Pensions Newsletter - Autumn 2008
Welcome to the September 2008 Pensions Newsletter.
In this edition:
• A Nasty and Costly “Aftershock” for Sponsoring Employers
• Companies Act 2006 – Are You Conflicted?
• More Flexibility for SIPPs
• New Guidance from The Pensions Regulator
A Nasty and Costly “Aftershock” for Sponsoring Employers
The aftershock from the Dubery case is still being felt and this is likely to continue for some time in the world of pensions. Why should this be so? Arguably, the decision simply confirmed what has always been the position – that in order to validly amend the Rules of a pension scheme, the conditions set out in the amendment power must be met. If not, any attempted amendment is not valid or effective.
What is becoming increasingly clear is that many intended “amendments” to pension schemes over the years have not met these requirements. The result? Even though a scheme has been run as if the intended amendments have been validly made, in terms of funding and benefits, this is not correct and the position will have to be revisited. This can be a major issue for trustees, sponsoring employers and also advisers.
Trustees
Trustees have the responsibility of running the scheme and should know what the governing rules are. In other words, they should know whether or not amendments have been validly made. There may be implications for trustees if they have come up short.
Sponsoring Employers
If an intended amendment which has not been properly made has financial consequences (and the majority do) then there may be an additional and unwelcome cost for the sponsoring employer. One area where it has proven to be a big issue for many schemes is in relation to equalisation of retirement age for men and women. The Barber case (decided on 17 May 1990) confirmed the requirement for equality between men and women from 17 May 1990. From that date, individual schemes decided how to amend their rules in so far as required to comply. Many trustees and sponsoring employers are finding that not all the steps have been taken and so pension ages for men and women are still unequal. The cost implications of this problem are likely to be very considerable indeed.
Advisers
Advisers were often retained to carry through the “equalisation” exercise. Their clients will have been relying on them to ensure that it was done properly. If sponsoring employers find themselves landed with additional costs then it is likely that the advisers will have some explaining to do. Expect claims to follow.
Many trustees have been alerted to this issue when the actuary has asked them to confirm that retirement ages have been validly equalised.
The very strong message here is:-
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If you have not already done so, review the Rules of your scheme and check that all amendments, particularly equalisation of normal retirement age, have been properly carried out. Do not wait until your actuary asks the question.
If you are in the unhappy position that any proposed amendments have not been properly carried through, then take appropriate action as soon as possible to close off liability.
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Companies Act 2006 – Are You Conflicted?
In our February 2008 newsletter, we mentioned that there would be a phased implementation of the Companies Act 2006, the longest act ever passed by Parliament. One of the provisions that comes into force on 1 October 2008 is the new statutory duty on a director to avoid a situation in which he/she has, or can have, a direct or indirect interest which may conflict with the company’s interests.
It will be possible to amend the Articles of a company to allow such conflicts to be authorised if the Articles do not contain such a power. Remember though, the overriding duty of a director is to promote the interests of the company. This is of particular relevance to the pensions sector, as anyone who sits on the board of a company and is also a trustee of the company’s pension scheme should seek authorisation from the directors on the board to continue as a trustee of the pension scheme, to avoid being in breach of this new statutory duty.
So, if you have two roles:-
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You will be in a potential conflict of interest situation. In order to avoid a breach of your duty as director, the potential conflict must be authorised by the board of directors.
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There are specific requirements to be met so that proper authorisation can be given.
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Consequences for breach of this new statutory duty include,having to indemnify the company for loss, receiving a court order to stop specified actions and actions by the company or shareholders.
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Where all directors are trustees no one can then ‘authorise’ the potential conflict. If this is the case then it may be possible to obtain authority from shareholders.
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Trustee boards should be vigilant in identifying and dealing with actual conflicts of interest and potential conflicts of interest.
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Many companies have already decided, given the extent of actual/potential difficulties, to appoint an independent professional trustee or trustees to the trustee board in place of such directors.
More information on this and other important changes contained in the Companies Act 2006 is in our guide.
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More Flexibility for SIPPs
From 1st October 2008, those individuals who contracted out of the State Second Pension (SSP) will be given the flexibility to invest their protected rights (the funds accrued when an individual contracts out of SSP) in Self Invested Personal Pensions(SIPPs).
This was previously prohibited under Department of Work and Pensions regulations to shield those contracting out of the SSP from perceived risks that can arise from self-investment.
Following the changes made to the FSA regime in April 2007, which introduced consumer protection provision across all types of personal pensions including SIPPs, the existing restriction sare now deemed unduly restrictive.
According to the Minister for Pension Reform, Mike O’Brien, the new rules “will give more flexibility and investment choice to people taking an active interest in the management of their pension fund. It will also be easier for individuals to transfer funds between different types of pension schemes and to consolidate pension rights in one place”.
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New Guidance from The Pensions Regulator
Guidance on relations with advisers and draft guidance in relation to calculation of transfer values.
Guidance on Relations with Advisers
Best practice guidance has bee npublished to help trustees make the best use of the expertise that advisers and service providers can bring to a pension scheme.
The guidance outlines key issues that trustees may wish to take into account when appointing a new adviser or reviewing the performance of an existing adviser. It also explores the issues to consider in order to obtain the best service from current scheme advisers.
It highlights additional online services such as “The TrusteeToolkit” which emphasize the importance of trustees getting best value out of their relations with scheme advisers.
To read the guidance click here.
To read the draft guidance click here.
Draft Guidance on Calculation of Cash Equivalent Transfer Values
From 1 October 2008, trustees will become responsible for the calculation of defined benefit (final salary) transfer values. Up until 30 September 2008, that responsibility has largely rested with the scheme actuary.
To assist trustees to meet their new responsibilities, The Pensions Regulator issued draft guidance on 8 August 2008.
What We Think
The period for responding to the consultation closed on 19 September 2008. The timing of the draft guidance is unfortunate as the regulations imposing the obligations on the Trustees come into force on 1 October 2008. It is unlikely that the final guidance will be available before then. Most Trustees should have received advice on their new obligations already and this may have to be revisited if there are changes in the final guidance. Much of the guidance was as expected and it would be surprising if there were major changes at this late stage.
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter
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