Accordingly, the purchase of a properly drafted and comprehensive insurance policy can be a cost-effective means of protecting the assets of the pension scheme, the sponsoring employer, individual trustees and internal administrators from losses resulting from claims, be they well-founded or not. opdu provides a unique combination of risk management and comprehensive insurance protection for its members with advice and representation at personal and corporate level not only for trustees but for the sponsoring employer and fund. www.opdu.com

Barclays Global Investors Established over 30 years ago, Barclays Global Investors (BGI) is today the world’s largest fund manager.1 (1/06) BGI, a subsidiary of Barclays PLC, has a significant international presence, with 11 offices worldwide and a 2,600 strong workforce. We currently manage £877 billion (€1,269 billion) in assets for 2,855 clients around the world. Recognising the differing financial needs and goals of investors, BGI provides unparalleled choice when it comes to investments. We offer funds focusing on active, index and asset allocation strategies, as well as services including liability driven investment, currency strategies, cash management, securities lending, hedging strategies, transitions and commodities trading. BGI also provides a comprehensive range of exchange traded funds (ETFs) and is the global leader in the ETF business by assets under management – via the iShares range.2 (9/05)We are also one of the world’s largest securities lenders,3 (9/05) with loans creating opportunities to enhance our clients’ returns. Innovation in investment management has been the focus at BGI since its inception and a primary driver of performance. We pioneered the first index strategy in the 1970s, and today it is a successful and widely used modern investment strategy. Applying this innovative focus to our investment process has allowed us to maintain a market leading position. Over thirty years on, we continue to innovate and focus sharply on the three elements underlying investment: return, risk and cost. This is our Total Performance Management proposition for clients. At its core are thoroughly tested and rigorous investment processes, driven by indepth analysis and research. These are then employed by an experienced team of investment professionals to deliver risk-controlled, cost-effective investment returns. This consistent philosophy forms the basis of all our investment activities worldwide. BGI was one of the first asset managers to identify the increasing need for institutional investors to achieve a transparent link between their assets and liabilities. Since the first cash-flow matching portfolio in 1991, we have become a market leader in liability driven investing (LDI). BGI’s LDI Team was created in 2004 and has grown rapidly throughout 2005 and 2006. This reflects our anticipation of a change in the investment landscape and in response to an increasing number of queries and mandates from clients. One of the primary objectives of the Team and a key innovation is to provide holistic investment solutions across our entire product range to ensure clients fully benefit from BGI’s broad-based expertise. Our approach is not a simple matching strategy, but based upon more efficient use of a pension fund’s risk budget to achieve its target return. BGI has developed a highly disciplined and rigorous investment process that is applied to LDI portfolios. It is founded on the philosophy that

risk and return are measured against the liabilities rather than in absolute terms. Quantitative techniques are at the heart of portfolio design. Continuous innovation in LDI research and products will help our clients achieve their aims, while the quality of implementation is as important as the quality of the investment solutions. As well as our capabilities in swap implementation on a segregated basis, we have launched a comprehensive series of pooled funds that form the building blocks of liability driven strategies. The individual funds can be combined to address the interest rate and inflation risks of most UK pension funds and performance is measured relative to individual pension fund’s liabilities. These ‘matching’ funds can be combined with our outperformance products to create a true ‘LDI Plus’ solution, reducing risk whilst maintaining target returns. Trustee and client education has also been integral to this innovation. We have held a number of educational seminars around the UK, contributed to NAPF guides related to LDI and swaps, as well as published a range of educational materials that help promote a deeper understanding of LDI and its advantages. Footnotes: 1

Global Investor

2

Morgan Stanley Research

3

ISF Magazine

You could

DO NOTHING. Or you could talk to Barclays Global Investors about outperforming your liabilities – and begin the journey back to a fully-funded position.

If you want to return to a fully-funded position, you need a strategy – and you need to act upon it. Liability Driven Solutions could be your route map. By aligning your assets to your liabilities and taking risk only where it is rewarded, you can progress towards that fully-funded position. Our range of pooled funds (including absolute return, equity, fixed income and commodity strategies) removes the barriers and makes it easier for almost any pension fund to benefit from Liability Driven Solutions. So, let’s get busy. For more information: Jo Roberts Tel: +44 (0)207 668 8421 / E-mail: [email protected]

Liability Driven Solutions from BARCLAYS GLOBAL INVESTORS

visit www.barclaysglobal.com/liability This advertisement is intended for and directed at Institutional Investors in the UK only. No other persons should rely upon the information contained within it. This advertisement is issued by Barclays Global Investors Limited (BGI), authorised and regulated by the Financial Services Authority (FSA). The BGI Liability Solutions Funds (Dublin) are authorised by the Financial Regulator and can only be held by Qualifying Investors as defined in the fund Prospectus. Any investment is made subject to the terms of the fund Prospectus and relevant Supplement, which are available from the Investment Manager, Barclays Global Investors Limited, Murray House, 1 Royal Mint Court, London EC3N 4HH or The Manager, Barclays Global Investors Ireland Limited, New Century House, Mayor Lower Street, Dublin 1, Ireland. BGI does not guarantee the performance of its funds. Any investment in the BGI Liability Solutions Funds Life funds is subject to the terms of the Life Policy. The Insurer is Barclays Global Investors Pensions Management Limited. Investors may be required to agree to the Manager’s Terms of Business. All rights reserved © 2006 Barclays Global Investors Limited.

a

Trustee training. The bar has been raised – are you prepared?

Trustee competence has never been the subject of so much attention. In April 2006 it became a statutory requirement for trustees to obtain the knowledge and understanding needed to carry out their role and to be conversant with their schemes. Aon Consulting’s programme of trustee courses is designed to address this need, whether you are a new or an experienced trustee. Each course has been designed specifically to cover the scope of The Pensions Regulator’s Code of Practice and focus on the reality of day-to-day trusteeship. For further information on our trustee training and on Aon Consulting’s trustee services, contact us on 0800 279 5588 or email [email protected].

www.aon.co.uk Aon Consulting Limited is authorised and regulated by the Financial Services Authority

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PART II TRUSTEESHIP IN PRACTICE What few of the books tell you, at least the conventional trustee training books, is what to do when faced with some of the day-today problems in running a pension fund, or the questions that are asked at a trustees’ meeting. This next section is intended to do just that. If you find that your problem is not discussed – write to us, and we’ll try to make sure it comes out in the next edition. It covers such areas as: • what to do when the employer calls for a return of surplus or is unable to pay off any deficit; • what to do if he goes bust; • how to exercise discretions; • the problems of take-overs and amalgamations. This section does not pretend to have all the answers; every problem is personal to you and your fund. But it does try to mention some of the common difficulties – and suggests one or two ideas on how to approach their solution.

Independent Trustee Services Limited Chris Martin Independent Trustee Services Limited (ITS) has been providing innovative and tailored services to Trustee boards since 1992. ITS is trustee to a wide range of pension schemes both in wind up and ongoing situations. We work in close partnership with employers and scheme advisors to meet both business and pension scheme objectives and provide tailored, innovative solutions to meet the unique requirements of each client. We are keen advocates of the valuable role of lay trustees and provide coaching and mentoring support to trustee boards. We provide guidance and assistance in areas where one or more of the trustees has a conflict that could impact on the pension scheme and where support is needed when negotiating with employers. Trusteeship is our sole business and we are on The Pension Regulator’s panel of trustees. We can act as sole or joint trustee or chairman of trustees and accept appointments for special situation projects, as well as ongoing trusteeship appointments. ITS is a member of The Association of Corporate Trustees (TACT), the NAPF Trustee Group and the PMI Trustee Group. ITS is part of the Jardine Lloyd Thompson Group of companies

Key contacts Carol Perry Email: [email protected] Tel: 0207 895 7720 Terry Monk Email: [email protected] Tel: 0207 895 7873 Web: www.itslimited.org.uk

Keeping a balanced view

The challenges facing trustees in the light of the new regulatory regime, economic backdrop and changing dynamic between employer and trustee mean that there has never been a greater need for professional trustee representation. Independent Trustee Services Limited have provided high quality innovative and tailored professional trustee services to occupational pension schemes since 1992. Our wide range of services include: • Ongoing appointments • Forensic Services, including independent investigation and advice, particularly relating to debt and contribution negotiations • Statutory Trustee appointments • Professional advice on current issues and trends including; conflict, governance,TKU and employer covenant reviews.

A member of the Jardine Lloyd Thompson Group. Registered Office: 6 Crutched Friars, London EC3N 2PH. Registered in England No 02567540. VAT No. 244 2321 96

For more information please contact: Carol Perry Tel: 0207 895 7720 Email: [email protected] Terry Monk Tel: 0207 895 7873 Email: [email protected] Web:

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11 FUNDING SURPLUSES AND DEFICITS The Times of Tuesday gives some very interesting figures as to the finances of the United States. The mighty work of ‘getting rid of the surplus’ to which the Republican Party has devoted itself for the last three years has been accomplished, and unless President Harrison can manage to effect economies under certain heads, there will actually be a deficit next year. The heroic scale on which the money has been ‘chucked away’ may be gathered from the fact that the charge for pensions during the year ending June 30th was close on £25,000,000 – an increase since the previous year of some three millions sterling – and more than a third of the total annual disbursements of the nation.

The Spectator, 18 July 1891

Introduction Until very recently trustees could take a relaxed view on the funding of the pension scheme. In defined contribution (moneypurchase) schemes, it is a non-issue. Each side puts in an agreed amount, it is invested the best the trustees know how, and what is available at retirement is used to buy a pension. In defined benefit (salary-related) schemes, until 1997 there was no need to have any money in a fund at all. For 70 years, with the odd

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failure, most pension schemes worked pretty well without any law requiring them to have a minimum amount of assets. Following a scandal called the Maxwell scandal in 1991, all that changed. Partly because of Maxwell, partly because of other perceived pension scheme failures (in fact mostly caused by badly drafted regulations), and partly due to changes in European Union law, schemes nowadays have to have a certain minimum amount of assets, and trustees are partly responsible for ensuring that the assets are available. This is not always easy to achieve; assets rise and fall in value, tax rules change, actuarial valuation techniques change and turn what might have been enough money into too little money.

Schedule of contributions Today, trustees of defined benefit schemes must agree a schedule of contributions with the employer, initially prepared by the actuary, to try and ensure as much as possible – without bankrupting the company – that there is enough money in ordinary circumstances (ie that the company continues to back the scheme) to pay the expected benefits. Every year in simple terms (and every three years in more detail) trustees must review the rate of contributions in light of the way the investments have performed and negotiate with the employer what the new contributions might be. As time goes by, it will be seen that the level is too high or too low; no-one can predict with certainty how markets will perform, what interest rates will be or how mortality will affect your own pensioners. The actuary will make some educated guesses – but that is what they are. Accordingly, every so often it is seen that the assumptions were wrong. The errors can go either way. In the 1980s, for example, the major concern was that pension funds had too much money in them

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(surpluses). Nowadays, we seem more concerned with deficits (nothing new: they were a deep concern in the 1970s). The law makes it clear where deficits belong: they are a liability of the employer. How he discharges it is a matter for the law and the outcome of discussions between him and the trustees. The law is less clear about who owns surpluses – whether they belong to the employer, the employees or even the Crown. And despite press reports, there are still pension schemes with surpluses. The debate reflects a critical misunderstanding about the nature of the assets in a pension scheme: • The employer argues that in a ‘balance-of-cost’ scheme, ie a scheme where the employer promises to pay whatever is necessary after the employees has paid a fixed contribution, the surplus should be his. After all, he has to put money in to meet any deficit, and the reason the surplus has arisen is because of over-payment by him in the past. • The employees argue (supported by their unions) that the money should be theirs; after all it has resulted from the growth in value of ‘their’ money, on assets held in trust for their benefit. • HMRC argues that some of it at least should be theirs, since they gave tax relief on it in the past. Of course the assets of a pension scheme are not really ‘owned’ by anyone; they are really there as a form of limited protection against the possible failure of an employer to meet its pension expectation (if it goes bust for example).

The trustees’ role on surpluses and deficits The trustees should not have a view. First, much depends on what the deed says – some deeds absolutely prevent a repayment of money to the employer, and you may need to apply to the court or to the Pensions Regulator to have the restriction lifted. Secondly, the law

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is a little vague on some details as to how the money should be split if you receive a request for repayment from the employer. In practice, a useful rule of thumb in the case of surpluses is to give say 35% to the taxman, 30% to the employer and 30% to the employee (and 5% to the lawyers, which seems fair) or some similar split. A rather formal dance has to be performed to get to this position, and the trustees and the employer should have separate legal and actuarial representation. Both of you need to negotiate hard on a deal – and explore whether there are other options, or a combination of options. For example, you might be able to negotiate a mixture of a partial return of surplus, a contribution holiday, an increase in some benefits, or some other alternatives. Whatever you agree, receiving independent advice is crucial in all but relatively minor cases. The fact that HMRC and the Pensions Regulator has to agree to any deal, and may in fact do so, does not mean that it is a reasonable one for you as a trustee – it just means that it is reasonable for HMRC, which is a very different thing. Where deficits arise, ie there is not enough money in the fund to pay the benefits, the trustees will take a view on how long it is sensible to allow the employer to take to pay it off (one year, five years, 15 years) depending on his own state of health. The paradox is of course that the sicker he is, the more it is important for the trustees to claim the fund early – and the less likely he is able to pay it. The existence of the Pension Protection Fund should make it easier these days to take a pragmatic view. The PPF helps support the payment of pensions if the fund eventually proves insufficient and the employer cannot make up any difference. It does not guarantee all pensions at all times and there are caps on benefits, but it is a useful animal to have around.

The special case of insolvency Where your employer has gone bust, different rules may apply; in some cases if the company is wound up before the scheme is, any

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surplus there might be must go to the Crown, because it is presumed there is no owner at all. This would be a great waste of the contributions so painfully built up by employer and employee over the years, and would not only infuriate creditors but also your members. In other cases, the liquidator may put in a claim either for the surplus, or even for all the contributions paid over the previous few years, arguing they were paid when the company was insolvent. The question of what to do when the company goes bust is dealt with elsewhere (chapter 19). Dealing with deficits

WHAT TO CHECK ON AN APPLICATION FOR RETURN OF SURPLUS BY AN EMPLOYER • Have you got your own independent actuary? • Have you got an independent lawyer? • What does the deed say should happen? • Have you considered contribution holidays? Benefit improvements? Payments of tax? • What do the members want or need? • Are any benefit improvements fair across the board? • Do you need an independent trustee? • What can the employer do if you refuse to give him the money? • Can you do a deal – ie improve benefits in exchange for agreeing to a return of surplus? • What happens if the employer goes bust? • Will the Regulator agree to the deal? • Who pays for the separate advice?

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Walton J But what is called, in this connection, a surplus, having no existence in reality, represents, in a case of the present nature, what may be termed temporary surplus funding by the employing company. (Re Imperial Food Ltd’s Pension Scheme [1986] 2 All ER 812) Warner J One cannot, in my opinion, in construing a provision in the rules of a ‘balance of cost’ pension scheme relating to a surplus, start from an assumption that any surplus belongs morally to the employer. (Mettoy Pension Trustees Ltd v Evans [1990] Pensions Law Reports para 177) Scott J Accordingly, in my judgment, if any part of the surplus has derived from employees’ contributions or from the funds transferred from the pension schemes of other companies, that part of the surplus devolves as bona vacantia (Davis v Richards & Wallington Industries [1990] Pensions Law Reports para 150) Millet J I think it would be a pity to waste these surpluses by not ensuring that some part of them are used to pay the lawyers (Re Courage Group’s Pension Scheme [1987] 1 WLR 495)

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The case where a company has gone bust and is unable to meet the deficiency in the fund poses complex issues; the trustees have a claim against the administrators for any deficiency, but in most cases this will not produce enough to make up the losses. In such cases the Pension Protection Fund will either take over the fund or in some cases let you get on with winding it up yourself.

Pension Protection Fund The Pension Protection Fund is based on a US system, called the Pension Benefit Guaranty Corporation which has been around for about 30 years. It is funded by a tax (levy) on all defined benefit schemes of around £25 a head each year, and where a particular scheme is found to have insufficient reserves it has the right to take it over, use whatever money there is together with the money it levies on all other schemes to make a certain level of pensions to the affected members.

Trustees and contributions Trustees are theoretically (and actually) most vulnerable if they do not collect employers’ and employees’ contributions on time. At one time if they were a day or two late, the Pensions Regulator would fine trustees; in the present framework of sensible regulation, trustees only need to report late payment of contributions if they are 90 days late (payments normally have to be received 19 days after the end of the month in which they were deducted). Members must also be told if the contributions are 60 days late. Even so you need to make sure that your administrators are on the ball. Late payments of contributions have a regulatory importance beyond all common sense, but we live in sensitive times.

Liability-driven investment Sarah Aitken, Head of Institutional Business, Insight Investment The past ten years has seen one of the worst equity bear markets in history, combined with a steady decline in bond yields and an increase in life expectancy. As a result, the vast majority of UK pension schemes moved from nurturing sizeable surpluses to contending with enormous deficits in the space of just a few years. This rapid reversal of fortune has served as a harsh reminder of the importance of understanding and managing investment risk. While equity markets have rebounded significantly in recent years, we have not seen such a corresponding improvement in funding deficits, as bond yields have continued to decline, thereby increasing the present value of pension liabilities, while life expectancy estimates have moved ever higher. This highlights the fact that traditional assets, such as equities, have little natural correlation with liabilities. Changes to pension fund accounting regulations have placed liabilities under far greater scrutiny than in the past. With most UK schemes still in deficit, trustees are now obliged to ensure that all investments are contributing towards deficit reduction and meaningfully improved funding positions in the future. This has fuelled a growing interest among schemes in liability-driven investment (LDI).

What is LDI? LDI is an approach to pension fund management that places liabilities at the heart of investment strategy. By providing an effective framework for managing risk, it aims to deliver a significant improvement in a scheme’s risk/return characteristics compared to traditional strategies. LDI is based on the principle that the ultimate benchmark for any final salary pension scheme should be its projected cashflows (future liabilities). These cashflows, considered in the context of a scheme’s funding status, maturity and the financial strength of the sponsor, will be important factors in driving a scheme’s investment target return and tolerance for risk (relative to its liabilities). There are essentially two key components to an LDI strategy: one that seeks to match liabilities and one that aims to generate growth. The core portfolio is designed to replicate the profile of a scheme’s liabilities and, specifically, their sensitivity to two risk factors: changes in interest rates and inflation. This component may be built from a combination of fixed income and index-linked bonds, together with interest rate and inflation swaps. While not all strategies will use swaps, they enable

much more effective liability-matching and can be used on a nonintrusive basis, via a swap overlay, leaving underlying assets unchanged. The growth-seeking component, meanwhile, may invest across a diversified range of asset classes, markets and strategies in order to generate consistent long-term investment returns to help reduce any funding deficit. This component can also be adjusted to mirror a scheme’s interest rate and inflation sensitivity through the use of a swap overlay. The growth-seeking component is relevant for most schemes, not only because they are rarely fully funded but also as a means of protecting against changing variables. Since pension liabilities are effectively actuarial estimates based on a number of assumptions, it is prudent to aim to be overfunded in order to avoid future shortfalls as a result of changing projections, such as mortality rates.

The risk/reward trade-off LDI does not claim to remove all investment risk, but rather to minimise unrewarded and unintended risk. A traditional investment approach, which typically involves a high exposure to equities, leaves schemes open to a variety of risks, including those associated with the fund manager, stock markets, interest rates, inflation and longevity. While equity market risk often receives the most attention, the main risks to funding levels actually come from interest rate and inflation exposure. An LDI approach will ensure that those two key risks are minimised as much as possible. Meanwhile, it will also help ensure that any active investment risk taken is done so in the context of the return a scheme needs to meet its liabilities, versus the traditional approach of measuring performance against a market index that has little relevance to a scheme’s liability profile. The amount of active risk taken will vary significantly from scheme to scheme, reflecting differences in their liability profiles, funding positions, appetite for risk and the strength of the sponsoring company. Trustees need to consider all these factors when determining the level of risk they can/need to take to ensure any shortfall in funding is met. Indeed, contrary to the traditional approach of favouring equities for their high-return potential, returns above a certain level may not add sufficient value to justify the additional risk involved.

LDI suitability Since the main objective of any defined benefit (DB) scheme is to be able to meet its liabilities, LDI is relevant to all DB pension schemes, regardless of their size or funding level. While minimum size and cost limitations may have previously restricted access to LDI primarily to large segregated schemes, pooled LDI solutions now enable smaller clients to benefit from this innovative management approach in a cost-effective way. The approach to defining the LDI benchmark for a pooled client is exactly the same as for a segregated mandate. The only difference is

that a smaller client’s portfolio will comprise a unique combination of pooled components rather than segregated assets. There is a sufficiently comprehensive number of pooled funds available to enable a very precise liability match. These can be combined with a return-seeking component, as outlined above. Meanwhile, LDI is suitable for all funding levels. A low level of initial funding need not be a barrier to implementation. The use of swaps allows under-funded schemes to manage a greater proportion of interest rate and inflation exposure than would be possible on a fully funded basis. However, LDI is not just about reducing deficits. An LDI approach may also be employed to protect a funding surplus by ensuring that the underlying investments are appropriately aligned to meeting future liabilities. LDI is a solution-based approach to investing, as opposed to an off-theshelf product. Each scheme will have unique requirements and their investment strategy will need to be correspondingly bespoke. A partnership approach between the trustees and their investment manager is essential to establishing the most appropriate solution.

The benefits of an holistic approach Many schemes currently hold investments with a number of specialist managers, in an effort to capitalise on their respective strengths. While this may generate optimal investment returns, it may be difficult to monitor (and control) the risk of the overall portfolio relative to its liabilities when the component parts are managed in isolation. Enlisting one manager to oversee an LDI strategy enables clients to gain a much greater understanding of their investments in relation to their liabilities through holistic reporting. With fewer managers appointed, it can also reduce direct management costs and governance overheads. Some schemes may feel that this feels too much like the traditional balanced approach of entrusting all assets to one manager. This need not be the case. An LDI specialist who will combine an LDI hedging portfolio – be it pooled or segregated – with a growth-generating portfolio managed by other providers, such as a best-of-breed multimanager with access to market-leading funds, overcomes this concern. This innovative approach enables schemes to maintain access to specialist providers while maintaining a focus on meeting liabilities, the key priority for any pension fund.

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12 BENEFIT CHANGES

A man who lied about his age 36 years ago while courting an older woman yesterday found himself in court after love turned sour and the woman disclosed the truth. For years Brian Sale kept the secret that he was six years his wife’s junior and not three years older as he had told her to win her heart. On his wedding day in 1955 his age was recorded as 29 and that of his wife Gwen as 26, and, aided by his mature physique and by falsifying documents, he was able to carry on the deception throughout his life. He did so even when he took early retirement because of an injury and received over £11,000 in pension payments to which he was not legally entitled, Elwyn Evans, for the prosecution told Swansea crown court. Lin Jenkins, Law catches the young pretender, The Times, 22 August 1991

Introduction Having invested the assets to the best of your ability, a major obligation of a trustee is to pay the benefits, as set down in the rules and announcements.

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In practice you will not do this yourself – the insurance company, pensions consultant or administrator will do this for you. But there may be cases where the wrong amount has been paid – or the wrong person has been paid – or the records do not match the claim. It is not your job to change the benefits or improve them – unless the deed says so. And even so, you usually have to do it with the consent of the employer. Some of the more common problems that arise include: • Should you count time on strike as part of pensionable service? • Should you count maternity leave as part of pensionable service? • Should the benefits be paid monthly, quarterly or for some other period? • How do you check that the beneficiary is still alive? • How do you check that a person claiming to be a widow was married to the dead member? These kind of benefit checks, including who is eligible to join and how, are normally agreed by the employer rather than the trustee.

Benefit improvements Benefit improvements can arise: • from a decision of the employer, perhaps negotiated with the trade union; • as a way of dealing with part of a surplus or responding to a deficit; • where increased contributions are agreed; or • where required by law.

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In almost all cases they arise from employees’ negotiations with the employer – not with the trustees. Unless a deal has to be done about some surplus, you will not be called upon to decide who gets what – but if you are, you need to remember to treat all groups on an equal footing (members, retired members, deferred pensioners and the rest). They do not have to get equal benefits – you can treat different groups differently, but you need to be satisfied that the split is fair in the circumstances.

Benefit reductions Sometimes perhaps as part of a company reconstruction, the employer decides to reduce benefits. The law normally restricts this to benefits built up for future service only, and most benefit rights already acquired are considered sacrosanct. In other cases, perhaps when the employer has gone out of business, and there are insufficient funds in the scheme it may be your duty to reduce benefits across the board. The law now sets down strict rules about how this may be done (sometimes very unfairly) and the advisers will set out what has to happen.

Recovering overpayments Sometimes, perhaps because of an administrative error, payments have been made to scheme members which are more than they should have been. In strict law these overpayments have to be recovered, because they have been taken out of other people’s money. It is an easy mistake to make; the government for example each year pays millions of pounds too much in tax credits. But like the government, if recovery is too hard, and too unfair, you can decide either to write it off, or to arrange to recover the money in an humane and sensible way.

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13 TRADE UNIONS

When Denning had been transferred to the King’s Bench Division he had been nominated by the Lord Chancellor to hear Pensions Appeals. He thought that the Minister and Pensions Tribunals had been applying the wrong principles and took steps to put them right. The Minister had put upon the applicant the burden of proving that his injury or illness was due to war service. Denning changed the burden of proof. He held that if a man or woman were fit when he or she joined up and unfit when discharged the burden was on the Minister to prove that the injury or illness was not due to war service. The slogan was ‘Fit for service, fit for pension’. Edmund Heward, Lord Denning, A Biography, Weidenfeld and Nicholson, 1991

Introduction Trade unions nowadays play much less of a role in industrial relations than they used to – but as their influence has waned, so has their proficiency improved, certainly in the pensions arena. Many union representatives still find it difficult to understand that pension trusteeship is not a bargaining position, or that surpluses could ever have a home with an employer; but at the same time some unions have made significant contributions to the understanding of

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their members about pensions and can negotiate, over the wages table, about pensions with the best of them. Some even retain actuaries and lawyers to act on their behalf, increasing the skills resource even further.

Representation and consultation At present there is no law in the UK that unions are entitled to representation on the boards of trustees of pension funds. It was suggested some years ago but the suggestion has failed to catch the public imagination. Nonetheless, trade unions are entitled to be consulted on a number of matters, and are entitled in particular to consultation on contractingout, and at one time to information about their members’ pension schemes – although not, of course, about individual details of each member. Employers now need to consult any recognised trade unions (and members) about any proposed material changes to schemes.

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14 STATE PENSIONS

Claude’s been in pensions all his life. When he retires next year he’ll collect a knighthood. He’s got a Wates house in Surrey and 10 lines in Who’s Who. He is one of those ‘Beveridge Boys’, who took the 6.30 train in the ‘50s with a black bowler hat and talked enthusiastically about false teeth and free specs. Claude’s a retiring chap. But last week, he threw himself across a committee table and wrestled the PM to the floor. Has he gone mad? Michael Hastings, A Dream of People, Royal Shakespeare Company, 1990

Introduction The scheme of which you are a trustee provides a pension over and above that provided by the state. The UK’s level of state pension provision is amongst the lowest in the EU, which is why workplace pensions are so important; but workplace pensions need to interact in many cases with the state arrangements. The state arrangements are fiendishly complex; in brief, however, the government provides: • a basic state pension of around £85 a week;

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed • a state second pension, which varies according to the amount and length of contributions, but might be around another £40 a week; • certain social security add-ons, including free TV licences, bus passes and a means-tested state pension credit (in two parts) to top up people’s savings as an incentive to save (the third state pension).

The state second pension (S2P) (which replaced the state earnings related pension schemes – SERPS – in 2002) particularly helps the lower paid (earning under around £12,000pa) and pays benefits on earnings up to around £28,000. The state pension credit gives everyone over the age of 60 a guaranteed income of up to around £110 a week if the first two state pensions are not enough (it is means tested) and additional money to those who have saved (up to around £15 a person). The state second pension can be contracted-out. In other words, it can be provided by your employer through your pension scheme, in exchange for paying lower national insurance contributions. The state pension arrangements are so unwieldy and complicated that their long-term viability is in question, and all the schemes look likely to be replaced eventually by a ‘citizen’s pension’ of around £150 a week, payable to anyone resident in the UK over the age of 70.

Contracting-out Contracting-out (see Part III, Bluffer’s Guide) is one of the great turnoffs of any cocktail party conversation, and you should not spend too much time worrying about it. If your scheme is not contracted-out, breathe a sigh of relief and skip the rest of this section.

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If your scheme is contracted-out, do not agonise whether it is the right or wrong thing. The decision to contract-out or not is a matter for the employer, not the trustees. Once he has made the decision, the job of the trustee is to comply with it. Contracted-out schemes are a little more complicated than even ordinary schemes: • They have to collect contributions in relation to what would otherwise be national insurance payments from the employer and employee – and therefore there is additional supervision and form-filling and additional rules have to be agreed with the HMRC (formerly IRNICO – the Inland Revenue Insurance Contracting-out Office). • They have to file forms with HMRC every year to show they are solvent and have not invested the money wrongly. • They have to pay special transfer payments when members move, and need to maintain separate records and pay certain benefits in place of the state benefits, which need to be revalued. All this is a matter for the administrators and not for you. Pass on to other more exciting matters.

NPSS In addition,the government will almost certainly introduce a fourth state pension (NPSS – National Pensions and Savings Scheme) by 2010, which will involve a semi-automatic membership of a great national system under which if the member contributes 4% of income into the scheme, the employer will contribute 3% and the government 1% into a funded personal pension arrangement.

Penfida Partners LLP Jonathan Dawson The responsibilities and duties of pension fund trustees have never been more clearly at the centre of corporate affairs. Virtually every significant corporate event in the UK – refinancings, adverse trading performance, mergers, acquisitions, divestments, share buybacks, special dividends, demergers – is likely to have some implications for a defined benefit pension fund looking to such a company as sponsor to the pension scheme. Trustees are in a special position: not only do they have critical obligations to members but, with the Pensions Act behind them, they have real power. And with power comes the responsibility to ensure they that they have acted to use such power to protect members’ interests. Over many years the corporate sector has utilised a wide range of specialist advisory resources to assist in guiding the corporate through special situations. In the corporate finance field companies have a sophisticated array of talent, analytical power and innovative thinking at their disposal provided through the global investment banking and financing community. In order to discharge their duties, and in addition to the legal, accounting and actuarial advice that they already receive, trustees clearly need to have access to the same level and depth of advice from specialist investment bankers who understand both the requirements of trustees and the dynamics of corporate finance. Penfida Partners offers precisely that service to trustees. Penfida’s principals have extensive experience both as senior investment bankers and as pension fund chairmen. As a result they can bring to bear for clients a unique combination of practical experience in financial markets and appreciation of the issues faced by trustees. In practical terms, Penfida can advise its pension fund clients on covenant review and valuation, commercial and strategic assessment, key risk review, advice on negotiating options and tactics, and execution to secure the best outcome for its pension fund clients. Since Penfida started in January 2006 it has advised a wide range of major UK pension funds on the implications of mergers, restructurings, changes in control, and other changes in sponsor commercial and financial status and has worked with trustees to prepare for such events. Penfida Partners’ lengthy experience in corporate finance can make a real difference for trustees. For further information contact either Jonathan Dawson or Paul Jameson on 020 7520 9452.

Your scheme members trust your guidance. Whose can you trust? Being a pension trustee is a tremendous responsibility. And with all the detailed changes going on in the industry, this is the case now more than ever. Your actions at this point in time could have far-reaching consequences. It will pay to get expert advice. And at BDO Stoy Hayward Investment Management Limited, our Pensions and Actuarial Services team has plenty of experience in this area. Besides managing award-winning funds such as the Fitzwilliam Multi-Manager, our actuaries and advisers across the country are sought out for their expertise by entrepreneurs, entertainers and everyone else who is likely to be affected by the changes to pensions. We’d be delighted to take a look at your numbers. All you have to do is call ours. Birmingham Bromley Glasgow Guildford London Leeds Manchester

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15 EQUAL TREATMENT She got out of her mosquito netting and took a wooden chest out of the closet, with a packet of letters arranged by date and held together by a rubber band. She located the advertisement of a law firm which promised quick action on war pensions...... The colonel read the clipping dated two years before. He put it in the pocket of his jacket which was hanging behind the door. “The problem is that to change lawyers you need money.” “Not at all,” the woman said decisively. “You write them telling them to discount whatever they want from the pension itself when they collect it. It’s the only way they’ll take the case.” So Saturday afternoon the colonel went to see his lawyer... “I warned you it would take more than a few days,” said the lawyer when the colonel paused... “It’s been that way for 15 years,” the colonel answered...”Well I’ve decided to take action.” The lawyer waited. “Such as?” “To change lawyers.” A mother duck, followed by several little ducklings, entered the office. The lawyer sat up to chase them out. “As you wish, Colonel, he said... “My son worked all his life,” said the colonel. “My house is mortgaged. That retirement law has been a lifetime pension for lawyers.” “Not for me,” the lawyer protested. “Every last cent has gone for my expenses.” The colonel suffered at the thought that he had been unjust. Gabriel Garcia Marquez, No One Writes to the Colonel, Picador, 1979

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Introduction You can hardly open a newspaper (or even the Daily Mail) these days without being assailed by articles on equal treatment in pensions. Why has there been so much agitation? Is it anything for you as a trustee to worry about? Because in a way pension schemes are all about discrimination: they are designed to pay money to old people, not young ones, and to give benefits to ill people and not fit ones. Trustees in theory could find themselves discriminating in many areas in their scheme: • In sexual discrimination – paying women more or less than men. • In sexual orientation – in paying same sex partners lower benefits. • In belief – in paying lower benefits to people of different beliefs. • In disability – for example, refusing ill-health cover to disabled people. • In race – offering different benefits to people of a different race. • In age – refusing scheme membership to younger or older employees. Most of this kind of discrimination is illegal; but in many of these cases trustees are allowed to discriminate if there is ‘objective justification’ ie a good and sensible reason to do so; what is a good reason has to be objectively determined, eg by the court, and not subjectively, ie just in the opinion of the trustees.

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Sex discrimination Discrimination between men and women poses particular problems. First the state scheme already discriminates (although this is being phased out). The problem is a very simple one. Because in 1942 the government (after pressure from the TUC) agreed to change the then retirement age from 70 to 65 for men and 60 for women, most private or company schemes followed the same pattern. But nowadays: • women object to being forced to retire before men; • UK law makes it illegal to have different retirement ages in the contract of employment; and • European Union law (following a famous case called Barber v GRE) many years ago made it illegal to have different pension ages in the pension scheme. The problem for trustees is how can you reconcile the need to have the same retirement/pension age at work with different state pension ages? If the retirement age is equalised at (say) 65, then women can complain that they now have to work another five years before they can get their pension. If the age is equalised at say 60, then men will complain that they have five fewer years to earn a living and acquire additional pension rights. The bad news is that there is no perfect answer; whatever is done to try and reform the situation, someone will suffer. The good news is that the problem is not one for the trustees; it is the employer who has to sort out the problem. Since 1990, the retirement date for men and women has had to have been the same; but it is unlikely that retrospective benefits will have to be granted to members or former members of the scheme, or even pensioners, so that the fund will not be put in peril. Some pension schemes, especially those with many part-timers, may possibly have to find some extra money to equalise membership for men and women, but it is unlikely in practice.

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Bridging pensions (ie money paid to men who retire after 60 but before 65, to take account of the fact that they do not draw a state pension, unlike the women) are now probably legal, after a brief scare. And in defined contribution schemes, the fact that an equal amount of money at retirement will buy different annuities for men and women (because on average a woman will live longer than a man) has caused particular angst. Proposals for equalising annuity rates have, however, now been put on ice probably indefinitely.

Race discrimination It is as illegal to discriminate in pension schemes on racial grounds as it is on sex grounds. That is not to say that pension schemes are obliged to reflect differing social customs for different groups of members, such as those groups who possess more than one wife, or groups who have strong views on investment morality. But racial discrimination is as wrong in pensions as it is anywhere else.

Age discrimination In a way pension schemes are discriminatory on age everywhere you look. This changed at the end of 2006, when it became illegal for employers to discriminate against employees on the grounds of age – although there are exceptions which apply to pension arrangements.

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1. Diversification Hedge funds are actively managed unconstrained investment vehicles that target positive returns regardless of whether markets are rising or falling. They have the flexibility to trade different asset classes and financial instruments, and employ a variety of investment styles, strategies and techniques in diverse markets. The primary driver of hedge fund performance is the skill and expertise of the managers. Well constructed funds of hedge funds, which contain a portfolio of complementary hedge fund managers, are designed to deliver stable returns above LIBOR with low volatility that are independent of the overall market environment. Fund of hedge funds typically invest in a broad range of styles and strategies with different characteristics: •

Hedge fund strategies such as equity market neutral, statistical arbitrage, convertible bond arbitrage, fixed income arbitrage, merger arbitrage, volatility arbitrage, and multi-strategy arbitrage maintain low market exposure and seek to benefit from price movements between securities and instruments.

•

Strategies such as long/short equities, managed futures, global macro and emerging markets perform strongly during periods of clear upward or downward directional moves in markets.

The diverse range of return sources allows funds of hedge funds to deliver consistent and stable returns even during market shocks. The six worst monthly returns in the UK equity and fixed income markets and the corresponding returns from Man Investments’ highly diversified key flagship fund are shown overleaf.

2. Portable alpha These stable return properties make funds of hedge funds powerful tools for generating gains in excess of short term interest rates, typically LIBOR, regardless of whether markets are rising or falling. Recognising this property, investors are increasingly using these structures to transfer the excess return to other investments; hence the term ‘portable alpha’ as the alpha is transferred from one investment to another. Man Investments structure their portable alpha funds by combining a total return swap and an investment in a highly diversified fund of hedge funds. Due to our unique approach to structuring, portable alpha funds may be structured across a variety of benchmarks regardless of whether they are equity, fixed income, interest rate, or inflation based. As the swap agreement does not require any cash, 100% of invested funds may be allocated to a low volatility portfolio

containing over 150 hedge fund managers. Every manager is dedicated to the generation of absolute returns. A portfolio of hedge funds this diverse can be significantly more conservative, and considerably more successful, than any single traditional asset manager where the ability to add value may depend on a few key individuals. This portable alpha structure is designed to deliver: •

the return of the index, plus

•

the excess return of the hedge funds over LIBOR plus the cost of the swap

The attraction of this approach is demonstrated by the track record of our first portable alpha fund, which is based on a European equity index *: •

Annualised value added: 3.47% after all fees and costs

•

Annualised tracking error: 3.10%

•

Information ratio: 1.12

This solution from Man Investments offers institutional clients the opportunity to benefit from significant gains above pre-determined benchmarks in an integrated and easily accessible fund. * Since inception in November 2002 to August 2006

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16 EARLY LEAVERS Irving’s first words to me were “Hitler pensioned the widows of the hanged 1944 bomb plotters – and the officers of the Czech army after his takeover.” I said, “My dear fellow, when my country, AustriaHungary, was shattered into six pieces and the age-old all highest Arch-House of Hapsburg chucked out, the Austro-Hungarian Finance Minister got on a train to Warsaw, became Polish Finance Minister, and didn’t miss a single pension contribution.” Pensions offend the English sense of order because you don’t have to toady once you get your secure indexed pension. But in normal countries, even under Hitler, pensions have the status which payments to royals and landowners have in England – to be paid before all other things. Curiously those English who rather admire Hitler – maybe a third of the population – often praise his welfare system which, if proposed here, would lead to a universally applauded MI5 coup against the red threat. George Stern, review of David Irving, Hitler’s War, Literary Review, December 1991

Preservation and what it means Until only a few years ago, if you left your employer any time before your normal retirement age, all the pension you had earned could be forfeited. The reason was that most pension schemes confiscated your rights if you did not retire whilst in the employer’s employment.

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Nowadays, there are laws against this; in the UK they are called ‘preservation’. In the United States, they call it ‘vesting’ and Ralph Nader, the campaigner against unsafe cars, also wrote a less-well-known book exposing such companies as Studebaker and Woolworths, who promised fine pensions but paid them relatively infrequently. His efforts changed US law as well. There were (and are) some problems with preservation. It only applies to the rights you have earned at the date of leaving – not the date of retirement. And the benefits, until some years ago, did not have to be index-linked in any way. This particular problem, ie inadequate preservation at a time when funds were building up surpluses, led to a highly critical press, and after some years the law was changed. Poor transfer values and poor preservation had been one of the weak spots of workplace schemes (and allowed the proponents of personal pensions to insert a wedge into their bedrock); nowadays the position is much improved, and personal pensions offer very little to critics of poor preservation.

Transfers All members have a right not only to leave the scheme at any time, but to transfer their rights to some other arrangement when they have left employment. If they think it worthwhile they can move it to • another workplace scheme (if it will take them); • an insurance company (in some form of personal pension); • a building society; • a bank; • a unit trust.

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The right to transfer The right can be exercised at any time up to a year before retirement, and you have to give a member details of his transfer options. Whether it is worth the member’s while is one of the great unknowns. In practice, independent financial advisers are now very reluctant to advise scheme members to move to personal pensions after a substantial campaign against ‘personal pensions mis-selling. In any event it is not your function to sell one scheme or arrangement or another – you are not your members’ financial adviser. At the same time, you probably have a duty to explain to your members how they can lose by entering into personal pension arrangements without proper advice – which is all but impossible to get, since commission-based systems are still the rule.

The value of transfers The value of the transfer payment is set down by law as a minimum; you may have the right to offer more in particular circumstances, remembering to try not to discriminate between one group of members and another. But it is important also to protect the interests of members who remain, and for regulatory reasons transfer payments have been forced down considerably in recent years. In many cases it will be more sensible for members to stay with the scheme even if they have left the employer, which can add substantially to employer’s administration costs.

Information about transfers Members are entitled to information about their transfer values at least once a year on request. You will not normally charge, although it can be an expensive exercise doing the calculations.

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Why transfer payments from one scheme don’t buy years of service in the next scheme Suppose • You are in a scheme earning 1/60 of your final salary for each year of service. • You work for 20 years for Company Smith, and another 20 years for Company Jones. • Your salary has improved from £1,000pa to £10,000 in the first 20 years, and from £12,000 to £20,000 in the last 20 years. • Each company operates an identical pension scheme. Then • In the first 20 years you will have earned rights to a pension, to be taken at say age 65, as follows: • 20 years at 1/60th of final salary (in this case, not actual final salary, but salary at leaving the company) for each year of service is the same as • 20 x 1/60 x £10,000 = £3,333 pension pa at age 65 And • In the second 20 years, you will have earned rights to a pension as follows: – 20 years at 1/60 of final salary (in this your actual final salary) for each year of service, which means – 20 x 1/60 x £20,000 = £6,666 pension pa at age 65. – Together the two pensions are therefore £9,999.

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But • If you had spent 40 years with Scheme Jones, the sum would have been: • 40 x 1/60 x £20,000 = £13,333 Consequence • By changing employers midstream, you have lost a substantial pension. Why? The answer is that the first employer assumes that your final pension is not your actual final pension but the pension you earned when you left him. Is it fair? Well, the first employer argues that he cannot be responsible for your future rapid earnings growth once you have left him. And the new employer, when you bring a pension only worth £6,666 a year into his scheme argues that it is not his responsibility to make up another £3,000 a year of pension for time when you were not working for him. It’s just one of those conundrums. • Nonetheless, unless you are a very frequent mover to different employers, the system is still a better one, for most people, than a personal pension, with all its overheads and surrender penalties. Just try moving a personal pension between one provider and another and see what transfer value you get!

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Why the transfer won’t buy added years You would think it would be sensible, if you had saved with one occupational scheme for say ten years, that you could move the transfer rights to another scheme, and it would buy you also ten years’ worth. In some cases – especially in the transfer club of the Civil Service and similar schemes – such arrangements are in place. But the way in which occupational schemes work it doesn’t operate like that. The reason is that there are (at least) three ways of working out your rights in a scheme, which involve the way in which a scheme works. A pension scheme is not a savings pot (like a personal pension) – and it is not an insurance arrangement, like a life policy that pays only if something adverse happens. It is something in-between – and just because it is difficult to define, does not mean that it is a con. It works by calculating, as a group of people, what the life expectancy of the individual members of that group will be (and their dependants). The contributions take account of future inflation, future salary growth, future earnings in the fund, and any tax. If any of those assumptions prove incorrect (as they inevitably will), the contribution structure will later need adjustment. Unfortunately the only way we can explain it is by looking at some calculations (these are the only calculations in the book).

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The three transfer values There are many different ways of calculating transfer values. This section looks at just three of the main ones: • the discontinuance valuation; • the past service valuation; and • the share of surplus or deficit

The Differences Between Discontinuance Values, Past Service Reserves and Surpluses

£100,000

£50,000

Share of Surplus

Past Service Reserve Transfer Value (In Addition)

Start salary of £10,000 pa at age 25 Salary at date of leaving company is £50,000 at age 45

£10,000

Salary at retirement at age 65 is £100,000

Discontinuance Transfer Value

Age 25

45

65

The discontinuance transfer value assumes your final salary to be the one you are earning at the date you leave the employer or the scheme. It therefore does not include assumptions as to your future salary increases, either because of inflation, career progression, or increases for longer service. It is the minimum transfer value, and is regulated by the ‘Transfer Regulations’. It is the usual basis of calculating your transfer value when you leave before retirement.

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The past service reserve transfer value is the same as the discontinuance transfer value, but builds-in the reserves that have been set aside to take account of expectations about your future salary growth. It is the usual basis employed when there is a bulk transfer of many members or employees to another scheme (perhaps because of a take-over). The share of fund is sometimes looked at where there is a surplus; it can result in a transfer value more than those arising under the other two methods (where there is a surplus) or less (where there is a deficit).

Pensions Irwin Mitchell’s highly regarded pensions team providing specialist commercial advice on:

• Trustee governance • Corporate transactions • Scheme mergers and restructuring

• Executive benefits • Scheme documentation • Pensions litigation

For more information please contact Anne Taylor 0207 421 3956 [email protected] www.irwinmitchell.com

Irwin Mitchell, IM Asset Management Ltd and Irwin Mitchell Abogados are all owned by the partners of Irwin Mitchell Solicitors and are separate and distinct legal entitles. Irwin Mitchell is regulated in the UK by Law Society.A full list of the partners of Irwin Mitchell is available for inspection at our offices.

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17 MERGERS AND ACQUISITIONS The inevitability of disaster gripped Buddy’s stomach like a tick when he heard the word liquidate. He felt solitary in his terror and humiliation. Bud turned his eyes upon himself and looked at his body as if he were filthy. Was his father right after all? Betrayal and disintegration hung in the air like a dark cloud before Buddy’s eyes, as Burnside answered the bankers. “Guaranteed! No sweat… we already got the Bleezer brothers lined up to build condos where the hangars are. We can lay off the planes with Mexicano. Midcontinental Air is drooling to get the slots and routes. What’s the problem? It’s done.” Barnes passed a formal looking spreadsheet to the commercial bankers. “This is the price tag on the 737s, the gates, the hangars, the routes… We got it all nailed down to the typewriters.” Torment, shame, and self-mockery exploded inside Buddy like a cancer. So this was hell, he thought. Burnside’s voice sounded distorted to him in the background as he detailed the dismemberment of Bluestar. “The beauty of it is the over-funded pension fund. Gekko gets the seventy-five million in there. Fifty million buys him the minimum annuities’ protection for six thousand employees, and he walks away with the rest. All in all, he’ll net sixty to seventy million. Not bad for a month’s work.” He turned to Buddy. “Your man did his homework, Fox… you’re gonna have a short executive career. Now he’ll really start believing he’s Gekko the Great!” Kenneth Lipper, Wall Street, 1988

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Introduction A major concern for companies who may be the subject of unwelcome takeovers is the pensions position. Target companies need to ensure that the surpluses (if any) in their scheme are not ‘in play’, or that any deficits will be supported by an employer with the same financial strength as the former owner – and that the benefits will not be reduced by any future owner. This section gives the background to the problem, and suggests some practical steps.

Background There are two main problems when bids are made for a target company, so far as pensions are concerned: • funding – how is any surplus or deficit to be dealt with (in particular whether a surplus can be recovered by the purchaser to mitigate the purchase price, or a deficit underwritten by the purchaser); and • benefits – will the benefits, (especially the discretionary benefits like post-retirement increases), be continued after the takeover. A series of government reports in the 1980s and 1990s concluded that members’ rights in pension schemes were insufficiently protected on take-overs and the Pensions Acts in 1995 and 2004 added further protection for members. Trustees need to keep an eye on requests from employers to agree to scheme mergers following takeovers so as to ensure their members’ interests are not affected. And it may be that if the buyer is not as well capitalised as the existing scheme sponsor, the trustees should negotiate for an improved contribution rate where there is a deficit.

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Existing surpluses Existing surpluses normally arise: • through excessive employer contributions; • higher than expected returns on the pension fund assets; • higher than expected staff-turnover (perhaps through redundancy programmes); or a combination of all three. Once in the scheme however, much of it must be used to enhance benefits. At one time surpluses were an attractive prize for predators – and changes to the accountancy rules and the ‘Disclosure Regulations’ (information for members and others) made them more visible to shareholders and other interested parties. But recovery of surplus by a predator is now much more difficult than before: • there is a tax charge of 35% on any such recovery; • trust law requires (normally) that some of the surplus must be used to enhance benefits if any is returned to the employer; and • The Pensions Regulator must agree to any return of surplus. For these and other reasons, surpluses are much less attractive to predators than they used to be – and they are now much rarer.

Expectations Most pension schemes give ‘expectations’ of benefits as well as intentions. For example, members can confidently expect in most cases that they will receive their formula pension (eg 2/3rds of final salary after 40 years). But such benefits as cost-of-living increases, or other benefit improvements are usually at the discretion of the trustees –

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often subject to the permission of the employer. While in most cases such permission is given as a matter of course, when the employer changes, such expectations may also change, even though there is enough money in the kitty to meet those expectations.

Practice Most of the practical problems are those of the employer, not the trustees. But as a trustee you need to understand the employer’s options, so that you can exercise any discretions available, for example, whether to pay a bulk transfer payment in respect of a group of employees who have left to join another company pension scheme. Employer’s concerns include: • Changing the balance of power between the employer and trustee: – The employer often has power to reduce, suspend or terminate contributions, ie take a ‘contribution holiday’. This is a dangerous weapon in the hands of a predator, but amending the deed to take this right away might not be acceptable to the employer. – The benefits can usually only be increased with the consent of the employer. Taking that consent away is an obvious way to protect the trustees and members, but may be too high a price for the existing employer. – The trustees can usually be changed by the employer. Some schemes now have permanent ‘independent trustees’, but entrenching all the trustees in this way is usually unacceptable. – The advisers can usually be changed by the employer; but different advisers can produce different levels of surplus or deficit, for example.

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• Introducing triggers ie clauses which only take effect if there is a change in the control of the employer. The problem with such triggers is that they may take effect even on a friendly change: – Changing the deeds to forbid returns of funds to an employer; this is not totally predator proof; – Limiting the power of amendment of the deed by the trustees or employer, leaving control with the trustees who cannot be displaced; – Increasing the pensions automatically to the former Revenue maxima on a winding-up or other trigger event. As a trustee, your options will vary widely, depending on the position of the employer, the rules of the scheme and the expectations of the members. Some employers (that is companies quoted on the Stock Exchange) will need to make changes to the deed and rules to avoid or reduce the impact of the Takeover Code (Rule 21). But these changes cannot be made where a bid is in progress or is imminent. Any changes made must also of course be in the shareholders’ interest.

Requests for transfer payments If you get requests for transfer payments, you should comply with them as soon as possible; if you delay there could be penalties. It is also sensible to advise anyone who requests a transfer payment to take some independent advice (ie not from someone who is commission-hungry).

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Corporate reconstructions Because of the rules introduced in 2005 by the government, and to avoid getting a call from the Pensions Protection Fund and the Pensions Regulator, an employer who deliberately or incidentally restructures his companies (perhaps by changing the holding company, or selling off a subsidiary) is now best advised to get a clearance certificate from the Pensions Regulator before doing so in order to avoid triggering a claim for paying for any pensions deficit. Trustees in practice must be consulted before such a restructuring takes effect and then usually need expert help and advice from accountants and business advisers to see whether such a transaction affects the ability of the sponsoring employer to pay contributions in the future.

B A L A N C E D E X P E R I E N C E D P R AC T I C A L I N D E P E N D E N T B A L A N C E D E X P E R I E N C E D P R AC T I C A L I N D E P E N D E N T

Capital Cranfield Trustees provides professional independent trustee services to occupational pension schemes. Established in 1992, we bring experience, judgement and the relevant skills that ensure fairness, efficiency and good governance.

BALANCED

P R AC T I CA L

> adjective: (Not depending on something else for strength and effectiveness)

> adjective: (Of or concerned with the actual doing of something rather than with theory and ideas)

EXPERIENCED

INDEPENDENT

> adjective: (Having knowledge or skill in a particular field gained over a period of time)

> adjective: (Free from outside control; not depending on another's authority)

For further information please contact: Bob Bridges Email [email protected] Tel 020 7629 1124 Fax 020 7493 7694

Capital Cranfield Trustees Limited Capital Cranfield Pension Trustees Limited 5th Floor, 11 Bruton Street London W1J 6PY

3rd Floor, Rodney House

Scottish Pension Trustees

Castle Gate

One St Colme Street

Nottingham NG1 7AW

Edinburgh EH3 6AA

www.cctl.co.uk

LDI Solutions Richard Lockwood Morgan Stanley Investment Management Liability Driven Investment, or LDI, is a hot topic in the pensions industry right now, but there is some discussion about what it actually means. At its simplest level, it can be taken as investing with due regard to the liabilities, which of course pension schemes have always tried to do. But LDI has recently come to mean more than that: building an investment strategy which explicitly links the behaviour of assets to liabilities. Recent developments in how pension scheme assets and liabilities are shown in the annual report and accounts of their sponsors have added new pressures on trustees, who now have to juggle the shorter term stability that their sponsor may prefer with the need to take a longer term view in terms of investment decisions. If one adds to the mix the fact that many schemes are currently in deficit and trustees may prefer to pursue an investment strategy that helps close this gap, rather than merely relying on increased contributions, then it is clear that the LDI framework is more important than ever. The development of financial instruments, such as interest rate swaps and inflation swaps, have provided tools for pension schemes to construct investment strategies that provide greater linkage between the evolution of the value of assets and liabilities. However, it is also important to recognize that for many schemes this is not enough and that generating returns is equally important. Finding the answer to this dilemma is not easy, particularly for the many smaller and medium-sized defined benefit pension funds for which a bespoke solution is neither practical nor cost effective. We believe that one such solution should not only address the key risks facing defined benefit pension funds – hedgeable risks, such as interest rate risk and price inflation risk – and non-hedgeable risks, such as longevity risk, but also utilize a stable underlying return engine that aims to exceed liability-growth which can preserve and improve funding levels.

Morgan Stanley Investment Management

The topic of pensions has now well and truly caught the public's imagination, albeit for many of the wrong reasons. With frequent publicity about multi-billion pound deficits in pensions, reducing bond yields and increasing life expectancy, it is perhaps not surprising that much of the industry's focus should be on managing the liability and risk side of the equation. Of course, that in itself does not solve the problems. The funds still need managing, and returns still need to be generated. As ever, finding the right balance between managing liabilities and generating returns remains the key objective for trustees. Diversification has long been recognised as an important element in portfolio construction, traditionally encompassing both asset class and geographic allocations. Recent developments have added a whole new dimension to the investment opportunity set available to managers. Hedge Funds, Private Equity and Real Estate securities have seen increased focus. We would add to that mix Senior Loans, Commodities, Currency, Global Tactical Asset Allocation and CDOs, among others. Research undertaken by Morgan Stanley Investment Management would indicate that adding a basket of alternatives to a traditional pension fund allocation can have a positive impact on both the volatility and return profiles.

To discuss these issues further, please contact Richard Lockwood (Tel: 020 7425 9193 Email: [email protected]) Ian Martin (Tel: 020 7425 3473 Email: [email protected]) Simone Bouch (Tel: 020 7425 8776 Email: [email protected])

Past performance should not be considered a guide to future performance. Issued by Morgan Stanley Investment Management Limited, 25 Cabot Square, Canary Wharf, London, E14 4QA, United Kingdom. Authorised and regulated by the Financial Services Authority.

A member of The GAAPS Group

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Interim GAAPS Interim Across Financial Services Tel: +44 (0)20 7645 5350 www.interimgaaps.com

ProTrust Ltd Professional Recruitment of Independent Trustees Tel: +44 (0)20 7645 8730 www. protrust.ltd.uk

GAAPS Actuarial Expert Actuarial Recruitment Tel: +44 (0)20 7397 6200 www.gaaps.com 22 Bevis Marks, London EC3A 7JB

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18 WINDING-UP THE SCHEME It was almost midday. Her stomach was beginning to rumble. She ignored it for as long as possible then took a piece of bread out of her pocket and chewed on it. It would have to last until the evening; she could only afford one meal a day. She’d managed to save very little from the small pension the War Office had arranged for her, and most of that had gone on the train and ferry fare. Clare Francis, Night Sky, Pan, 1984

Introduction You may need, in exceptional circumstances, to • close the scheme, usually if the employer demands it, by refusing to admit new members; or • freeze the scheme, where, usually because the employer fails to pay any contributions due, or he goes bust, and there are no further contributions being paid to the scheme. In both those cases what you will need to do is usually called ‘windingup’, and there are likely to be extensive instructions in the deed on the steps to take.

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What winding-up means Winding-up does not necessarily mean the end of the scheme. You often have a choice: • Buy annuities or deferred annuities from an insurance company for all the members, and if there is anything left in the kitty, pay it back to the employer, and wind-up (cancel) the trusts. • Keep investing the income, and pay the benefits as they arise. You can run the scheme as is for another 60 years or so. This method is useful especially where the scheme has a surplus and for some reason it is not appropriate to pay it back to the employer. The bad news is somebody has to look after it for all that time, but that may not be an onerous job. The tontine Strictly tontines are illegal, but they still arise in pension funds. A tontine is a kind of bet, originally common amongst miners. Each miner put 25p, or its equivalent, in the pot, and the one who survived the longest scooped the pool. There was a great temptation to pull the odd pit-prop, and so tontines are no longer permitted. In a pension fund, however, the member who lives the longest could do just that. If there is a surplus in the kitty, and he is the only surviving member, by using a cunning device called The Rule in Saunders v Vautier, he could close the trust, and take all the money (there may be some tax to pay). While theoretically possible, in practice it is difficult to achieve – you need all the beneficiaries to agree to this, and getting unanimous agreement in pensions is something close to impossible.

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19 WHEN YOUR EMPLOYER GOES BUST Another side of Maxwell’s character that he has succeeded in hiding totally from public view enables him to be an exceptionally able chairman of committees, the best in my personal experience . . . The Mirror Pensions Board consists of half management, half trade union nominees. Maxwell, as chairman, has the casting vote. The balance is therefore tipped, as it always was, in favour of the management, but his conduct of the meetings was impeccable in my experience as a board member. When he does not hold all the aces, he will listen, persuade and respond. Bob Edwards [former editor, Sunday Mirror], Goodbye, Fleet Street, Jonathan Cape, 1988 He could never be trusted. Anyone who knew Maxwell knew he could not be trusted. And anyone who says otherwise is a craven liar. I remember people telling me that if he could get his hands on the pension fund he would . . . in the end the pension fund was run by Maxwell and his lickspittles and the trustees were kept in the dark. Bob Edwards [former editor, Sunday Mirror], the Sun, 6 December 1991

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Introduction When the employer goes bust the pension problems are usually the last thing on your mind – getting a new job is probably the priority. Nonetheless the sad occasion can be seen, pensions-wise, as an opportunity as well as a problem. First check the deed – the scheme may be automatically wound-up if the employer goes into receivership or liquidation. Receivership means the company still trades, but the company is run by a receiver, usually appointed by the bank. A liquidation means the company has finally failed – and no longer trades.

Independent trustee Until April 2005, an insolvency practitioner had to ensure that when he took over a company that had a defined benefit scheme, there was an independent trustee. That requirement no longer applies; but the insolvency practitioner must tell the Pensions Regulator that the employer is insolvent – the Regulator may (and usually will) appoint such a trustee. The trustee (and they are now usually professional trustees, some operated by law firms) will continue to look after the plan even if some of the normal trustees have left, for example because they have left the company. The job of the independent trustee is to try and ensure that all moneys due to the plan are collected, that the administration continues and the benefits are paid – and if necessary a claim to enter the Pensions Protection Fund is made, especially if for various reasons the existing trustees are no longer able to continue. If in the end the PPF takes over the scheme, the need for any trustees disappears. Once an independent trustee is appointed, your role as conventional trustee is much diminished, because he normally has most of the necessary powers to manage the scheme on his own, but you are entitled to information and to be involved in decision-making. You could also have views about the way the

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independent trustee behaves, which you might want to express to the Regulator. If there is already an independent trustee, and you are happy with him, you might also mention this to the Regulator, and he may be happy for him to continue.

Telling the members One of the simplest yet most crucial jobs is to tell the members what is happening, or even that nothing is happening. Members and pensioners will at that stage all feel lonely and unloved, and need to know that someone is looking after their interests. They may not be receiving their full benefits or indeed any benefits at all if the pensions were paid through the payroll system. There may be some hiccups, where for example money has gone missing and there is no Guaranteed Minimum Pension (GMP – see Appendix I) being paid. It may not be your fault (and the government will eventually pay up where the GMP funds have disappeared) but you will get the blame if you do not explain what is going on.

Deficits If there is a deficit in the fund, there may not be enough money in the kitty to pay the benefits – or there may be money owing to the fund. You have one or two tasks to do (or to find someone to do them) including: • claiming against the redundancy fund for payments which have been deducted by the employer but not handed over to the pension fund; • claiming against the employer for any unpaid contributions – although in practice the employer will have little money left after paying preferential creditors (such as HMRC) to pay you or your fund;

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20 MEMBERS’ RIGHTS Friday July 30: Our family went to Pandora’s house to discuss what was involved in looking after Bert while we are on holiday. Bert grumbled all the way through the meeting. He’s never a bit grateful for anything you do for him. Sometimes I wish he would go and live in the Alderman Cooper Sunshine Home. My mother gave this list to Pandora’s mother: I He will only drink out of the George V Coronation Cup… II He’ll accuse you of fiddling him out of his pension. Ignore him… Sue Townsend, The Growing Pains of Adrian Mole, Methuen, 1985

Introduction The money in the fund can be regarded as being there (1) to support the employer’s obligations to meet the pension expectations or (2) in the ownership of the beneficiaries, including both the employer and the members. Or even a combination of the two. Whatever the position, it is not surprising that members and other beneficiaries have a few rights over the management of it. These rights are quite wide; they include: • rights to information about the scheme; • a right to be dealt with fairly;

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They do not, however, include a right to be represented on the board of trustees; although there is a right to (together with other members) to elect up to a third of the board of trustees. These rights are often only of peripheral interest to trustees, but the ones that often come up in practice include:

Membership The right to be a member is usually set out in the deed and rules; it may be subject to the employer’s approval. The right to resign is a statutory right – no-one can be compelled to be a member of the scheme, although this right to resign is looked on with a jaundiced view by colleagues in other Member States of the European Union. It may be that membership of some kind of workplace scheme will become compulsory in years to come.

Information Members have always had a right to information about their scheme; that right is now enshrined in regulations, is extended to their dependants, and is more easily enforceable (in theory at least).

Transfers Members have a right, when they leave, to transfer their rights to another workplace scheme (or to a personal pension scheme managed by an insurance company, building society or bank in some cases). There is a minimum value related to the years-of-service and

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the level-of-benefits (in a final salary scheme) to which they are entitled. In some cases this may be unfair to people who stay – whose rights may be less well protected, especially in an under funded scheme.

Equal treatment Nowadays equal treatment covers a multitude of areas, from sex equality and racial equality to equality between different groups, such as pensioners and employees. The duty of trustees to behave fairly between these groups varies depending on whether the duty is statutory (as it is where the sex equality is concerned) or equitable (as it is where discrimination between age groups is concerned). It is dealt with in greater detail in Chapter 15.

The members and the employer The courts have made it clear that members and perhaps others are entitled to fair treatment not only from the trustees – but also from the employer. Where the employer has a right to limit the trustees’ actions – for example, when considering whether or not to give a pension on the grounds of serious ill-health – he must use such powers as though he were a trustee himself, and not merely an employer trying to save overheads. This obligation is not without controversy, and it is an area which is unsettled; nonetheless, trustees need to be aware of the duties of employers.

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21 GIVING ADVICE You might like to send birthday greetings to Jack Bendon, 75 on Sunday, who may well be the ultimate life insurance salesman. Mr Bendon is clearly all heart. He has to thank for this, most notably, Mr Magdi Yacoub, the eminent cardiothoracic surgeon. Mr Bendon has been fitted with, in turn, two pacemakers; more recently he has had heart by-pass surgery at Harefield Hospital, in Hillingdon. And then, what did he do? Picked himself up and promptly sold Prof Yacoub a personal pension, didn’t he? Mr Bendon, a senior associate with Abbey Life, said yesterday: “I’m just a very ordinary salesman but I have a bit of nerve. I was in the wholesale fruit business for 35 years…” Diary, The Guardian, 20 December 1990

Introduction Trustees like to help. They wouldn’t be trustees unless they were that kind of person. So when requests come in for some help from a member, it is natural to try and respond. In most cases, this is fine. But there are one or two areas where caution is needed. Clearly it would be foolish to advise on legal or actuarial matters – trustees are not usually lawyers or actuaries.

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But what about a member who asks for help on whether he should stay in the fund or take a personal pension? Or whether it is better for him to take a commuted lump sum, or a pension, when he knows he has an incurable disease? The law requires that advice on ‘investment matters’ can only be given by an authorised person – usually insurance brokers and the like. It is unlikely you are authorised, and you commit a serious offence if you advise in such cases – and the liability for getting it wrong is also high. But workplace pension schemes themselves are not considered to be investments – so you can advise quite freely on their benefits and advantages – and you should do so, since no-one else will. The Financial Services Authority has issued guidance encouraging employers and trustees to be helpful without fear of complaint. You might, however, like to help your members by offering them a protection certificate against over-ambitious personal pensions salesman. One is shown below.

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PERSONAL PENSION PROTECTION CERTIFICATE To our members: Before you sign up for a personal pension (and resign from your company pension scheme) you should get the salesman to sign this certificate. You do not have to, but it will ensure that the deal he offers you is the right one for you. I __________________________________________________ of ___________________________________________________ independent intermediary for / tied agent for / employee of _________________________________________________________ [pension provider]

HEREBY CERTIFY to _______________________________________________________ of______________________________________________________ [the member] that in accordance with: • the best advice rules; and • the know your customer rules I have: • examined the provisions of the ____________ Retirement Benefits Scheme and in particular • its history of benefit increases • its actuarial assumptions as to future growth • its benefit structure • its overheads • considered your personal financial needs and those of your family

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and am confident that the ______________ Personal Pension is a preferable pension arrangement having regard to your personal position. My commission / bonus / earnings in the first year from this sale will be £________ and in subsequent years will be £_____ pa. SIGNED ____________________ [personal pension provider/intermediary/tied agent] DATED ____________________

The state pension Giving advice on the state pension is a highly skilled art; it is better practice just to refer inquiries to a series of DWP leaflets many of which are well-drafted, or to the Age Concern guide (see Appendix VI, Further Reading).

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22 REGULATION I now come to another subordinate treasury, I mean that of the Paymaster of the Pensions; for which purpose I re-enter the limits of the civil establishment. I departed from those limits in pursuit of a principle, and following the same game in its doubles, I am brought into those limits again. That treasury and that office I mean to take away, and to transfer the payment of every name, mode, and denomination of pensions, to the Exchequer. The present course of diversifying the same object, can answer to no good purpose whatever its use may be to purposes of another kind. There are also other lists of pensions, and I mean that they should all be hereafter paid at one and the same place. The whole of that new consolidated list I mean to reduce to £60,000 a year, which sum I intend it shall never exceed. I think that sum will fully answer as a reward to all real merit, and a provision for all real public charity that is ever likely to be placed upon the list. If any merit of an extraordinary nature should emerge, before that reduction is completed, I have left it open for an address of either house of Parliament to provide for the case. To all other demands, it must be answered, with regret, but with firmness, ‘The Public is poor.’ J G Street, A Vindication on the Duke of Bedford’s Attack on Mr Burke’s Pension, London 1796

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Introduction There’s a lot of money in pension schemes, so it’s not surprising that it’s so well regulated. (Some would say that it’s not well regulated but over-regulated.) Since the value of their pension is worth more than their home to most people, it is probably just as well that there is some kind of supervision.

THE SUPERVISORS • The Pensions Regulator is a ‘quango’ (semiindependent of government) and checks that many of the terms of a pension scheme are fair, including transfers and ‘preservation’, and supervises trustees and employers to make sure they have performed their obligations to schemes. • HMRC checks that there is not too much money in a scheme, since it gives tax relief. • The HMRC APSS (National Insurance Contributions Office) checks that contracted-out schemes have enough in their kitty to meet the equivalent of the state second scheme contributions. • The Pensions Registry maintains a register of all schemes, so that people who have lost track of their schemes can try to find where they have gone to. • TPAS (The Pensions Advisory Service) is an advisory service to help people with preliminary queries. • The Pensions Ombudsman acts like a pensions court, where individual members, trustees and others can have their complaints listened to.

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• The Department of Work and Pensions sets out policy in pensions issues, and regulates the Pensions Regulator. • The Pension Protection Fund bails out pension funds where there is insufficient in the scheme, and the employer is bust. It also compensates schemes that are affected by fraud.

Each of these bodies is now examined in more detail. The Pensions Regulator The Pensions Regulator is supposed to police: • scheme funding • trustee behaviour • payment of contributions • transfer rights. Also it is obliged to help trustees and others improve their understanding of pensions arrangements and deals with the winding-up of pension schemes. It issues a range of guidance notes and codes of practice and has the power to disqualify trustees and fine them.

HMRC HMRC controls the funding of pension schemes; in particular it tries to ensure that there is not too much money in the scheme. All schemes need to be registered in order to ensure that the investments do not need to pay tax on their capital gains and their investment returns.

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Despite a determination to simplify HMRC rules, the tax law affecting pension schemes remains excessively complicated. HMRC examines pension schemes from time to time to ensure that the rules are complied with, and in extreme cases can remove taxation exemption, which could be a catastrophic liability and all but destroy the pension scheme.

The Pensions Registry The Pensions Registry is intended to enable people to find out who they left their pension with. With companies being taken over ever more frequently, and changing their name, it can be difficult to remember who employed you 20 years ago. The Pensions Registry (to which all schemes have to belong) has a computer with the names of schemes and employers to enable people to trace, like squirrels, who have lost their nuts, their pension rights.

TPAS – the pensions advisory service

Malcolm McLean, Chief Executive The Pensions Advisory Service is a government funded advisory service designed to take the steam out of a lot of pensions complaints that are based on inadequate information rather than a genuine grievance. If they find a serious well-founded complaint, they can try and resolve it amicably – or pass it over to the Pensions Ombudsman. They have

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advisers throughout the country – and best of all they are free. You should have no qualms about referring your members to them, although occasionally some of the advisers get bees in their bonnets about particular issues – and are often seen to be employee- rather than employer-biased, which is probably not true.

The Pensions Ombudsman The Pensions Ombudsman, described in more detail in the following chapter, is a kind of specialist court designed to solve pensions disputes. He has a small office in London and normally hears cases by post. The idea is that he is much cheaper than going to court. But the procedures are still not settled – and sometimes other ombudsmen or courts feel they should control the case.

The DWP – The Department of Work and Pensions

James Purnell, Minister of State for Pensions Reform The Department of Work and Pensions manages mostly the state scheme; it is also involved with contracted-out arrangements of personal and workplace schemes, stakeholder pensions and the Pensions Protection Fund and, with the Treasury, develops policy implications for workplace pension schemes.

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Financial Services Authority Investments are mostly supervised by the Financial Services Authority. Very few pension schemes are registered by the FSA, because they rarely manage their own investments. In most cases, pension fund trustees will appoint an investment manager (perhaps an insurance company or an asset manager) which will itself be authorised by the FSA. The fact that an investment manager is subject to regulation and supervision is no guarantee that everything is in order: it is still possible, despite the substantial regulatory framework put in place over the last few years, for funds to disappear. You cannot hope to ensure that fraud or mismanagement will never hit your funds but you can institute certain checks and balances to limit the risks – diversification, regular reporting and occasional investigations.

The Pension Protection Fund

Lawrence Churchill, Chairman, Pension Protection Fund The Pension Protection Fund offers a limited form of protection to members of schemes where there is insufficient in the fund and the employer is no longer available to put more funds in the scheme. Broadly it protects all pensions in payment, and 90% of pensions not yet in payment up to maximum payments of £25,000 a year.

Electronic Governance Solutions Alastair McLean, UBSi The pressure on business to improve corporate governance is having a ‘knock on’ effect with regard to pensions governance. Proposals from the Financial Services Authority requiring listed companies to demonstrate the quality of their internal controls (and the Sarbanes-Oxley Act of 2002 in the USA that affects any entity raising money in the USA) has resulted in pensions governance receiving a higher profile than it has previously. This higher profile has resulted in the Pension Regulator issuing its Trustee Knowledge and Understanding (TKU) Code of Practice; the requirement that trustees have excellent knowledge and understanding not just of their own scheme, but a good understanding of pensions, funding and investments in general. To meet the governance standards required, all parties responsible for the pension scheme (be it Chairman, Chief Executive, Finance Director, Human Resource Director, Pensions Manager or Trustee) should be confident that they can answer such questions as: •

Can we be sure that the policies we have put in place have been implemented?

•

Are all investment managers following the investment mandates?

•

Is the reporting we receive sufficient for us to be comfortable with the way the pension scheme is run?

•

Are the Trustees suitably (and demonstrably) skilled and trained to ask appropriate questions of advisors and to make the appropriate decisions concerning investments – or other issues?

•

Are our suppliers meeting their service level agreements?

•

How easy is it for us to check on the effectiveness of all parties responsible for contributing to the scheme’s performance?

Those responsible for the overall governance of the pension scheme need to understand what is expected of them on a personal level and what is expected of their advisers and suppliers. They also need a means of monitoring those activities and the ability to take whatever action is required. This is true whether they represent the trustees’ or the employer’s interests. This is also true whether the scheme is administered in-house or outsourced to a third party. The scheme’s advisers also need to have a full understanding of the scheme to properly advise the trustees and/or the scheme sponsor.

Electronic Governance Tools Electronic governance tools (like UBSi’s CAGe™) are expected to benefit those with oversight responsibilities for pensions in three main areas: •

Knowledge capture and distribution – including greater empowerment of the scheme sponsors and trustees. CAGe™ can ensure that trustees have access to all the information they need to fulfil their TKU requirements.

•

Facilitation of trustee responsibilities through a scheduling and automated alerting system. Tasks considered important can be scheduled, so that timely email reminders are issued to relevant parties. This is particularly beneficial to trustees with ‘day jobs’ (i.e. other non-pension responsibilities).

•

Better and more efficient management of suppliers and advisors.

If, like CAGe™, the governance system also permits collaborative working, this will enable the external scheme advisers to gain a better understanding of the scheme and the issues it faces, which in turn should result in more focused and more relevant advice.

Knowledge Capture In most organisations pension knowledge is widely distributed. While some knowledge rests with key people such as members of the pensions department, much knowledge rests with third parties (e.g., actuaries, solicitors, investment advisers). This leaves the scheme sponsor and/or Trustees in a potentially vulnerable position. The ‘knowledge capture’ benefits of electronic systems include: •

Reduced risks (and implied costs) of ‘lost’ knowledge – by capturing the existing: –

historical knowledge; and

–

knowledge of future tasks

from current advisers and current staff. •

Reduced dependence on third parties who typically hold dispersed knowledge.

•

Increased ease and reduced cost of changing third party advisers (or changing team members within an existing third party adviser).

•

Centralised documentation ensuring one consistent up-to-date view.

•

Reduced cost searching for knowledge and documentation (systems like CAGe™ make even historical paper documentation word searchable).

•

Focused information – by creating information ‘views’ dependent on roles.

•

Access to the web-based knowledge allows: –

home-working

–

non-centralised trustee boards to access all the information they need

–

new trustees to immediately have knowledge at their fingertips.

•

Greater trustee empowerment to identify the ‘real’ issues.

•

Increased ‘transparency’.

Maintained audit trails.

Governance Benefits Trustee boards usually consist of people who have ‘day jobs’ (i.e. other ‘non-pension’ roles) to perform. A fundamental governance principle is that a trustee should either: •

be assured that required tasks are being performed; OR

•

be alerted to the fact that they are not being performed.

A good electronic governance system will be able to issue automated email alerts to trustees (or other profile groups) whenever a task fails to be performed. Under current legislation, it is the trustees who bear the responsibility for these failures and who will be held to account for any ‘failures’ that occur. The benefits of a collaborative electronic governance system are: •

Greater ability to demonstrate Trustees are responding to new legislative requirements, such as TKU.

•

Reduced risk of exposure to the ‘failure’ of ‘delegates’.

•

Clear objective identification of areas where a Trustee is exposed.

•

Reassurance that defined tasks have been performed.

•

Ability to be notified when certain information is produced.

•

Greater empowerment to question ‘failed’ performance.

Management Benefits A good electronic system will provide a framework for the management of the pensions function by: •

Automatically chasing statutory and management documents that need to be produced according to timescales, e.g. Trustee papers and minutes.

•

Automatically alerting interested parties to the production of a new document.

•

Automatically alerting management to the failure of third parties to deliver, in accordance with previously agreed delivery targets.

Thus: •

Management time chasing and distributing information is reduced.

•

Supplier responsibilities are clarified.

•

Suppliers who ‘deliver’ (and those who do not) are objectively identified

•

There is increased ‘transparency’ of management activities and supplier performance.

Overall, this reduces the likelihood of non-compliance and associated management risks.

Components of an Electronic Governance System An electronic governance system should be designed to address the issues outlined earlier. The system will do this by providing one secure location where each of the pension scheme’s stakeholders (and advisers) can access and/or provide information in accordance with their position and responsibility. This location can be on the Internet or the Intranet. As pensions governance becomes more complicated with each new piece of legislation and regulation, the system should provide each individual with a personalised view of the documents as well as the communications and analyses necessary for their role. The system should also highlight any that are missing or overdue – at a glance. The core components of UBSi’s CAGe™ system are: •

A summary that provides information about the scheme at a glance.

•

A fully searchable document library.

•

Modules for Trustee and committee meetings.

•

A Trustee compliance module that provides all the information that the Pensions Regulator believes are necessary to undertake that role including: –

a TKU Checklist with facility to attach training materials; and

–

a TKU Assessment section, which summarises for each trustee their status with regard to their trustee knowledge and understanding.

•

‘Adviser’ modules.

•

An integrated document and task scheduler to assure the trustees that the managers of the scheme are being compliant.

CAGe™ can also be used as a tool to collate and monitor information about: •

Scheme Investments

•

Scheme Liabilities

•

Scheme Stewardship.

Within the new pensions environment, all trustees need to be aware of their oversight responsibilities and be given the tools and information to do this. Electronic governance tools (like CAGe™) can meet those needs.

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23 DISPUTES

Old Communist methods played their part in ensuring Mr Kravchuk’s election – above all, the state control of radio, television and many of the newspapers. “It has been a very unequal campaign,” the main opposition candidate, Vyacheslav Chornovil, told me, “On television, for instance, we have calculated that Kravchuk received 62 per cent of the coverage of all six candidates. In the Donbass (the coal and steel region of the south-east) I found that many governmentrun institutions were being used to campaign for Kravchuk – not just the local newspapers, but the post office as well.” That other powerful mass-medium, rumour, was also being used on Kravchuks’ behalf: rumour had it, for example, that Mr Chornovil would take away the farm-workers’ pensions when he privatised the collective farms. For me, having heard precisely the same sort of rumours during the Rumanian elections last year being put about by so-called ‘exCommunists’, there was a strange sense of déjà entendu. Noel Malcolm, Brave New Nation, Same Old Rulers, The Spectator, 7 December 1991

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Introduction From time to time even the best-run pension fund becomes involved in a dispute of one kind or another. The trick is in managing the dispute so as to minimise the legal costs and ill-will that can emerge. Most disputes can be resolved by negotiation – and good communication can often prevent them arising in the first place. In other cases the litigation (ie court fight) is a formal affair: going through the motions to make sure no-one feels aggrieved.

DISPUTE RESOLUTION • Negotiation • The Pensions Regulator • The Pensions Advisory Service • Internal dispute resolution • Alternative dispute resolution • Conciliation • Pensions Ombudsman • Employment Tribunal • County Court • High Court • Court of Appeal • House of Lords • European Court of Justice • Financial Services Authority

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Internal dispute resolution You must organise some form of internal dispute resolution, so that any member who is unhappy about the administration of the scheme or the benefits he is getting can have his case properly considered by the scheme – and, where provided for, re-considered. The system is intended to allow members to have a way of cheaply getting their complaints heard, and to save the fund money. If the member is still dissatisfied, he can still complain to TPAS and the Pensions Ombudsman.

Alternative dispute resolution If all else fails, many trust deeds make provision for arbitration, and increasingly frequently these days, alternative dispute resolution. The benefit of arbitration is that it is private – but it can cost as much if not more than ordinary litigation. Alternative dispute resolution (ADR) is a method under which an independent person attempts to reconcile the parties. The advantage is that it is cheap, quick and simple, but it doesn’t suit everyone – and there is a shortage of people able to carry out the procedure. Otherwise, the courts can become involved: these include the employment tribunals, the County Court, the High Court, and others set out in the table, including the Pensions Ombudsman and the Pension Protection Fund and The Pensions Regulator.

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The Pensions Ombudsman

Mr David Laverick, The Pensions Ombudsman The Pensions Ombudsman’s job is to sort out ‘maladministration’ in pension schemes, and in particular complaints that have not been settled by internal dispute resolution or by OPAS. Anyone can complain, and the costs are at his discretion, but they are likely to be low. There is also no need for a hearing – it can all be done by post. The Pensions Ombudsman is not normally the place to sort out problems between trustees themselves; his main interest is most keenly on the problems of private individuals. The annual report of the Pensions Ombudsman describes the kind of problems that commonly emerge. He may refuse to accept cases because they are too old, or would be better dealt with elsewhere, or because he doesn’t understand them. There are now several hundred reported Pensions Ombudsman decisions and the kinds of problems that afflict pension schemes and their members change from year to year. The big difference between the Pensions Ombudsman and all the other ombudsmen that are around is that he has the powers of a court of law – and the courts are quite keen to restrict the power of the Ombudsman.

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The courts The courts are not the best people to sort out your problems. So far as pensions are concerned, they have the following drawbacks: Employment tribunals, which can award judgments up to around £50,000, are mostly involved with contracts of employment (not affecting pension funds directly) although they can interfere and decide whether a contracting-out certificate should be granted despite union objections. They can be categorised as well-meaning but unskilled. County courts are involved with disputes up to £50,000 (in most cases), and do have control over pension funds in theory in matters up to that amount, or where the trustees or others fail to give information to members or others, or to enforce the Ombudsman’s decisions. In practice they are very inexperienced in pensions claims, and could take many (expensive) days to come to a decision. The High Court covers all other matters. Normally pensions cases are dealt with by the Chancery Division of the High Court, the division of the High Court that so upset Dickens in Bleak House. It is a little better nowadays, but not much. In one pensions case, the legal fees amounted to £1.5m – after which it was discovered the matter in dispute was £100,000. Most matters can go to appeal. From an employment tribunal, appeal is to the Employment Appeal Tribunal (a division of the High Court). From the County Court and High Court you appeal to the Court of Appeal, and then, if still solvent, to the House of Lords. At any time, matters can be referred by a UK court to the European Court of Justice for an opinion on a matter of principle. Some human rights-related cases go to the European Court of Human Rights. The costs of going to court are frightening. It is not the fault of the lawyers – but of the judges, who insist on the production of huge quantities of information, copies of documents of every description and amount, and run a Rolls Royce system of justice when most would

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be content with a Ford. The Pensions Ombudsman was designed to cut a swathe through this, but there is evidence emerging that some cases would be more quickly and effectively dealt with by the courts.

Disputes with the employer No one likes to fall out with the boss – but as a trustee of a pension fund that very rarely might be your function. The most common problems include failure to pay, or agree the level of, contributions – or comply with a request to return some surplus in the fund. The best route for everyone is to obtain independent advice, both legal and, where necessary, actuarial. Only in very rare cases will you need to go to court to have a problem settled. It is unpopular because it is slow, expensive and unpredictable. (You might in some cases be able to go to the Pensions Regulator or the Pensions Ombudsman.) Whatever happens, you should make sure that you get your expenses paid for first – either you will have power to reclaim your costs in the deed – or you may need to go to the court first to get your costs approved out of the fund under the Rule in Beddoes case in case your lawyer has overlooked it.

Disputes with the members It’s also no fun having a fight with your members – after all, you are there to protect their interests. As before, sometimes the fight is a formal one, to have the matter settled by an outside person so that no-one can complain afterwards.

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24 DIVORCE AND FAMILY MATTERS Introduction Since pensions became one of the great family assets after the war (eclipsing, for example, the value of housing in many cases, especially public sector fund members) quite what to do about pension rights on divorce has proved something of a conundrum. Since 2000, however, the rules have settled down a little and the law provides that the courts can sort out pension arrangements on divorce in one (or a mixture) of several ways. First, by rearranging the allocation of assets, so that if one party keeps all the pension rights, the other party gets for example more of a share of the house. This is sometimes called offsetting. It is usually the preferred route because it is so simple, but it doesn’t preserve pension rights for the divorcing spouse. An alternative is ‘attachment’, where the court grants an order against a member’s pension rights, so that some or all of them are paid to the former spouse when they fall due; the downside for the former spouse is that they usually only get paid if she (normally) does not remarry, or where the member lives a reasonable length of time after retiring. It is high risk for the former spouse. Thirdly, the courts now have the power to order ‘sharing’, where some or all of the pension rights are put in the former spouse’s name.

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It has not been widely used as a remedy usually because the way in which it is valued makes it less useful than the others. Trustees only become involved in approving the last two remedies, and may decide not to accept a former spouse as a member in the sharing route but merely make a transfer available as an option.

Gender reassignment The Gender Recognition Act allows transsexuals to formally change their sex status in official documents. In practice the condition is a rare one, so the costs of pensions for individuals moving from male to female for example are minimal. There are pages of rules governing the position which mostly relate to state pension arrangements.

Civil partnerships Same sex relationships can now be formalised with a civil partnership agreement. Pension schemes are free to recognise such arrangements or not as they think fit, but the general consensus is towards recognition. If so, then it is considered improper to discriminate between conventionally married couples and civil partners, although scheme rules can be redrafted if wished so as to allow trustees to exercise discretion in paying benefits to dependants, so that scarce funds are allocated where really needed.

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Supporting Pension Trustees Hillier Hopkins LLP We currently act for approximately 100 pension schemes and provide a range of services to address the increasingly complex responsibilities of pension scheme trustees. We have extensive contact with actuaries and administrators as well as independent trustees and hence can provide an effective advice service in addition to our role as auditors. Supporting you by: •

Guiding you in gaining a better understanding of your important role.

•

Keeping you up to date with new developments in pensions legislation.

•

Advising you of any changes in tax legislation that impact on your scheme.

•

Assisting you in presenting the annual financial statements in line with current best practice.

•

Offering a full range of employer covenant review services.

•

Providing you with a dedicated and experienced team and ensuring you have continuity of staff.

•

Delivering a no-nonsense, hassle free service.

•

Offering competitive fees.

Flexible Employer Covenant Reviews One important new service available to you as a trustee is to regularly review the employer covenant to ensure that the scheme sponsor is able to continue to meet your scheme’s liabilities. Our belief is that, given the fast changing nature of business, this should be approached as an ongoing part of the management of the pension scheme. As a trustee, you want to feel comfortable that factors affecting the sponsor’s business are reviewed against the covenant. For this reason we can offer you a range of services, from a complete indepth review to be carried out on an annual basis, right through to an ad-hoc review of the covenant following recent or planned changes in the business.

Supporting you by: •

Offering you complete flexibility on the level of detail and service you require.

•

Furnishing you, as necessary, with a regularly updated picture of the employer covenant status.

•

Giving you peace of mind that you are fulfilling your responsibilities as a trustee.

•

Providing a cost effective solution to this vital area of your responsibilities.

We continuously deliver a high quality service to our pension scheme clients and we would be delighted to offer you a free no obligation comparison quote for any of the services you require. Our pension team is led by Phil Collins, Partner, and supported by Managers Paul Brunt and Stuart Hoey. Phil is a pension scheme specialist audit partner, based in Watford, also responsible for a number of corporate clients. He trained with Touche Ross and qualified in 1983. He worked with Hillier Hopkins during the mid 1980s before returning as partner in 1997 bringing with him a large portfolio of clients. Phil has been instrumental in winning for the practice audit work from some of the largest blue chip companies in the United Kingdom. His role as partner is to oversee the audit, involving himself with the higher-level decisions as well as being available to the trustees for specific advice and guidance. Paul trained with Hillier Hopkins and qualified in 1989. He has specialised in pension scheme audits since 1992 as this part of Hillier Hopkins client base has grown. Stuart was recruited in October 2002 to strengthen the pension scheme audit team and has many years’ experience of pension scheme audit clients. We produce a regular newsletter called PensionLine, which we would be delighted to send you, free of charge. If you would like to receive a copy of this, please email [email protected] giving your full name and postal address or call Anna on 01442 220718. Hillier Hopkins LLP St Martin’s House 31-35 Clarendon Road Watford, Herts, WD17 1JF (Other offices at Aylesbury and Hemel Hempstead) Enquiries: 08452 770660 or [email protected] www.hillierhopkins.co.uk

“We inherited three pension schemes in 2000 following a business acquisition. Hillier Hopkins were appointed auditors to these schemes shortly afterwards and helped us sort out numerous problems that had accumulated over the years. They also helped us with the provision of accounting services for our main pension scheme at a time when our internal resources were particularly stretched. The same partner and manager have been working with us throughout this period, which is very reassuring for us, and they have proved efficient and effective throughout. Overall, we are delighted with the service we have received and will definitely consider them for any similar work in the future.” Geoff Mellor – Whitbread Pension Group “We have found the service much more targeted and useful than that provided by our previous big 4 firm… overall very impressed.” Brian Murkin – Institute of directors

Additional information We are members of both the Pensions Research Accountants Group (PRAG) and the National Association of Pensions Funds (NAPF). Registered to carry on audit work by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Services Authority.

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We are members of both the Pensions Research Accountants Group (PRAG) and the National Association of Pension Funds (NAPF). Registered to carry on audit work by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Services Authority.

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Building knowledge Learning and development for trustees Take advantage of support, education and guidance from the Pensions Regulator our website to find codes of practice for the pensions Visit community as well as a range of guidance material for trustees, employers, advisers and members. It’s all at

www.thepensionsregulator.gov.uk. Keep up to date by signing up for news-by-email too. online with our e-learning modules in the trustee toolkit. Learn It’s free, available to all and is flexible; work wherever, whenever and at your own pace. You will cover all the trustee knowledge and understanding requirements of the Pensions Act 2004, for both defined benefit and defined contribution trustees. Visit

www.trusteetoolkit.com.

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APPENDIX I

THE BLUFFER’S GUIDE When pensions people get together for a party, one of the party games they play is ‘Definitions and Abbreviations’ – there are not many who can score 100%. Set out below are some of the terms used in this Handbook, and others which you may come across in practice. Accrual is the system under which benefits are earned year-by-year in a pension scheme. The more years you work, the more rights you accrue (or earn, perhaps). At the moment it is important in pensions at the moment because it is the basis of the argument the UK government is using in the European Court to explain that pension rights in the UK do not magically appear once you reach retirement age, but are painfully acquired (and funded for) year-by-year. Actuary is a mathematician who by definition always gets it wrong. He estimates what he thinks the funds will earn over the next 20 years or so, what your salary will be over the next 30 years and. on the basis of these and other assumptions, calculates backwards how much money needs to be put in the kitty now. Even though he can predict the future no better than an astrologer (according to one blessed judge) he is worth every penny of his substantial fees. Additional Voluntary Contribution was the extra contribution (not more than 15% of salary) which a member could pay into a scheme to buy extra benefits. At one time members had a right to make such contributions, but compulsory provision for AVCs disappeared after April 2006.

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Administrator is an HMRC technical term to describe the person with whom the buck stops as far as they are concerned. It is your job to ensure that is not you – and is someone like the pensions manager or insurance company. Appropriate personal pension is a personal pension which provides for an employed person a S2P benefit through a personal arrangement with a bank, building society, insurance company or unit trust. Due to the immense costs of administration charged by insurers and others – and it is not guaranteed – it is peculiarly inappropriate for most people, hence its name. Beauty Parade is a competition you can hold where you invite potential advisers to display themselves to best advantage, indicate how little they charge, and how special is their service. It can be by post, or you can actually meet a short list. They can involve huge expense for the contestants, and are surprisingly time-consuming and exhausting to judge. You should not normally kiss the winner. Contracting-in is the opposite of contracting-out. Contracting-out is a system under which a company pension scheme provides benefits equivalent to one of the state pensions (the State Second Pensions – S2P (formerly the State Earnings-Related Pension Scheme – SERPS) in exchange for the employer and employee enjoying reduced National Insurance contributions. In recent years, the government offered a bribe (incentive) to persuade people to contract-out and anticipated the cost would be about £750m – it actually cost around £8bn, say 2p on the income tax. Corporate Trustee is simply a trustee who is a limited company, rather than an individual. Customer Agreement is an agreement between the trustees and the investment managers, which is required by law. Although it must state certain terms, the content of those terms is open to negotiation. Most customer agreements are very user-unfriendly.

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Deferred Pensioners are people who have left the company usually to go and get a better, higher-paid job with a competitor. You may feel that they have forfeited your sympathy, but they are nonetheless beneficiaries under the scheme, and you must treat them in the same manner as you treat other beneficiaries. Derivatives are so-called investments which are one stage removed from reality. For example, instead of buying a share in Marks and Spencer, you might buy the right to buy a share in Marks and Spencer in three months time at a price fixed now and hope that the price will rise in the meantime. If the price falls you will still have to buy the share at a loss, with money you might not have at the time. For most pension funds they are not suitable, unless used in conjunction with some other strategy, such as the intention to buy an investment overseas. Take great care and special advice. Derivatives include Swaps, Futures and Options – they are not explained because you should normally keep away from them. Independent trustees are trustees who are not connected with the employer or the fund’s advisers. They are increasingly common these days to help trustees avoid any pressures arising from conflicts of interest. Personal pension is a pension which operates like a money box for an individual. He or she saves money each month and hopes that when retirement is reached there will be enough to buy a reasonable pension after the investment management charges, dealing fees, commission expenses, marketing overheads and administration costs have been paid, and that the Stock Market will not have collapsed three days before retirement. It can be useful, however, for young, mobile employees. Preservation is a law which states that you do not forfeit your pension rights just because you leave the employer sometime before retirement. It is not a perfect law, but it is very much better than it used to be, and is getting better all the time. It is explained in Chapter 17.

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Protected rights are the rights which, in a contracted-out money purchase scheme, replace the rights you would have earned under SERPS. Since they are money-purchase, you have no idea what they are until retirement, so that they are not in fact protected at all. S2P is the State Second Pension which was introduced in 2002 to replace over time the State Earnings Related Pensions (SERPS). It is a flat-rate pension which gives benefits to people who are earning under £11,000 as though they had been earning that amount. Common sense dictates that since it is a flat rate pension it will eventually be merged with the Basic State Pension. It can be provided by the state (in which case the individual is contracted-in) or by a company scheme (which is contracted-out) or through a personal pension, if you are in employment (in which case it is called an appropriate personal pension). SERPS was the State Earnings Related Pension Scheme, a second state pension introduced by Barbara Castle in 1978. Soft commission is so called because trustees who are soft-hearted allow fund managers to enjoy what is in effect Christmas twice-a-year. It allows investment managers to use stockbrokers to buy and sell your shares at a high commission rate so that the stockbrokers can buy them gifts (not normally cheapies, like silk stockings and champagne, but really expensive ones like Reuters screens). Don’t allow it without good cause. The Myners review published by the Treasury in March 2001 recommended the abolition of soft commission arrangements. Split fund is an arrangement which means that you divide the assets of your scheme between different fund managers and watch them compete. Some schemes have up to a dozen fund managers, but even for the smaller schemes a couple is not a bad idea. Survivors is the modern term for ‘widows and widowers’; it is shorter and discrimination-free.

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Abbreviations APSS (part of HMRC). AVC Additional Voluntary Contribution (see Definitions). COMPS, CIMPS, COSRS, CISRS etc Contracted-out Money Purchase Schemes, Contracted-in Money Purchase Schemes, Contracted-out Salary Related Schemes, Contracted-in Salary Related Schemes. DWP The Department of Work and Pensions, which governs contracting-out, pensions policy and state pensions. GMP Guaranteed Minimum Pension being the replacement (by the company scheme) for the state second tier pension. Nowadays it may not be guaranteed or provide a minimum. HMRC Her Majesty’s Revenue and Customs. IRNICO Inland Revenue National Insurance Contributions Office. PPF The Pension Protection Fund uses your money to protect other people’s pensions. How long it will survive in its present form is uncertain. TPAS The Pensions Advisory Service. TPR The Pensions Regulator, formerly the Occupational Pensions Regulatory Authority (OPRA), formerly the Occupational Pensions Board (OPB).

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THE PENSION TRUSTEE’S HANDBOOK 5th ed

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APPENDIX II

THE BRITISH PENSIONS SYSTEM Ministers, he [Sir Michael Partridge, Permanent Secretary at the Department of Social Security] said, regarded the far greater takeup of the scheme – and thus its far higher cost – as a ‘success’, not a matter for apology. But he also disclosed that the cost of [contracting-out] rebates had been so high that ministers had had to transfer three benefits, including statutory maternity and sick pay, out of National Insurance and onto general taxation, in order to balance the National Insurance Fund’s books. Michael Latham, Tory MP for Rutland and Melton told Sir Michael: “Any more successes [like that] and we are all ruined.” Nicholas Timmins, The Independent, 18 December 1990

The system The British pensions system appeals particularly to people who like to do the Times crossword puzzle. It is one of the most complicated and over-regulated in the world and there are relatively few who fully understand all its implications. In brief, it works as follows: • Everyone who has a job, including the self-employed, and earns over around £5,000pa is entitled to a basic state pension, provided sufficient contributions have been paid over the years.

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed • Also, an additional state pension (also known as S2P, the state second pension, and formerly organised as SERPS – the State Earnings Related Pension) is payable to people who have been paying extra contributions since 1978. This is payable either by the state (when it is said to be contracted-in) or by a company pension scheme (when it is said to be contractedout) or by a personal pension scheme (when it is said to be appropriate). • In addition, around 10 million people are earning rights under a company or occupational pension. The rules vary tremendously from scheme to scheme, but HMRC set down the maximum amount of pension rights (around £1.5m worth in a lifetime, say a pension of around £70,000) and no more than £215,000 contributions in any one year). For most people, that is not an issue, but the rules that control remain even more complex than they were before the great reform of the Finance Act 2004. • Some people have decided not to join their company or workplace scheme. They can do nothing – or make contributions to a personal pension scheme. A personal pension is the only kind of pension which the self-employed can enjoy. A personal pension can only be money purchase, not final salary.

State pension credit The state pension credit is in two parts: the guarantee credit and the savings credit. The guarantee credit is a form of means-tested income support for the over-60s who are on low income and work fewer than 16 hours a week. Lower benefits are paid where there are savings of over £6,000. The savings credit is intended to reward anyone who has made their own provision for retirement. It is paid from age 65, and pays an allowance of 60p per £1 of income between around £80 and £110. No savings credit is paid where income exceeds around £150. The joint complexity of these two benefits (a payment if you have not saved, and a payment if you have) is under review and it

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may be that all the state pension arrangements will be ditched in favour of a simple single pension paid to everyone over a certain age.

HMRC rules HMRC lays down the rules which decide whether pension funds are eligible for tax relief. Nowadays their jurisdiction is diminishing slightly as they have foregone control of unapproved unfunded schemes which provide pensions for top-earners; but in most cases they are concerned to police schemes to ensure that the benefits they pay are within bounds and that they do not provide benefits worth over around £1.5m in total without paying extra tax. It is not clear whether the skies would fall in if HMRC were abolished and replaced by some simple rules (as in other countries). There were around eight different tax systems that could apply to pensions, depending on when the member joined, when the scheme was set up, and what kind of scheme it is. Now there is only one, but more pages of law than ever before.

Self-administered and insured All company pension schemes in the UK are strictly speaking selfadministered, ie managed by trustees. But schemes which have delegated all the investment and administration to insurance companies are said to be ‘insured’. For trustees, there may be problems with insured schemes. Firstly, it is sometimes very difficult to work out what the management and investment expenses are (usually higher than self-administered schemes for all but the smallest funds). Secondly, the actuary sometimes has a conflict of interest between acting for you and acting for his employer (the insurance company), and may be tempted to suggest higher contribution rates for example than might be strictly necessary (in order to raise fees) or lower amounts than might be

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prudent (in order to get business). Thirdly, the contracts imposed by insurers (if you ever get a chance to see them) can be rather onesided, in their favour, with unacceptable penalty clauses for early discontinuance – which is why almost all the larger pension schemes tend to go self-administered as soon as they are old enough.

Money purchase and final salary A final salary (defined benefit) scheme is one of the great antidotes to the effect of inflation on pensioners, although it is not perfect. It promises benefits related to the salary at the date of leaving, usually according to some formula related to the number of years you have worked with the company. One example is to promise a pension of 1/60th of final salary for each year you work with the company. If you work for 40 years, you will get 40/60ths, ie 2/3rds. With luck there may be some element of inflation protection once the pension starts in payment. (The Americans call this kind of scheme ‘benefitsrelated’.) A money purchase (defined contribution) scheme doesn’t promise anything at all. It establishes a kind of piggybank into which your contributions and those of the employer (if any) are paid. The money is invested – and at the end of the day whatever is available is gambled with an insurance company. Your bet is that you will live a long time, and the premium or wager will pay off. The insurance company hopes on the other hand you will die soon, so it can make a profit. The value of the pension depends not on your salary at retirement, but on what the accumulated pot will buy at the time – and the value of the pot may be affected by changes in the value of the shares or other assets at the date you retire.

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Unfunded schemes The point of a funded scheme is that if the employer does not meet his promise for any reason (eg bankruptcy) there will be money available to meet the promise. HMRC rules now make it tax inefficient (with some exceptions) to pre-fund pension rights in excess of broadly £70,000pa, so there is no security for those with higher pensions.

AVCs As very few people actually spend 40 years with one company, very few people actually accrue full pension benefits (for why not, see Chapter 17). They were therefore allowed to make additional contributions (within limits – 15% of their salary) to their scheme. These were known as Additional Voluntary Contributions, for obvious reasons. Because of changes to the tax rules, individuals can now gain pension rights of up to £215,000 a year, and there are no limits as to how many pension schemes they can contribute to, so it is now up to schemes themselves whether they will allow you to make AVCs.

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APPENDIX III

PENSIONS BY NUMBERS What tax relief is there on pensions? In fact pensions cost the state very little indeed in terms of lost tax; pension arrangements are largely fiscally neutral, rather than fiscally privileged because although there is tax relief on the contributions made and the build up of investments, tax is paid on the benefits. There is, however, an advantage in that some of the pension can be taken as a tax-free lump sum, and that sometimes the income tax paid on the pension is lower than the tax that would have been paid on the salary. The Treasury considers that the annual tax relief given amounts to £16bn; most normal people consider the opposite is true – that the pensions movement probably contribute to the Exchequer around £5bn a year on balance, ie it is tax inefficient for companies to pay into funded arrangements than simply to pay a lower salary in retirement.

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Can I live on the basic state pension? Since 1948, single person, pa, £ Basic State Pension

5000

4000

3500

3000

2500

2000

1500

1000

500

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1991

1993

1990

£s per single person, pa

1992

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1975

1974

1973

1972

1971

1969

1967

1965

1963

1961

1958

1955

1952

1951

1948

0

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£795.60

1992

£2,815.00

1977

£910.00

1993

£2,917.20

1978

£1,014.00

1994

£2,995.20

£104.00

1979

£1,211.60

1994

£3,060.20

1958

£130.00

1980

£1,411.80

1996

£3,179.80

1961

£149.50

1981

£1,539.20

1997

£3,247.40

1963

£175.50

1982

£1,708.20

1998

£3,364.40

1965

£208.00

1983

£1,770.60

1999

£3,471.00

1967

£234.00

1984

£1,861.60

2000

£3,510.00

1969

£260.00

1985

£1,991.60

2001

£3,770.00

1971

£312.00

1986

£2,012.40

2002

£3,926.00

1972

£351.00

1987

£2,054.00

2003

£4,027.40

1973

£403.00

1988

£2,139.80

2004

£4,139.20

1974

£520.00

1989

£2,267.20

2005

£4,226.60

1975

£603.20

1990

£2,438.80

2006

£4,381.00

1975

£691.60

1991

£2,704.00

1948

£67.60

1976

1951

£78.00

1952

£84.50

1955

What will pensions cost the country? The government is concerned about the future cost of state pensions, which is why it encourages private pension provision with tax breaks. Recent estimates suggest the cost of public sector pensions might amount to £690bn in March 2005 (Watson Wyatt, February 2004); this excludes the cost of state pensions. But it is expected that state pension arrangements in the next few years will be simplified immensely, and paid later in life at a higher rate than presently. Current spending suggests it will involve around 6.3% of GDP by 2050, up from 5.9% of GDP at present (around £65bn pa). This is around half the average for other EU Member States.

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How important is grey power? The UK has about 11 million people over state pension age, about 20% of the population. Adding all those over the age of 55, and taking into account the fact that older people vote much more often then younger people, some observers suggest that those over 55 have around 80% of the voting power in the UK.

How long will I live? The life expectancy for a man aged 65 was about 11 years in 1950; by 2050 it is expected to be about 28 years.

How important are workplace pensions? In 1979 around 30% of single pensioners enjoyed an occupational pension on average of £40 a week; by 2001, around 50% of single pensioners enjoyed around £80 a week from occupational pensions. The number of workplace pensioners is expected to fall over the coming years.

Are there enough people working to support me in my old age? The dependency ratio (the number or people working age 20-64, compared with the number of retired people over age 65) in 1941 was around five to one; by 2050 it is expected to be about two to one.

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APPENDIX IV

BLUFFER’S CASES One of the things that irritates many trustees is the throwaway reference made in conversation by advisers to famous law cases. Set down below are brief outlines of some of the more important cases, and ones which are referred to frequently in practice. Because three of the cases deal with the Imperial Group pension scheme, they have been given their alternative colloquial names to avoid confusion. References are given to enable further study if required. A full treatment here is not possible; there are now around a hundred cases a year in the courts, and several hundred ombudsman decisions, many emerging from company reconstructions, the interpretation of deeds or insolvency.

Investments Scargill Arthur Scargill, the miners’ leader, was a trustee with other union members of the mineworkers’ pension scheme. When the in-house fund managers produced an investment plan and sought the approval of the trustees, he objected. The plan included investments in property in the United States, and in oil shares; the union objected on the grounds that a UK fund should invest in the UK to support the UK economy, and that a coal pension fund should not support the shares of a competing fuel industry. The judge held that the only objective which trustees should bear in mind is the financial performance of the fund; trustees should not promote their external objectives which might have an adverse impact

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on the fund’s performance. It did not hold that social and ethical investments were inappropriate for pension funds; but where these criteria are involved trustees need to ensure that their members will not suffer. (Cowan v Scargill, Re Mineworkers Pension Scheme Trusts [1985] Ch 270) Grumman This is an American case – but very relevant to current problems. Although it is forbidden for pension funds to buy too much of its parent company’s shares nowadays, it may have some shares, or shares in the predator. Should it take the best price – or help out the employer? Conventional trustee thinking should say: take the money and run. But other minds have thought that you could take into account job prospects and other matters affecting the members for whom you care. The Department of Labor in the States (which looks after pension schemes) sued the trustees who had refused to sell the Grumman fund’s shares in Grumman, the fighter aircraft manufacturer, to Lockheed which had made a juicy offer. But by the time the case came to trial, the share price was higher than ever, so the Department could not show the trustees had made a loss, and dropped the case. (Blankenship v Boyle (1971) 329 F Supp 1089)

Surpluses – whose money is it? Hillsdown When Hillsdown bought a subsidiary company from the Imperial Group, the bulk transfer payment received in respect of the members who became employed by Hillsdown did not include a share of the surplus in the Imperial fund. The judge said that in reality the surplus was ‘temporary surplus funding’ by the employer, and that in the particular case the members had no interest in it. For a short time it indicated that there was nothing wrong in employers

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claiming a return of surplus. (Re Imperial Foods Ltd Pension Scheme [1986] 1 WLR 717). The compliance rules (if surpluses ever return) would be a little different now, but the principle is now well established in other later cases. Courage The next year, in a case involving the same scheme, a different judge held, however, that surpluses could not be automatically recovered by an employer as part of a commercial transaction. There was no principle that a surplus by its nature was the employer’s, even in a ‘balance-of-cost’ scheme, that is where the employer pays whatever contributions are deemed necessary by an actuary. This made it difficult for advisers to determine when a surplus could be recaptured by employers, and when it could not. (Ryan v Imperial Brewing and Leisure, Re Courage Group’s Pension Schemes [1987] 1 WLR 495) Mettoy When the Corgi toy car company went bust, it left behind a string of debts and a large pension scheme. The scheme was so large it had around £9m surplus left after the scheme trustees had bought the appropriate benefits for all the pensioners and other members. The question was whether the liquidator of the company could also act as trustee of the fund, and pay himself (as liquidator) the surplus, which he could then pass on to the creditors of the company. After a fair chunk of the surplus had been spent on legal fees (not just the fault of the lawyers – the judge insists on all conceivable parties (such as widows and children) being separately represented) and many years travelling through the courts, the judge simply said that he would approve a deal involving improvement of benefits and return of surplus, if it were brought to him. (Re Mettoy Pension Scheme [1990] Pensions Law Reports 9)

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Davis v Richards and Wallington This is another case where the employer was in liquidation. The judge said that if it had not been for the fact that the documentation was in force, the surplus in relation to the employers’ contributions could be returned to the employer – and the surplus in relation to the employees’ contributions would have to go to the Crown! The judgment seems deeply flawed, but it shows that there are several ways of looking at what a surplus is – or was. Fisons Fisons, a fertiliser and chemicals company, sold its agrochemicals subsidiary to a another company. In the time between the sale and the time when the bulk transfer payment was made in respect of the employees who had transferred, the Stock Market rose. Should the transfer value reflect that a surplus had arisen – or be based on the original deal set out in the sale and purchase agreement? In yet another rather odd judgment the Court of Appeal said that where the employees stay in the scheme while the new employer sets up a new scheme, they are entitled to a share of the surplus. The case is a worry for trustees, and they need to ensure that their lawyers have covered the position in the sale and purchase agreement. (Stannard v Fisons Trust Ltd)

Equal treatment Barber Mr Barber was made redundant at the age of 52 and his employer offered people within ten years of retirement an early retirement pension. His normal retirement age was 65, and he was therefore not within ten years – but a female colleague in the same position but whose retirement age was 60 (reflecting the state retirement age) would have been entitled to call for an early retirement pension.

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The European Court of Justice held that pensions were to be regarded as pay, covered by the equal pay law of the Treaty of Rome, and Mr Barber (or rather his widow – he had died by the time the case came to court) was entitled to the benefit. The major problem was whether the decision affected pension rights acquired by men before the date of the judgment (May 1990) – if so it would have enabled all men to have an unreduced early retirement pension, cost UK plc around £50bn, and bankrupted a number of employers. Fortunately, before any further cases went to court the matter was settled by an amendment to the Treaty of Rome, which indicated that pension rights earned before May 1990 were not covered. (Barber v Guardian Royal Exchange Assurance Group, Case C262/88, [1990] 2 All ER 660). This was a very famous case at the time – and the reverberations of the decision continue today in relation to the equal treatment of part-time employees, the details of which remain to be settled.

Employers and trustees Mihlenstedt A bank clerk in her thirties complained of illness and asked for an ill-health early retirement pension. As such a pension is very expensive to provide, the trustees could only give it with the consent of the employer. Since medical examinations failed to disclose any illness, the employer refused. The judge said that the employer’s refusal had to be fair (and as though he were a trustee of the scheme) and not just based on a desire to save money for the company. In fact the company had behaved properly – but the case imposed a new obligation on employers, and made the use of employer’s vetoes problematical. The case is a problem for employers, rather than trustees. (Mihlenstedt v Barclays Bank International Ltd [1989] Pensions Law Reports 124)

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Imperial The employer tried to squeeze surplus out of a (closed) pension scheme by saying that he would not agree to any increases in pensionsin-payment over 5% (on which he had a veto) unless the trustees and members agreed to move over to another pension scheme. The judge said that employers had to use such vetos (consents) as though they were trustees, not to force through decisions under which they could benefit. Since the company was Hanson, which had a reputation for attempting to squeeze pension funds, there was not much sympathy for the employer. But the decision raised the interesting question of what is the function of such a veto, if it is not to save the company money. (Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd)

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APPENDIX V

ADDRESSES Trustees can usually rely on their in-house support (if any) or their advisers to deal on a day-to-day basis with the regulators and other institutions. But there may be times when you need to get in touch direct, perhaps to check that something has been done, or to complain about the quality of service of an adviser. Set out below are some of the more useful addresses and phone numbers. ACCOUNTS Pensions Research Accountants Group (PRAG) David Slade, Deloitte & Touche, Four Brindleyplace Birmingham B1 2HZ [email protected] (www.prag.org.uk) ACTUARIAL MATTERS In England and Wales Institute of Actuaries Director: Caroline Instance, Staple Inn Hall London WC1V 7QJ 020-7632 2100 www.actuaries.org.uk Consulting actuaries Association of Consulting Actuaries Warnford Court 29, Throgmorton Street London EC2N 2AT 020-7382 4594 www.aca.org.uk

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In Scotland: Faculty of Actuaries in Scotland Mclaurin House, 18 Dublin Street Edinburgh EH1 3PP 0131-240 1300 www.actuaries.org.uk CONSULTANTS Society of Pensions Consultants John Mortimer, Secretary, St Bartholomew House 92 Fleet Street, London EC4Y 1DH 020-7353 1688 www.spc.uk.com CONSUMER AFFAIRS Complaints and remedies TPAS The Pensions Advisory Service Malcolm McLean, Chief Executive, 11 Belgrave Road London SW1V 1RB 020-7630 2270 www.pensionsadvisoryservice.org.uk Occupational schemes Pensions Ombudsman David Laverick, 11 Belgrave Road London SW1V 1RB 020-7834 9144 www.pensions-ombudsman.org.uk Personal pensions Financial Ombudsman Service Walter Merrick, South Quay Plaza, 183 Marsh Wall London E14 9SR 020-7964 1000 www.financial-ombudsman.org.uk

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EUROPE & INTERNATIONAL The Double Century Club David West, Aon Consulting, 15 Minories London EC3N 1NJ 020-7767 2151 [email protected] DWP International Pensions Centre Tyneview Park, Newcastle-upon-Tyne NE98 1BA 0191-218 7777 www.thepensionservice.gov.uk INDUSTRY National Association of Pension Funds Joanne Segars, Chief Executive, NIOC House 4 Victoria Street, London SW1H ONX 020-7808 1300 www.napf.co.uk CBI Pensions Working Group Employment Affairs Directorate, CBI 103 New Oxford Street London WC1A 1DU 020-7379 7400 www.cbi.org.uk INVESTMENT UK Society of Investment Professionals Chief Executive 90 Basinghall Street London EC2V 5AY 020-7796 3000 www.uksip.org

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Institutional Shareholders Committee Joanne Segars, Chief Executive, NAPF NIOC House, 4 Victoria Street London SW1H ONX www.napf.co.uk NAPF Investment Committee Joanne Segars, Chief Executive NAPF, NIOC House, 4 Victoria Street London SW1H ONX www.napf.co.uk Investment Management Association, Richard Saunders, Chief Executive 65 Kingsway, London WC2B 6TD 020-7831 0898 www.investmentuk.org LAWYERS Association of Pension Lawyers Derek Sloan, Chairman, c/o PMI House 4-10 Artillery Lane, London E1 7LS 020-7247 1452 www.apl.org.uk PERSONAL PENSIONS Association of British Insurers 51 Gresham Street, London EC2V 7HQ 020-7600 3333 www.abi.org.uk

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POPULATION AND DEMOGRAPHY Government Actuary’s Department Chris Daykin, Government Actuary, Finlaison House 15-17 Furnival Street, London EC4A 1AB 020-7211 2600 www.gad.gov.uk National Statistics 1 Drummond Gate, London SW1V 2QQ 0845 601 3034 www.statistics.gov.uk PENSIONS PROFESSION Pension managers The Pensions Management Institute Vince Linnane, Secretary, PMI House 4-10 Artillery Lane, London E1 7LS 020-7247 1452 www.pensions-pmi.org.uk REGULATION AND COMPLIANCE Department of Work and Pensions Private Pensions, The Adelphi 1-11 John Adam Street, London WC2N 6HT 020-7712 2171 www.dwp.gov.uk The Pensions Registry PO Box 1NN Newcastle on Tyne NE99 1NN 0191-225 6316

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The Pensions Regulator Tony Hobman, Chief Executive Invicta House, Trafalgar Place Brighton BN1 4DW 01273-627600 www.thepensionsregulator.gov.uk The Pension Protection Fund Partha Dasgupta, Chief Executive Knollys House, 17 Addiscombe Road Croydon, Surrey CRO 6SR 0845-600 2541 www.pensionprotectionfund.org.uk Financial Services Authority London Inland Revenue (Policy) Mark Baldwin, Inland Revenue Room No: 1/38, 1 Parliament Street London SW1A 2BQ 020-7417 2939 [email protected] TAX Inland Revenue (Savings, Pensions and Share Schemes, Audit and Pension Schemes Services) Yorke House, Castle Meadow Road Nottingham NG2 1BG 0115-974 1600 www.inlandrevenue.gov.uk/pensionschemes

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APPENDIX VI

FURTHER READING The library of books and videos on pensions is now almost without number. If you’d like to explore this fascinating subject more clearly, some of the more readable texts include:

General The entire raw materials on pensions, trust and investment law is found in only one place in organised form: Perspective (www.pendragon .co.uk); it is in its main form a professional information tool, but the best. A cut down version for trustees is expected soon. The Pensions Regulator (www.thepensionsregulator.gov.uk) has a widening range of booklets mostly in minatory mood; they are all available free on their website or by post. Current issues include Appointing professional advisers: a guide for occupational pension scheme trustees; a guide to help their pension scheme clients comply with pensions legislation; Pension scheme trustees: a guide to help occupational pension scheme trustees understand their duties and responsibilities; A guide to appointing professional advisers; A guide for occupational pension scheme trustees; A guide to solving disputes; A guide for trustees of occupational pension schemes; Getting your audited accounts and the auditor’s statement on time; A guide for occupational pension scheme trustees; A guide to audited scheme accounts; A guide for people involved with insured salary-related pension schemes; Record keeping for your pension scheme; A guide for trustees of insured occupational pension schemes.

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You probably do not need to read all of these, but it is handy to know they are around if you need them in a particular instance. The National Association of Pension Funds (www.napf.co.uk) has a series of ‘made simple’ guides which are well worth browsing; they include: Pensions act made simple; Voting made simple; Cash management made simple; Corporate bonds made simple; Equity derivatives made simple; Transaction costs made simple; Venture capital and private equity made simple.

Periodicals Weeklies There are two main weeklies: Pensions Week, Tabernacle Court 1628 Tabernacle Street London EC2A 4DD 020-7382 8602. Nominal subscription is £162, but you should be able to get it free, especially if you are an NAPF member. The other is Professional Pensions MSM International Thames House 18 Park Street London SE1 9ER (0207378 447) £325 a year nominal but free if you insist. Monthlies There is one ‘official’ periodical, Pensions World (LexisNexis, 2 Addiscombe Road, Croydon, Surrey CR9 5AF I(020-8662 2000) £84 per annum. Content and layout is a little dry for most tastes and it is minimally sub-edited, but it does have the basic information – plus a monthly shower of leaflets and booklets, some of which are worth reading – and it is relatively cheap. Try the half-page summary of legal developments at the end if you cannot manage any more. Most of the others are also designed for pensions technicians or salesmen, but Occupational pensions (LexisNexis, 2 Addiscombe Road, Croydon, Surrey CR9 5AF (020-8662 2000) www.irsonline.co.uk ISSN 0952-231X) designed for personnel people is usually readable. Pensions today is an 8-page monthly (very expensive £426 pa) but

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an easy idiosyncratic read www.informafinance.com (Informa Finance 30-32 Mortimer Street London W1W 7RE (020-7017 4072)). Informa also issue a monthly Pension scheme trustee, which is worth a look, but is a little heavy going for some tastes. International information is available from still the best (and free) IPE (Investment and Pensions Europe), 320 Great Guildford Street, London SE1 OHS 020-7261 0666. European Pensions News is twice a month, very good, but expensive (£575) (020-8606 754) www.ftbusiness.com Tabernacle Court, 16-28 Tabernacle Street, London EC2A 4DD. Global Pensions is also published monthly (MSM International MSM International Thames House 18 Park Street London SE1 9ER (0207940 7246); some people pay a subscription, but there is free access to their website if you register www.globalpensions.com. See also Pensions international (Informa Finance 30-32 Mortimer Street, London W1W 7RE (020-7017 4072)) www.informafinance.com. Quarterlies The only quarterly readily available is Pensions: an international journal, which looks at issues both of policy and detail in greater depth (Henry Stewart Publications, Russell House, 28/30 Little Russell Street, London WC1A 2HN (020-7404 3040) www.henrystewart.com) Many of the financial pages in the daily and weekly newspapers offer very good summaries of current issues; you should keep a watching brief on them. For information on the web try www.ipe.com; www.pensionnet.com; www.pensionsworld.co.uk; and www.thepensionsite.co.uk

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Law Textbooks There is one major textbook, written by the author, called Pensions law and practice (Sweet and Maxwell, 4 vols, looseleaf, £450, ISBN 0-85121-306-5). Whilst well-printed, and looking impressive on the bookshelf, it may be a little intimidating for everyday use. For the trust technician The law of occupational pension schemes (Nigel Inglis-Jones, Sweet & Maxwell ISBN 0-421-3580-8) is handy. Equity and trusts If you are fascinated by the law of trusts and their history, skip most of the conventional texts. A readable though long book, available in paperback, and much appreciated by trust lawyers, is Graham Moffat and Michael Chesterman, Trusts law: texts and materials, Butterworths Law, 2004, ISBN 0-4069-72664 £29.95. The standard book is Underhill & Hayton: Law relating to trustees, (2002, ISBN 0-4069-38849 £315). And if you don’t like this Handbook, you could try a somewhat different approach: Roger Self, Tolley’s Pension fund trustee handbook (LexisNexis). The Pensions Regulator publishes the rather more formal A guide for pension scheme trustees, packaged with this book (www.thepensionsregulator.gov.uk). If you are preparing yourself for one of the certificates, there is The guide for pension trustees, looseleaf (NTC 01494 418605) which also includes an examination preparation pack. And for a view of the way in which these things are done in the States, look at Understanding and managing fiduciary responsibility (Principal Financial Group). Law reports You should not need to read law reports; if you are keen you can suggest your manager might take them, and your lawyer should certainly subscribe to them (Pensions Benefits Law Reports, www.pensionslaw.org) £250 pa) or available on the forthcoming trustee version of Perspective (020-7608 9000).

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Tax. You need to be a Senior Wrangler to understand the tax structure of pension schemes. Most of the tax books were out of date from 2006. Social security You cannot be serious if you want to refer to the social security law; if you must, try The blue volumes, volume 5 (The Law Relating to Social Security: Occupational and Personal Pensions, Corporate Document Services (DWP), ISBN 0-8412-35466, £19, looseleaf). Statutes The amount of raw pensions law has increased over the last 20 years from about 40 pages to about 8,500 pages. Much of it is all reproduced, more or less accurately, in Butterworths Pensions legislation (LexisNexis, looseleaf, ISBN 0-4069-98388, £286.67). Most professionals use Perspective, which also lets you track the changes in the law. If you need a bit of a shock, try the www.pendragon.co.uk (the Perspective website, open access), which lets you scroll through all the new law that has had to be absorbed over the last few years. That scroll effect shows why the pensions system is overloaded.

The pensions system General There are innumerable guides to the pensions system. One of the more practical is Pensions handbook (Tony Reardon, Prentice Hall, 2003, ISBN 0-2736- 75419, £31.99), though a little technical. The general pensions issue is looked at by, amongst very many others, The pension challenge, edited by Olivia Mitchell and Kent Smetters, Oxford University Press, 2004, ISBN 0-13-144603-7 £40. But the most useful source of all is the Pensions Policy Institute which is producing an increasing range of easy-to-read and on-the-point papers and discussion papers (www.pensionspolicyinstitute.org.uk).

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If you would like to look at the history of pensions, there is Chris Lewin, Pensions and insurance before 1800: a social history, Tuckwell Press, ISBN 1-86232-2112, 2004, £25. Company policy on pensions is explored in A view from the top: a survey of business leaders’ views on UK pension provision (CBI, April 2004 ISBN 0-85201-597-6, £7) Insurance Policies There is no shortage of works on which is the best insurance contract; unfortunately none of them will tell you which will be the best policy in twenty five-years’ time. Figures are published monthly in a monthly periodical Money management. Jargon The jargon of pensions is legion. You could try Pensions terminology – a glossary for pensions schemes, (6th ed 2002) published by the Pensions Management Institute (www.pensions-pmi.org.uk). International If you think it’s bad in Britain, it’s worth looking sometimes at what happens in the rest of the world. Always as up to date as these things can be, International benefit guidelines annual (Mercer Human Resources, Telford House, 14 Tothill Street, London SW1H 9NB, no longer free unfortunately). Also good value is Employee benefits in Europe but dating fast (Howard Foster, Sweet & Maxwell).

Accounting The impact of FRS 17, the standard set by the accountancy profession for the disclosure of pensions obligations on the accounts of companies, has concentrated the minds of many companies on the pensions issue. It can be a technical area, and is changing very fast, but if you want to avoid being out bluffed, one of the most useful

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guides is Accounts & audit of pension schemes (Amyas Mascarenhas & Teresa Sienkiewics (Touche Ross), Butterworths, 2nd ed, ISBN 0406-00348-3 £26.50, 240pp pb). More recent is Jo Rodger, Accounts and audit of pension schemes (LexisNexis, November 2002). There is also the Pensions Regulator’s guide for trustees (see above) and technical notes issued by various accountancy bodies.

Investment Investment is the fun part of being a trustee; unfortunately there is very little recent UK material for the non-expert and there seems to be a gap in the market. There are occasional brochures from asset managers, and the NAPF publishes some ‘made simple’ leaflets (see above), but most of the standard guides are now very dated and have not been replaced. In relation to ethical investments, there is David Bright, Socially responsible investment – a guide for pension funds and institutional investors (Monitor Press, 2000) and EIRIS (Ethical Investment Research Service) operates widely in this area (www.eiris.org).

Policy If you are interested in examining why pensions systems are so complicated you might like to look at some of the government papers on certain problems. Mergers and acquisitions The then Occupational Pensions Board published a series of readable reports, one of which is on what happens to pension funds on takeovers and mergers. It is now hard to find, but it foretold many of the problems we now suffer from: Protecting pensions (Department of Social Security, Protecting pensions: safeguarding benefits in a changing environment, February 1989, HMSO Cm 573, ISBN 0-10105732-6, £8.30).

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Equal treatment A superb analysis of the problems of equal treatment is the House of Lord’s Social Services Committee Report on the age of retirement (HCP3 1981-2). For a beautiful discussion (literally) of the problem of rationalising the state pension age, see Options for equality in state pension age, (DSS, HMSO Cm 1723, ISBN 0-10-117232-X, £9.80). Demography There is a huge literature on ‘whither pensions’; some of the more readable include Workers versus pensions: intergenerational justice in an ageing world (edited by Paul Johnson and others, Manchester University Press, 1989, ISBN 0-7190-3038-2, £22.50). If you want to know how pensioners feel, read the spoof The thoughts of pensioner activist and radical granny Betty Spital, (Christopher Meade, Penguin, 1989, ISBN 0-14-012150-1, £3.99). The Organisation for Economic Co-operation and Development has produced Aging populations: the social policy implications (OECD, from HMSO, 1988, ISBN 92-64-13113-2, £12 pb) which is much shorter, 90pp – by 2040 the proportion of people over 65 will have doubled. The pensions system If you would like to read background papers on the reform of the pension system in 1986 and later, it is all set out in what became known as The Fowler Report (in homage to the Beveridge report half-a-century before): Reform of social security (3 vols, Cmnd 9517,9518,9519, 1985, ISBN 0-10-195170-1, 0-10-195180-9, ISBN 0-10-195190-6, £3, £6,60 and £10, HMSO). A bizarre and very personal approach was set out in Pensions and privilege: how to end the scandal, simplify taxes and widen ownership (Philip Chappell, Centre for Policy Studies, 8 Wilfred Street, London SW1E 6PL, 1988, ISBN 1-870-26523-8, £5.50) which attacked company pension schemes in rather intemperate language. It is interesting to read to see how some of the ideas proposed there have now come to grief. More recently the Pensions Commission and the Pensions Policy Institute have both

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published outstanding guides to the present system (Pensions Commission, Pensions: challenges and choices, www.pensionscommission.org.uk, October 2004). Trade unions Unfortunately there are at present few suitable guides to trade union practice in pensions, although the TUC pensions department and certain leading unions such as the EETPU and others provide an excellent service to members. A brief and sensible guide is The LRD guide to pensions bargaining, (Labour Research Department, 78 Blackfriars Road, London SE1 8HF, 1988, ISBN 0-946-898-650, £1.25) and a more partisan view is set out in The essential guide to pensions: a worker’s handbook, (Sue Ward, Pluto Press, 1988, ISBN 1-85305-093-8). Both are ancient and not easy to find, but there seems little newer. Social security Social security and its impact on pensions is a minefield. The standard guide is Tolley’s social security and state benefits (Jim Mathewman, annual, £24.95 ISBN 0-85459 502-3, Tottel) State benefits A very useful and understandable guide is Your Guide to Pensions 2005 Planning ahead to boost retirement income, Sue Ward, ISBN: 086242397X, 184pp September 2004 and Your rights 2004-2005, A guide to money benefits for older people Sally West, ISBN: 0862423937, 176pp, April 2004, £4.99 Communication One of the undervalued areas of pensions, marketing your scheme is a crucial social service. A useful, simple and well-written guide, setting out sample booklets and newsletters is Pensions: promoting and communicating your scheme (by Sue Ward, published by the Industrial Society Press, 1990, £16.95, ISBN 0-85290-472-X).

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Statistics Getting statistics in pensions is rarely a problem – getting useful ones is all but impossible. The government used to publish quarterly investment statistics about pension funds, but has discontinued them following substantial errors in their compilation. The National Statistics website does however have a wealth of information on pensions. UBS publish Pension fund indicators (020-7901 5137) analysing investments. The NAPF publishes an annual survey which shows what pension funds are doing now in certain abstruse areas – but fails to show trends or comparative figures. You can use their database by arrangement. A useful guide, really designed for use by actuaries, is the Pensions pocketbook, which comes out every year (NTC Publications / Hewitt Bacon & Woodrow, Farm Road, Henley on Thames, Oxfordshire RG9 1EJ (01491 411000), ISBN 1-84116-1462). Watson Wyatt statistics is a nicely produced monthly digest of pensions statistics (Watson Wyatt Worldwide, Watson House, London Road, Reigate, Surrey RH2 9PQ 01737 241144, www.watsonwyatt.com). The Government Actuary has published his Eleventh Survey (Occupational pension schemes 2000, HMSO, 2003, ISBN 0-9544972-0-1, £5.50 – which shows the time it takes to do these things!) (www.gad.co.uk). Aon publish a small booklet of annual statistics (www.aon.co.uk, 11 Devonshire Square, London EC2M 4YR 0800-279 5588) Directories The NAPF publishes a yearbook (NAPF, NIOC House, 4 Victoria Street, London SW1H ONX 020-7808 1300 www.napf.co.uk) for the moment only on their website, and the principal directory is Pension funds and their advisers (Alan Philip, AP Information Services, Marlborough House, 298 Regents Park Road, London N3 2UU 020-8349 9988 www.apinfo.co.uk 2004 ed £195). The same outfit also publishes the even larger International pension funds and their advisers. Local authority trustees (councillors and others) should have the PIRC local authority pension fund yearbook, (annual, PIRC, ISBN 0-904677-42-7, £115) and might turn to Pension funds performance

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guide (local authority edition) £250 (DG Publishing, 9 Carmelite Street, London EC4Y ODR www.pensionsperformance.com) Investments There is no good all round guide for beginners; however, Pension fund indicators is published annually by UBS (020-7901 5315); www.ubs.com /1/e/globalam/uk/institutional/publications gives a survey of the various sectors with good graphs and charts (sometimes over-complicated) and is the generally regarded main source. Comparative surveys If you are asked to compare benefits in your scheme with other schemes, you can commission a survey of your own surprisingly cheaply – the NAPF will run a search through its database, though you won’t know the names of the other companies. Management and administration As yet there do not appear to be any useful guides to administration and management. But there is now a government website, www.pensionsatwork.gov.uk which suggests ways of improving workplace pensions; the site is designed mostly for HR and pensions managers. Giving advice It is usually very unwise to attempt to attempt to advise members of their options; the regulations are not very sympathetic to trustees. By and large, the message is don’t, except as indicated in Chapter 22. But if you are asked for a guide try Jonquil Lowe Take control of your pension (Which?, ISBN 0-85202-927-6 www.which.net £10.99). For handing out to pensioners, you could try Your Rights 2004-2005, a guide to money benefits for older people Sally West, ISBN: 0862423937, 176pp, April 2004, £4.99 (Age Concern, Department YR, Age Concern England, Astral House, 1268 London Road, London SW16 4ER, 0208765 7200, less in bulk(www.ageconcern.org.uk). There is also The directory of pre-retirement courses, (Pre-Retirement Association,

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annual), which is self-explanatory. Rosemary Brown, Good non-retirement guide (annual) (Enterprise Dynamics ISBN 0-7494 4145 3 www.kogan-page.co.uk (£12.79) is comprehensive and readable. Whether a member should top-up his pension is best left to others to advise; members can be referred to the not terribly helpful FSA Guide to topping up your occupational pension, (www.fsa.gov.uk/ consumer, free) together with fact sheets.

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APPENDIX VII

THE PENSIONS YEAR The Pensions Year is full of luscious conferences all over the world. It is a poor trustee that cannot get himself invited on one or more of these jollys – and as part of the training that trustees nowadays should undergo, it is not as cynical an exercise as might seem. If you have members in other parts of the world, you might as well look at some of the overseas conferences, some of which are free or nearly free. The UK spends relatively little on training; but considering the sums you are responsible for, and the future comfort of all those pensioners (of whom you may be one), and the need to comply with the knowledge requirements of the Pensions Act 2004, a little training is not so terrible, and very cost-effective. You should also agree to send the scheme manager on one or two, particularly in the South of France. Who does the training As well as the institutions (the NAPF, the PMI and others) many commercial organisations run training sessions. The actuarial and pensions consultancies run many useful ones, but with less emphasis on your legal obligations and you may end up knowing more about actuarial science than you really need. The commercial training conferences only spasmodically run courses, and usually on more specialised topics; they are also expensive. If there are enough of you, get your solicitor to come in and give you an afternoon of his time. It will usually be cheaper and more fun, as well as more useful.

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JANUARY Some useful, commercially-run, conferences are marketed in January. You can ask to be placed on the mailing lists of the principal ones (including LexisNexis Conferences, Halsbury House, 35 Chancery Lane, London WC2A 1EL (020-7347 3573) www.lexisnexis.co.uk/ conferencesandtraining, IBC/Informa, Enterprise House 45 Station Approach West Byfleet KT14 6NN (01932 893600) www.ibcfinancial.com) and Hawksmere Fourth Floor, North West Wing, Bush House, Aldwych, London WC2B 4PJ (020-7632 230) www.hawksmereltd.co.uk FEBRUARY The NAPF Investment Conference is a real eye-opener, especially when the property guys are there – the car park is jammed with Ferraris, most of them paid for by you. The recession does not seem to have affected the car fleet much. The bad news is that it is usually in very cold places. For many years it was in Eastbourne; more recently in Edinburgh, both of which can be bitterly cold and miserable. MARCH The Budget usually contains something about pensions, including any increase in state benefits and changes to National Insurance contributions. MAY/JUNE The NAPF Annual Conference is a must for at least one of you – to find out what are the problems over the next year or two, pick up a few tips, see what is on offer at the exhibition, and just keep a feel on the industry. There is no shortage of free alcohol. If you have a tendency to bulkiness, you might need to book into a health farm the following week.

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AUGUST Like France, the Pensions Industry is on holiday, and so should you be. SEPTEMBER Still on holiday. OCTOBER The PMI Autumn Conference, always well attended, and generally not too technical. Good value. NOVEMBER The NAPF holds an annual Autumn Conference for just one day. A summary of latest developments. An occasional visit is enough. DECEMBER December is the month for investment managers’ and stockbrokers’ parties. Some of these can be very good indeed, although if you have a split fund (see Bluffer’s Guide) you might get sick of the sight of turkey. Other than that, there are very few pensions conferences. Qualifications and training Many of the consultants run adequate though partisan courses; the lawyers are best. The TUC run courses, also with an angle. The Pensions Management Institute and the National Association of Pension Funds (see addresses) also offer good value courses taking a couple of days, but depend very much on who is doing the teaching – they recruit from the industry, which is good, but not all experts are good teachers.

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APPENDIX VIII

QUALIFICATIONS AND TRAINING Trustees do not need to be qualified to be effective, but you are entitled to time off for training (Pensions Act 1995), and must be knowledgeable about investments, trusts and pensions (Pensions Act 2004). Trustee training is a sensible use of precious time; but you need the right course. You need to decide whether you want training: • on how pension schemes work (offered by most of the consultants and actuaries) or • on trustee responsibilities and obligations – much more difficult to find. Much of the knowledge emerges from experience and from the experts that you hire to advise you. And many of the advisers (lawyers, actuaries and pensions consultants mostly) offer one- or two-day courses. Pensions world run an annual summary of the courses available. But if you would like to have a piece of paper, there are several organisations that offer training and qualifications. They include: The Pensions Management Institute offers a Certificate of Essential Pensions Knowledge with trustee training courses and a Trustee Group to join with occasional newsletters. You will need a little more knowledge than this book provides – but not a great deal. The PMI issues an annual handbook and sample examination questions. Details are available from The Pensions Management Institute, PMI House, 4-10 Artillery Lane, London E1 7LS 020-7392 7400 www.pensions-pmi.org.uk (or e-mail education@pensions-

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pmi.org.uk). The PMI also offers a Fellowship and Associateship in pensions management (FPMI and APMI) and now has a more basic qualification for junior administrators called the Qualification in Pensions Administration (QPA). They also offer occasional courses in trustees training and a six monthly pension trustees conference. The PMI Trustee Group is cheap to join and gives discounted admission to PMI seminars and conferences. There are also local group meetings and seminars. The National Association of Pension Funds offers a Certificate in pension trustee competence produced in association with the Pensions Management Institute. It covers your role as trustee, what UK pension schemes look like, the benefits of pension schemes, funding and investments of schemes and other matters. Details are available from www.napf.co.uk. It is somewhat harder to obtain, needing about 80 hours of training; details are on www.trusteeknowhow.com which sets out the on-line trustee training programme. For those who prefer a less structured method of learning, there is also The trustee development programme. They both cost around £500. There are four courses a year. The Pensions Regulator operates a dedicated website to enable you to complete a course on: http://www.trusteetoolkit.com/arena/index. cfm. It allows you pass even if all your answers are wrong…

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APPENDIX IX

THE NAPF CHECKLIST FOR PENSION FUND TRUSTEES (Reproduced by kind permission of the National Association of Pension Funds) 1 Constitution of the scheme • Are you satisfied that the Trust Deed and Rules are fully up to date and implemented in full? • Is your own appointment and that of your fellow trustees in order and in accordance with the Trust Deed and Rules? • Is there provision for an independent trustee? If not, should there be? 2 Investments • Are the arrangements for managing the assets adequate? • Are the investment managers independent of the company? If not, are there adequate safeguards? • Are the powers of investment managers clearly defined? • Are the classes of investment controlled? (eg authorised, not unduly risky) • Is self-investment permitted? Does it happen? Is there a policy for phasing it out? • Does the fund participate in a performance measurement service?

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3 Security of assets • Are there adequate arrangements for custody of scheme assets? • Is there a separate custodian trustee? If not, should there be? • Is there a separate bank account for the scheme? • Do the procedures for authorising transfers of cash and assets provide sufficient safeguards? • Are bank mandates appropriate and lists of signatories up to date? 4 Financial control • Are scheme auditors properly appointed? • Are there any qualifications to the last audited accounts? • Are payments of employers’ and employees’ contributions received regularly and on time? • Are payments of benefits subject to adequate checks? (eg birth certificates, death certificates etc) • Are internal audits or other checks conducted between annual audits? • Are trustee meetings held often enough? Do you attend them? 5 Information to scheme members • When you are satisfied that the arrangements for your scheme are adequate, would it be helpful to write to scheme members to reassure them? 6 Action programme • If the answer to any of the above questions is unsatisfactory, what action needs to be taken to remedy the matter? NAPF, December 1991

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APPENDIX X

THE MYNERS PRINCIPLES Defined Benefit Pension Schemes 1 Effective decision-making Decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively. Where trustees elect to take investment decisions, they must have sufficient expertise to be able to evaluate critically any advice they take. Trustees should ensure that they have sufficient in-house staff to support them in their investment responsibilities. Trustees should also be paid, unless there are specific reasons to the contrary. It is good practice for trustee boards to have an investment subcommittee to provide appropriate focus. Trustees should assess whether they have the right set of skills, both individually and collectively, and the right structures and processes to carry out their role effectively. They should draw up a forward-looking business plan.

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2 Clear objectives Trustees should set out an overall investment objective for the fund that: • represents their best judgment of what is necessary to meet the fund’s liabilities, given their understanding of the contributions likely to be received from employer(s) and employees; and • takes account of their attitude to risk, specifically their willingness to accept underperformance due to market conditions. Objectives for the overall fund should not be expressed in terms which have no relationship to the fund’s liabilities, such as performance relative to other pension funds, or to a market index. 3 Focus on asset allocation Strategic asset allocation decisions should receive a level of attention (and, where relevant, advisory or management fees) that fully reflect the contribution they can make towards achieving the fund’s investment objective. Decision-makers should consider a full range of investment opportunities, not excluding from consideration any major asset class, including private equity. Asset allocation should reflect the fund’s own characteristics, not the average allocation of other funds. 4 Expert advice Contracts for actuarial services and investment advice should be open to separate competition. The fund should be prepared to pay sufficient fees for each service to attract a broad range of potential providers.

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5 Explicit mandates Trustees should agree with both internal and external investment managers an explicit written mandate covering agreement between trustees and managers on: • an objective, benchmark(s) and risk parameters that together with all the other mandates are coherent with the fund’s aggregate objective and risk tolerances; • the manager’s approach in attempting to achieve the objective; and • clear timescale(s) of measurement and evaluation, such that the mandate will not be terminated before the expiry of the evaluation timescale other than for clear breach of the conditions of the mandate or because of significant change in the ownership or personnel of the investment manager. The mandate should not exclude the use of any set of financial instruments, without clear justification in the light of the specific circumstances of the fund. The mandate should incorporate a management fee inclusive of any external research, information or transaction services acquired or used by the fund manager, rather than these being charged to clients. 6 Activism The mandate should incorporate the principle of the US Department of Labor Interpretative Bulletin on activism.Managers should have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy.

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7 Appropriate benchmarks Trustees should: • explicitly consider, in consultation with their investment manager(s), whether the index benchmarks they have selected are appropriate; in particular, whether the construction of the index creates incentives to follow sub-optimal investment strategies; • if setting limits on divergence from an index, ensure that they reflect the approximations involved in index construction and selection; • consider explicitly for each asset class invested, whether active or passive management would be more appropriate given the efficiency, liquidity and level of transaction costs in the market concerned; and • where they believe active management has the potential to achieve higher returns, set both targets and risk controls that reflect this, giving managers the freedom to pursue genuinely active strategies. 8 Performance measurement Trustees should arrange for measurement of the performance of the fund and make formal assessment of their own procedures and decisions as trustees. They should also arrange for a formal assessment of performance and decision-making delegated to advisers and managers. 9 Transparency A strengthened Statement of Investment Principles should set out: • who is taking which decisions and why this structure has been selected; • the fund’s investment objective;

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• the fund’s planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at; • the mandates given to all advisers and managers; and • the nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected. 10 Regular reporting Trustees should publish their Statement of Investment Principles and the results of their monitoring of advisers and managers and send them annually to members of the fund. The Statement should explain why a fund has decided to depart from any of these principles.

Defined Contribution Pension Schemes 1 Effective decision-making Decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively. Where trustees elect to take investment decisions, they must have sufficient expertise to be able to evaluate critically any advice they take. Trustees should ensure that they have sufficient in-house staff to support them in their investment responsibilities. Trustees should also be paid, unless there are specific reasons to the contrary. It is good practice for trustee boards to have an investment subcommittee to provide appropriate focus. Trustees should assess whether they have the right set of skills, both individually and collectively, and the right structures and processes to carry out their role effectively. They should draw up a forward-looking business plan.

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2 Clear objectives In selecting funds to offer as options to scheme members, trustees should: • consider the investment objectives, expected returns, risks and other relevant characteristics of each fund, so that they can publish their assessments of these characteristics for each selected fund; and • satisfy themselves that they have taken their members’ preferences into account, and that they are offering a wide enough range of options to satisfy the reasonable return and risk combinations appropriate for most members. 3 Focus on asset allocation Strategic asset allocation decisions (for example for default and lifestyle options) should receive a level of attention (and, where relevant, advisory or management fees) that fully reflect the contribution they can make to achieving investment objectives. Decision-makers should consider a full range of investment opportunities, not excluding from consideration any major asset class, including private equity. 4 Choice of default fund Where a fund is offering a default option to members through a customised combination of funds, trustees should make sure that an investment objective is set for the option, including expected returns and risks. 5 Expert advice Contracts for investment advice should be open to competition, and fee rather than commission based. The scheme should be prepared to pay sufficient fees to attract a broad range of kinds of potential providers.

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6 Explicit mandates Trustees should communicate to members, for each fund offered by the scheme: • the investment objective for the fund, its benchmark(s) and risk parameters; and • the manager’s approach in attempting to achieve the objective. These should also be discussed with the fund manager concerned, as should a clear timescale(s) of measurement and evaluation, with the understanding that the mandate will not be terminated before the expiry of the evaluation timescale other than for a clear breach of the conditions of the mandate or because of significant change in the ownership or personnel of the investment manager. The management fee should include any external research, information or transaction services acquired or used by the fund manager, rather than these being charged to clients. 7 Activism The agreement with fund managers should incorporate the principle of the US Department of Labor Interpretative Bulletin on activism. Managers should have an explicit strategy, including the circumstances in which they will intervene in a company; the approach they will use in doing do; and how they measure the effectiveness of this strategy. 8 Appropriate benchmarks Trustees should: • explicitly consider, in consultation with their investment manager(s), whether the index benchmarks they have selected are appropriate; in particular, whether the construction of the index creates incentives to follow sub-optimal investment strategies;

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed • if setting limits on divergence from an index, ensure that they reflect the approximations involved in index construction and selection; • consider explicitly for each asset class invested, whether active or passive management would be more appropriate given the efficiency, liquidity and level of transaction costs in the market concerned; and • where they believe active management has the potential to achieve higher returns, set both targets and risk controls that reflect this, giving managers the freedom to pursue genuinely active strategies.

9 Performance measurement Trustees should arrange for measurement of the performance of the funds and make formal assessment of their own procedures and decisions as trustees. They should also arrange for a formal assessment of performance and decision-making delegated to advisers and managers. 10 Transparency A strengthened Statement of Investment Principles should set out: • who is taking which decisions and why this structure has been selected; • each fund option’s investment characteristics; • the default option’s investment characteristics, and why it has been selected; • the agreements with all advisers and managers; and • the nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected. 11 Regular reporting Trustees should publish their Statement of Investment Principles and the results of their monitoring of advisers and managers and send them annually to scheme members. The Statement should explain why a fund has decided to depart from any of these principles.

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APPENDIX XI

US DEPARTMENT OF LABOR STATEMENT ON ACTIVISM US Department of Labor www.dol.gov CFR Code of Federal Regulations Pertaining to US Department of Labor Title 29

Labor

Chapter XXV

Pension and Welfare Benefits Administration, Department of Labor

Part 2509

Interpretive Bulletins Relating to the Employee Retirement Income Security Act of 1974

29 CFR 2509.94-2 Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines. Section Number: 2509.94-2 Section Name: Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines. 1 This interpretive bulletin sets forth the Department of Labor’s (the Department) interpretation of sections 402, 403 and 404 of the Employee Retirement Income Security Act of 1974 (ERISA) as those sections apply to voting of proxies on

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed securities held in employee benefit plan investment portfolios and the maintenance of and compliance with statements of investment policy, including proxy voting policy. In addition, this interpretive bulletin provides guidance on the appropriateness under ERISA of active monitoring of corporate management by plan fiduciaries.

1) Proxy Voting 2 The fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock. As a result, the responsibility for voting proxies lies exclusively with the plan trustee except to the extent that either (1) the trustee is subject to the directions of a named fiduciary pursuant to ERISA Sec. 403(a)(1); or (2) the power to manage, acquire or dispose of the relevant assets has been delegated by a named fiduciary to one or more investment managers pursuant to ERISA Sec. 403(a)(2). Where the authority to manage plan assets has been delegated to an investment manager pursuant to Sec. 403(a)(2), no person other than the investment manager has authority to vote proxies appurtenant to such plan assets except to the extent that the named fiduciary has reserved to itself (or to another named fiduciary so authorised by the plan document) the right to direct a plan trustee regarding the voting of proxies. In this regard, a named fiduciary, in delegating investment management authority to an investment manager, could reserve to itself the right to direct a trustee with respect to the voting of all proxies or reserve to itself the right to direct a trustee as to the voting of only those proxies relating to specified assets or issues. 3 If the plan document or investment management agreement provides that the investment manager is not required to vote proxies, but does not expressly preclude the investment manager from voting proxies, the investment manager would have exclusive responsibility for voting proxies. Moreover, an investment manager would not be relieved of its own

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fiduciary responsibilities by following directions of some other person regarding the voting of proxies, or by delegating such responsibility to another person. If, however, the plan document or the investment management contract expressly precludes the investment manager from voting proxies, the responsibility for voting proxies would lie exclusively with the trustee. The trustee, however, consistent with the requirements of ERISA Sec. 403(a)(1), may be subject to the directions of a named fiduciary if the plan so provides. 4 The fiduciary duties described at ERISA Sec. 404(a)(1)(A) and (B), require that, in voting proxies, the responsible fiduciary consider those factors that may affect the value of the plan’s investment and not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives. These duties also require that the named fiduciary appointing an investment manager periodically monitor the activities of the investment manager with respect to the management of plan assets, including decisions made and actions taken by the investment manager with regard to proxy voting decisions. The named fiduciary must carry out this responsibility solely in the interest of the participants and beneficiaries and without regard to its relationship to the plan sponsor. 5 It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring. Thus, the investment manager or other responsible fiduciary would be required to maintain accurate records as to proxy voting. Moreover, if the named fiduciary is to be able to carry out its responsibilities under ERISA Sec. 404(a) in determining whether the investment manager is fulfilling its fiduciary obligations in investing plans assets in a manner that justifies the continuation of the management appointment, the proxy voting records must enable the named fiduciary to review not only the investment manager’s voting procedure with respect to plan-owned stock,

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed but also to review the actions taken in individual proxy voting situations. 6 The fiduciary obligations of prudence and loyalty to plan participants and beneficiaries require the responsible fiduciary to vote proxies on issues that may affect the value of the plan’s investment. Although the same principles apply for proxies appurtenant to shares of foreign corporations, the Department recognises that in voting such proxies, plans may, in some cases, incur additional costs. Thus, a fiduciary should consider whether the plan’s vote, either by itself or together with the votes of other shareholders, is expected to have an effect on the value of the plan’s investment that will outweigh the cost of voting. Moreover, a fiduciary, in deciding whether to purchase shares of a foreign corporation, should consider whether the difficulty and expense in voting the shares is reflected in their market price.

2) Statements of Investment Policy 7 The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B). Since the fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock, a statement of proxy voting policy would be an important part of any comprehensive statement of investment policy. For purposes of this document, the term “statement of investment policy” means a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting decisions. A statement of investment policy is distinguished from directions as to the

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purchase or sale of a specific investment at a specific time or as to voting specific plan proxies. 8 In plans where investment management responsibility is delegated to one or more investment managers appointed by the named fiduciary pursuant to ERISA Sec. 402(c)(3), inherent in the authority to appoint an investment manager, the named fiduciary responsible for appointment of investment managers has the authority to condition the appointment on acceptance of a statement of investment policy. Thus, such a named fiduciary may expressly require, as a condition of the investment management agreement, that an investment manager comply with the terms of a statement of investment policy which sets forth guidelines concerning investments and investment courses of action which the investment manager is authorised or is not authorised to make. Such investment policy may include a policy or guidelines on the voting of proxies on shares of stock for which the investment manager is responsible. In the absence of such an express requirement to comply with an investment policy, the authority to manage the plan assets placed under the control of the investment manager would lie exclusively with the investment manager. Although a trustee may be subject to the directions of a named fiduciary pursuant to ERISA Sec. 403(a)(1), an investment manager who has authority to make investment decisions, including proxy voting decisions, would never be relieved of its fiduciary responsibility if it followed directions as to specific investment decisions from the named fiduciary or any other person. 9 Statements of investment policy issued by a named fiduciary authorised to appoint investment managers would be part of the “documents and instruments governing the plan’” within the meaning of ERISA Sec. 404(a)(1)(D). An investment manager to whom such investment policy applies would be required to comply with such policy, pursuant to ERISA Sec. 404(a)(1)(D) insofar as the policy directives or guidelines are consistent with titles I and IV of ERISA. Therefore, if, for

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed example, compliance with the guidelines in a given instance would be imprudent, then the investment manager’s failure to follow the guidelines would not violate ERISA Sec. 404(a)(1)(D). Moreover, ERISA Sec. 404(a)(1)(D) does not shield the investment manager from liability for imprudent actions taken in compliance with a statement of investment policy. 10 The plan document or trust agreement may expressly provide a statement of investment policy to guide the trustee or may authorise a named fiduciary to issue a statement of investment policy applicable to a trustee. Where a plan trustee is subject to an investment policy, the trustee’s duty to comply with such investment policy would also be analysed under ERISA Sec. 404(a)(1)(D). Thus, the trustee would be required to comply with the statement of investment policy unless, for example, it would be imprudent to do so in a given instance. 11 Maintenance of a statement of investment policy by a named fiduciary does not relieve the named fiduciary of its obligations under ERISA Sec. 404(a) with respect to the appointment and monitoring of an investment manager or trustee. In this regard, the named fiduciary appointing an investment manager must periodically monitor the investment manager’s activities with respect to management of the plan assets. Moreover, compliance with ERISA Sec. 404(a)(1)(B) would require maintenance of proper documentation of the activities of the investment manager and of the named fiduciary of the plan in monitoring the activities of the investment manager. In addition, in the view of the Department, a named fiduciary’s determination of the terms of a statement of investment policy is an exercise of fiduciary responsibility and, as such, statements may need to take into account factors such as the plan’s funding policy and its liquidity needs as well as issues of prudence, diversification and other fiduciary requirements of ERISA.

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12 An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan may be subject to a proxy voting policy of one plan that conflicts with the proxy voting policy of another plan. Compliance with ERISA Sec. 404(a)(1)(D) would require such investment manager to reconcile, insofar as possible, the conflicting policies (assuming compliance with each policy would be consistent with ERISA Sec. 404(a)(1)(D)) and, if necessary and to the extent permitted by applicable law, vote the relevant proxies to reflect such policies in proportion to each plan’s interest in the pooled investment vehicle. If, however, the investment manager determines that compliance with conflicting voting policies would violate ERISA Sec. 404(a)(1)(D) in a particular instance, for example, by being imprudent or not solely in the interest of plan participants, the investment manager would be required to ignore the voting policy that would violate ERISA Sec. 404(a)(1)(D) in that instance. Such an investment manager may, however, require participating investors to accept the investment manager’s own investment policy statement, including any statement of proxy voting policy, before they are allowed to invest. As with investment policies originating from named fiduciaries, a policy initiated by an investment manager and adopted by the participating plans would be regarded as an instrument governing the participating plans, and the investment manager’s compliance with such a policy would be governed by ERISA Sec. 404(a)(1)(D). 3) Shareholder Activism 13 An investment policy that contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock is consistent with a fiduciary’s obligations under ERISA where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after taking into account the costs involved. Such a reasonable expectation may exist in various circumstances, for example, where plan investments in corporate stock are held as long-term investments or where a plan may not be able to easily dispose such an investment. Active monitoring and communication activities would generally concern such issues as the independence and expertise of candidates for the corporation’s board of directors and assuring that the board has sufficient information to carry out its responsibility to monitor management. Other issues may include such matters as consideration of the appropriateness of executive compensation, the corporation’s policy regarding mergers and acquisitions, the extent of debt financing and capitalisation, the nature of long-term business plans, the corporation’s investment in training to develop its work force, other workplace practices and financial and non-financial measures of corporate performance. Active monitoring and communication may be carried out through a variety of methods including by means of correspondence and meetings with corporate management as well as by exercising the legal rights of a shareholder. [59 FR 38863, July 29, 1994]

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APPENDIX XII

PENALTIES OFFENCES AND CIVIL PENALTIES UNDER THE PENSIONS ACT 2004

OFFENCES NB: Section 309 provides that directors, managers, secretaries, officers and members may in certain circumstances be held liable for an offence committed by a body corporate.

Section number

Person affected

Offence

Sanction

77(1)

Any person

Failure to provide information or a document when required to so by the Regulator

Fine not exceeding level 5 on the standard scale

77(2)

Any person

Intentional delay or obstruction to an inspector inspecting premises

Fine not exceeding level 5 on the standard scale

77(3)

Any person

Neglecting or refusing to answer a question or to provide information when required

Fine not exceeding level 5 on the standard scale

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77(5)

80(1)

82(5)

Any person

Any person

Any person

Intentional alteration, suppression, concealment or destruction of any document which he is liable to produce

(a) on summary conviction, a fine not exceeding the statutory maximum;

Knowingly or recklessly providing the Regulator with false or misleading information

(a) on summary conviction, a fine not exceeding the statutory maximum;

Disclosure of information in contravention of section 82 (Restricted information)

(a) on summary conviction, a fine not exceeding the statutory maximum;

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

193(1)

Any person

Neglecting or refusing to provide information or produce a document required by the PPF Board

Fine not exceeding level 5 on the standard scale

193(2)

Any person

Intentional delay or obstruction of a PPF Board appointed person or neglecting or refusing to answer a question or to provide information when required

Fine not exceeding level 5 on the standard scale

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193(6)

195(1)

197(5)

Any person

Any person

Any person

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Intentional alteration, suppression, concealment or destruction of any document which he is liable to produce

(a) on summary conviction, a fine not exceeding the statutory maximum;

Knowingly or recklessly providing the PPF Board with false or misleading information

(a) on summary conviction, a fine not exceeding the statutory maximum;

Disclosure of information in contravention of section 197 (Restricted information)

(a) on summary conviction, a fine not exceeding the statutory maximum;

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

(b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

218(2)

Any person

Obstruction of the PPF Ombudsman or guilt of any action or omission in relation to an investigation by him which would (in relation to court proceedings) constitute contempt of court

Matter to be certified as an offence to the court for the court to enquire further

256(4)

Trustee or manager

Failure to prevent oneself from being reimbursed out of scheme assets for a fine or penalty

(a) on summary conviction, a fine not exceeding the statutory maximum; (b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

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Paragraph 11(3) of Schedule 4

Any person

Failure to attend following issue of a summons to the Pensions Regulator Tribunal or to give evidence

Fine not exceeding level 5 on the standard scale

Paragraph 11(6) of Schedule 4

Any person

Alteration, suppression, concealment or destruction of any document which he is liable to produce or refusal to produce a document to the Pensions Regulator Tribunal

(a) on summary conviction, a fine not exceeding the statutory maximum; (b) on conviction on indictment, a fine or imprisonment for a term not exceeding two years, or both.

CIVIL PENALTIES The Pensions Regulator may, where may impose a fine up to the maximum amount, ie a) £5,000 in the case of an individual and £50,000 in any other case, or b) such lower amount as may be prescribed in the case of an individual or in any other case. Section number

Person affected

Compliance failure

13(8)

Trustee or manager

Failure to comply with an improvement notice

14(6)

Any person

Failure to comply with a third party notice

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20(11)

Deposittaker

Failure to comply with any obligation imposed by a restraining order (pension liberation)

21(5)

Deposittaker

Failure to comply with a direction to pay a sum of money (repatriation orders - pension liberation)

24(8)

Trustee or manager

Failure to comply with a freezing order

24(10)

Employer

Failure to repay an amount required by a direction that certain deducted contributions be repaid by the employer

28(4)

Trustee or manager

Failure to comply with a direction contained in an order to wind up an occupational pension scheme while a freezing order has effect

30(7)

Employer

Failure to comply with an order that a contribution of a specified amount be paid by or on behalf of the employer where a freezing order ceases to have effect

30(8)

Trustee or manager

Failure to comply with the requirement to give notice of an employer's failure to comply with an order that a contribution of a specified amount be paid by or on behalf of the employer where a freezing order ceases to have effect

31(5)

Trustee or manager

Failure to comply with a direction by the Regulator to notify scheme members of the fact that a freezing order (or other orders connected with a freezing order) has been made

41(5)

Trustee or manager

Failure to comply with a direction issued by the Regulator not to take any steps to recover a debt due to them under section 75 of the Pensions Act 1995 pending the recovery of a debt due to them by virtue of a contribution notice

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50(5)

Trustee or manager

Failure to comply with a direction issued by the Regulator not to take any steps to recover a debt due to them under section 75 of the Pensions Act 1995 pending the recovery of a debt due to them by virtue of a contribution notice

62(6)

Trustee or manager

Failure to comply with requirement to register a scheme, to provide registrable information, to notify changes or the cessation of a scheme to the Regulator

64(2)

Trustee or manager

Failure to provide a scheme return before the return date to the Regulator

69(7) and 69(8)

Any person

Failure to comply with requirement to give notice of a notifiable event

70(4)

Any person

Failure to comply with obligation to report a breach of the law

71(7) and 71(8)

Any person

Failure to comply with a report notice

133(11)

Trustee or manager

Failure to comply with certain restrictions on schemes during assessment periods

134(5) and 134(6)

Any person

Failure to comply with a direction made by the PPF Board

135(10)

Trustee or manager

Failure to comply with certain restrictions on schemes during assessment periods

138(9)

Trustee or manager

Failure to reduce benefits correctly during an assessment period

140(4)

Trustee or manager

Failure to secure that an application for the award of an ill-health pension once an assessment period starts is decided in the prescribed period

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153(8)

Trustee or manager

Failure to apply to the PPF Board within an authorised period where a full buy-out quotation cannot be obtained or failure to take reasonable steps to obtain a full buy-out quotation (where scheme has sufficient assets to meet protected liabilities)

154(9) and 154(10)

Any person

Failure to comply with a direction or order by the PPF Board relating to the manner of winding up a scheme

157(8)

Trustee or manager

Failure to comply with the requirement to make an application to the PPF Board where, in relation to a close scheme, they become aware that the value of the assets is less than the amount of the protected liabilities.

219(5) and 219(6)

Any person

Failure to comply with a direction by the Regulator relating to the backdating of the winding up of a scheme

223(4)

Trustee or manager

Failure to comply with the requirement to prepare a statement of funding principles

224(8)

Trustee or manager

Failure to comply with the requirement to obtain an actuarial valuation and report

225(3)

Actuary

Failure to comply with the duty to report to the Regulator if the technical provisions cannot be certified in the actuarial valuation

226(7)

Trustee or manager

Failure to comply with the requirement to prepare a recovery plan where the statutory funding objective is not met

227(8)

Trustee or manager

Failure to comply with the requirement to prepare a schedule of contributions

227(9)

Actuary

Failure to comply with the duty to report to the Regulator if the schedule of contributions cannot be certified

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228(4)

Trustee or manager

Failure to comply with the duty to give notice to the Regulator if amounts are not paid in accordance with the schedule of contributions or to treat the amount as a debt due to the scheme

228(4)

Employer

Failure to make payments in accordance with the schedule of contributions or to treat an unpaid amount as a debt due to the scheme

229(6)

Trustee or manager

Failure to agree certain matters requiring agreement with the employer (methods and assumptions for calculating the technical provisions; statement of funding principles; recovery plan; and schedule of contributions)

230(4)

Trustee or manager

Failure to comply with the requirement to obtain actuarial advice on certain matters (methods and assumptions for calculating the technical provisions; statement of funding principles; recovery plan; schedule of contributions; and modifying the scheme as regards future accrual)

238(5)

Any person

Failure to comply with the requirement for employers to take action for the purpose of enabling employees to obtain information and advice about pensions and saving for retirement

241(9)

Any trustee of an occupational trust scheme

Failure to comply with the requirement for member-nominated trustees.

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242(11)

Any company that is a trustee of an occupational trust scheme

Failure to comply with the requirement for member-nominated directors of corporate trustees.

252(5)

Trustee or manager of an occupational pension scheme that has its main administration in the UK

Failure to secure that no funding payment is accepted contrary to section 252 (UK-based scheme to be trust with effective rules)

253(6)

Employer who causes a contribution to be paid to an occupational pension scheme that has its main administration outside the member States

Failure to prevent a contribution to be paid contrary to section 253 (NonEuropean scheme to be trust with UKresident trustee)

255(3)

Trustee or manager

Failure to secure that the activities of the scheme are limited to retirementbenefit activities.

256(3)

Trustee or manager

Failure to comply with the requirement to ensure that no amount is paid out of the assets for the scheme to reimburse a trustee or manager for a fine or penalty

262 (inserting new provisions into the Pensions Act 1995)

Any person

Range of new penalties for failure to comply with amended section 67 of the Pensions Act 1995

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264 (inserting new provisions into the Pension Schemes Act 1993)

Trustee or manager

Failure to notify member of his new right under section 101AB of the Pension Schemes Act 1993 to a cash transfer sum or contribution refund or to comply with that right

264 (inserting new provisions into the Pension Schemes Act 1993)

Employer and trustee or manager

Failure to comply ensure compliance with direct payment arrangements to personal pension schemes

287(5)

Trustee or manager

Failure to comply with requirement to ensure that trustees or managers do not accept any contribution to a scheme from a European employer unless certain conditions are met

291(3)

Trustee or manager

Failure to comply with duty to ensure that, where contributions are received from a European employer, the scheme is operated in a way which is consistent with the requirements of the social and labour law of the host member State.

292(3)

Trustee or manager

Failure to comply with a ring-fencing notice from the Regulator

293(7)

UK employer

Failure to comply with a notice from the Regulator to take certain action (or refrain from certain action) where the Regulator is satisfied that a European pension institution which receives contributions from a UK employer is contravening any relevant legal requirements.

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CIVIL PENALTIES UNDER REGULATIONS UNDER THE PENSIONS ACT 2004

Section number

Person affected

Compliance failure

Regulation 12 of the Occupational and Personal Pension Schemes (General Levy) Regulations 2005

Any person

Failure to pay levy (maximum fine for individual of £1,000 and for any other person of £10,000)

Regulation 13 of the Occupational Pension Schemes (Independent Trustee) Regulations 2005

Appointed trustee

Failure by appointed independent trustee to furnish information required by regulation 13 (maximum fine for individual of £5,000 and for any other person of £50,000)

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APPENDIX XIII

THE PENSIONS REGULATOR TRUSTEE GUIDES Pensions Act 2004 224 Requirement for knowledge and understanding: individual trustees 1) This section applies to every individual who is a trustee of an occupational pension scheme. 2) In this section, ‘relevant scheme’, in relation to an individual, means any occupational pension scheme of which he is a trustee. 3) An individual to whom this section applies must, in relation to each relevant scheme, be conversant with: a) the trust deed and scheme rules, b) any statement of investment principles for the time being maintained under section 35 of the Pensions Act 1995 (c. 26), c) in the case of a relevant scheme to which Part 3 (scheme funding) applies, the statement of funding principles most recently prepared or revised under section 204, and

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed d) any other document recording policy for the time being adopted by the trustees relating to the administration of the scheme generally. 4) An individual to whom this section applies must have knowledge and understanding of: a) the law relating to pensions and trusts, b) the principles relating to: i) the funding of occupational pension schemes, and ii) investment of the assets of such schemes, and c) such other matters as may be prescribed. 5) The degree of knowledge and understanding required by subsection (4) is that appropriate for the purposes of enabling the individual properly to exercise his functions as trustee of any relevant scheme.

225 Requirement for knowledge and understanding: corporate trustees 1) This section applies to any company which is a trustee of an occupational pension scheme. 2) In this section, ‘relevant scheme’, in relation to a company, means any occupational pension scheme of which it is a trustee. 3) A company to which this section applies must, in relation to each relevant scheme, secure that each individual who exercises any function which the company has as trustee of the scheme is conversant with each of the documents mentioned in subsection (4) so far as it is relevant to the exercise of the function. 4) Those documents are: a) the trust deed and scheme rules, b) any statement of investment principles for the time being maintained under section 35 of the Pensions Act 1995,

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c) in the case of a relevant scheme to which Part 3 (scheme funding) applies, the statement of funding principles most recently prepared or revised under section 204, and d) any other document recording policy for the time being adopted by the trustees relating to the administration of the scheme generally. 5) A company to which this section applies must secure that any individual who exercises any function which the company has as trustee of any relevant scheme has knowledge and understanding of: a) the law relating to pensions and trusts, b) the principles relating to: i) the funding of occupational pension schemes, and ii) investment of the assets of such schemes, and c) such other matters as may be prescribed. 6) The degree of knowledge and understanding required by subsection (5) is that appropriate for the purposes of enabling the individual properly to exercise the function in question. 7) References in this section to the exercise by an individual of any function of a company are to anything done by the individual on behalf of the company which constitutes the exercise of the function by the company. 226 Requirement for knowledge and understanding: supplementary 1) For the purposes of sections 224 and 225, a person’s functions as trustee of a relevant scheme are any functions which he has by virtue of being such a trustee and include, in particular: a) any functions which he has as one of the trustees authorised under section 34(5)(a) of the Pensions Act 1995 (c. 26) (delegation of investment discretions) in the case of the scheme, and

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed b) any functions which he otherwise has as a member of a committee of the trustees of the scheme. 2) Regulations may provide for any provision in sections 224 and 225: a) not to apply, or b) to apply with modifications, to a trustee in prescribed circumstances. 3) Nothing in either of those sections affects any rule of law requiring a trustee to have knowledge of, or expertise in, any matter.

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APPENDIX XIV

CODE OF PRACTICE: TRUSTEE KNOWLEDGE AND UNDERSTANDING (TKU) Reproduced with the kind permission of The Pensions Regulator

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INDEX OF ADVERTISERS ABN Amro Mellon GSS..................................................................10-12 Aegon Trustee Solutions....................................................................94 Aon Consulting Ltd..........................................................................134 Aries Pensions & Insurance Systems Ltd ...........................................xx Artemis Investment Management Ltd .................................xxxii-xxxiv AXA Investment Managers ..............................................................152 Barclays Global Investors Ltd....................................................131-133 BDO Stoy Hayward Investment Managers.......................................160 Blackrock ...........................................................................................vii Capital Cranfield Trustees ...............................................................183 Chantrey Vellacott DFK LLP .........................................................viii-ix Combined Pension Forecasts .................................................xxvi-xxix Cobbetts LLP .....................................................................................16 DBC Pension Services Ltd..................................................................86 DIAM International ...........................................................353-354, IBC Edis Partnerships ..........................................................................61-64 EIMSA ..............................................................................................106 Euronext-liffe .................................................................................xxiv GAM Ltd ............................................................................................71 Gazelle ................................................................................xii, 100-105 Grant Thornton ...............................................................................xxii Heath Lambert Consulting.................................................................19 Hillier Hopkins LLP...................................................................222-225 Horwath Clark Whitehill LLP ......................................................... 115 HSBC Actuaries and Consultants Ltd ...............................................121 Irwin Mitchell Solicitors ..................................................................176 Jardine Lloyd Thompson / Independent Trustees Services Ltd...........................................136-137

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· THE PENSION TRUSTEE’S HANDBOOK 5th ed KMPG LLP (UK) ..................................................................48-50, OBC Man Investments Ltd ................................................................165-168 MNPA Ltd...............................................................................xiv, 91-93 Morgan Stanley Investment Management.................................184-185 Morley Fund Management .....................................................25, 28-30 Occupational Pension Defence Union Ltd / Trustee Risk Management Ltd ........................................116, 122, 130 Pacific Alternative Asset Management Company ...................xxx-xxxi Partnership Incorporations Ltd ......................................................192 Paymaster .........................................................................................23 Penfida Partners LLP ................................................................158-159 Pensions Management Institute ..............................................IFC, ii-iv Pictet Asset Management Ltd ..........................................................xvi Pitmans Solicitors .....................................................................16, 106 Pointon York Sipp Solutions Ltd ....................................................196 Profund Solutions ..........................................................................xviii Russell Investments Group ...............................................................72 Sacker & Partners ........................................................................83-85 Scottish Life .................................................................................14-15 Scottish Widows Investment Partnership ..........................................9 Skandia Life Assurance Company Ltd .............................................234 Societe Generale Asset Management UK ........................................221 The GAAPS Group ...........................................................................186 The Gate Worldwide / Insight Investment ...................x, 138, 146-148 The Pensions Regulator ..................................................................228 UBSi Group ..............................................................................207-211 World Gold Council .........................................................................3-6 Zurich Assurance Ltd ......................................................................226

A quick overview to the Japanese Market DIAM – DLIBJ Asset Management Ltd. A typical risk aversion attitude has been observed in Japan’s stock markets recently. Not only foreign investors, but also retail investors in Japan have been selling the stocks as a result of ‘flight to quality’ tendency due to the nervous situation in the Middle East. It is clear that less liquid stocks have been the deepest hit, such as the stocks listed in Mothers and Hercules. However, less risky stocks such as food and pharmaceutical large cap stocks have been also suffering. To a much lesser extent, some investors are also nervous about the results coming from high-tech U.S. companies and also the outlook for the U.S. monetary policy. The Japanese domestic issues are hardly affecting the market. The economy still follows a positive trend. The outlook for Japan’s monetary policy remains the same (no aggressive monetary tightening expected). JPY has been depreciating, which should have a positive impact on the overall stock market. The North Korean situation is probably something unique to Japan, as North Korea is located next to Japan. Although North Korea has shot several missiles towards Japan (they landed in the sea between Japan and Russia), we believe that North Korea’s attitude is more to do with a demonstration to get more attention from the world, especially from the U.S. The U.S. has been refusing to negotiate with North Korea for a long time and it seems like North Korea definitely needs the U.S. to negotiate with to make sure of its survival as an independent country. That may lead to a better compromise in the assistance area especially for food too (North Korea is suffering from famine). For the time being, the investors are watching the oil price. It is difficult to guess what comes next as the situation will be very much depending on the geopolitical issues. However, the main scenario remains the same. In our opinion, although the economic fundamentals in Japan will continue to be very good, it will be difficult for the market to break through the peak of the market we saw in April. The market will fluctuate within a range for the time being, triggered by the outlook for the geopolitical issues and the U.S. monetary policy. The current level is, however, close to the bottom of the range for this year.

September 2006 If you would like to receive more information please contact: [email protected]

© 2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved.

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