In business terms you always used to know when you’d arrived. A company parking space, the key to the executive toilet, first class travel and a seat on the trustee board of the company pension scheme. How times have changed.
You’d have needed to be living on a desert island to have escaped the mass of press comment surrounding what has now become one of the key issues, not only in the pensions arena, but also on the corporate agenda. The Pensions Act 2004 (“the Act”) received Royal Assent on 18 th November 2004. It extends to 325 sections and 13 schedules with more regulation and guidance to follow. It will begin to take effect from April 2005 and whilst the legal position of trustees remains unchanged the Act will define the role of a trustee more closely. The establishment of a new code of practice will provide a benchmark against which trustees can be judged. Trustees need to understand that they each have a personal, non transferable liability and that ultimately the buck stops with them.
To give some idea of the level of risk now involved we need only look at the soaring costs of trustee indemnity insurance cover. With fewer and fewer providers seeing the market as viable and with the rising costs associated with increasing numbers of claims given our ever more litigious society, premium rates have increased by threefold in the last 12 months. Risks are significant as even though few cases ever reach court even the most spurious of claims need to be defended with the commensurate costs entailed. Whilst trustees have some protection provided by the trust deed indemnity clauses, once a clear code of practice is established it will be more difficult for trustees to rely on these. Trustees will need to take personal responsibility and, simply put, if they are uncomfortable with this they should not take on the role. Trustee indemnity insurance will become increasingly essential to cover the potentially huge legal costs associated with defending actions in this very specialist area.
The section of the Act which relates to trustee knowledge extends to nine pages. The code of practice is expected to be considerably longer. The Act contains provisions which require trustees to have an understanding of their scheme documentation and an appropriate knowledge and understanding of pensions and trust law. This places greater emphasis on the requirement for trustee education, with the regulator considering promoting on-line learning for trustees.
Corporate governance champion, Paul Myners, commented “It is ridiculous that the crucial decisions – on investment, benchmarks and manager selection – are taken by lay trustees who spend less than 12 days a year on investment needs.”
Whilst at the moment there is no suggestion that a mandatory qualification will become a requirement that is not to say it won’t happen at some point. Such a qualification would demonstrate a core level of competence ensuring that the trustee understands their role as well as providing a useful defence if their ability or knowledge is challenged. It may even be the case that Trustee Indemnity Insurance premiums may at some point reflect the level of qualification of the trustee board. Whilst a requirement for a formal qualification has not been introduced there is a requirement for formal record keeping with a proposal that trustees will need to keep a log of how they have kept their training up to date.
There are undoubtedly formidable challenges ahead for pension scheme trustees and despite one of the Acts objectives being to encourage more member trustees, who will volunteer to perform this function once they are made aware of the responsibilities the role entails.
It is also becoming increasingly difficult for the directors of the scheme’s sponsoring employer to act as a trustee given that there are inherent conflicts between the interests of the company and the trustees particularly in underfunded schemes. In the past where schemes were well funded and benefits adequately secured contentious issues were still there, but their impact was limited and less apparent. Now, with scheme solvency sharply in focus, more difficult negotiation between trustees and employers is required. Trustees, who often wear a number of “hats” will need to be able to identify and manage such conflicts of interest when they arise.
There is little doubt that standards in this area needed to be raised and the code of practice will provide a sound foundation for the future management of trust based pension schemes. As ever the effectiveness of the proposed measures will be shown by how consistently they are implemented by trustees and scheme sponsors, particularly in terms of the time and financial commitment required to keep trustees fully up to date with what is expected of them.
As the realisation of the level of responsibility to which trustees are being exposed becomes increasingly apparent we can only see a continuing move towards the appointment of professional independent trustees, either as sole trustee or in partnership with the existing trustee board.
Published in The Herald on 19/02/05