Publications

Bulletin 3 Spring 1993

The Taxation of Private Pensions

The Institute of Fiscal Studies has produced a report entitled "The Taxation of Private Pensions". The report, which was sponsored by the NAPF, concluded that there was no case for substantial changes to the tax structure for private pensions, but that the Government could raise around £700m a year in tax by ending the tax exemption on lump sum payments. The actual cost of tax relief on pensions was estimated at £lbn per annum, relative to investment in PEPs. In arriving at that figure, it was assumed that if tax relief were removed from pension fund contributions, then savings currently made through pensions would in future be made via the next best alternative. This cost is significantly lower than some other estimates that simply examine the assets and cash flows of pension funds and ignore the fact that other forms of saving are also encouraged by tax exemptions.

Taxation of pension schemes would lead to a reduction in membership as savers sought alternative tax-efficient methods of saving. From a national standpoint, the attractiveness of pension schemes is that the assets accumulated must, lump sum commutations excepted, be used to provide pensions in retirement. Other forms of savings can just be spent, potentially leaving the State to provide the safety net.

Voting by Institutional Shareholders

The final version of the Report of the Committee on Financial Aspects of Corporate Governance was issued in December. In a change from the draft report, a new paragraph states, "Voting rights can be regarded as an asset and the use or otherwise of those rights by institutional shareholders is a subject of legitimate interest to those on whose behalf they invest. We recommend that institutional investors should disclose their policies on the use of voting rights.”

This follows a number of initiatives aimed at improving the voting record of institutional shareholders including the introduction by the NAPF early last year of a voting issues service to assist it members in their proxy voting

Trustees are often unclear as to whether the right to vote has been delegated to their investment managers or remains with them. In order to comply with the Cadbury Report you should make certain that your investment management agreement is unambiguous, ensure that those responsible are aware of the appropriate procedures and make a suitable disclosure, for example in the fund's annual report.

The Regulator's View

At the annual dinner of The Association of Corporate Trustees last October, Martin Vile, Group Director, Capital Markets of the Securities and Investments Board (SIB) and the principal regulator for pension fund assets, gave some of his personal views on the way that pensions regulations should develop.

He started by questioning the status quo and, in particular, the conflicts of interest faced by trustees who are also employed by the sponsoring company. He argued for greater independence and professionalism, and concluded that the Goode enquiry must find ways of ensuring that the professional expertise available to pension funds is properly used. He remarked that "there is a saying in Whitehall that lawyers should be on top, not on tap. In the field of occupational pension schemes, professionalism should be on top, not on tap." We express those same sentiments in drawing the distinction between working with the sponsoring company and for the sponsoring company and in describing the BESTrustees service as an expert on the team".

The following extracts summarise his speech.

"Curiously, given the cardinal tenet of trust law to avoid a conflict of interest, we select our trustees on principles which institutionalise conflicts of interest. We appoint as trustees the executives (probably from the finance function itself) of the sponsor company on which funding the scheme depends and employees whose jobs are dependent on the financial health of the sponsor company, possibly also members and beneficiaries of the scheme. We then expect them, when they sit round the trust table, to clear their minds of all interest save those of the members and beneficiaries of the scheme. And to relate to each other as equals round the table regardless of any disparities outside the room in employment status, relevant expertise or representational stake in the trustees' decisions."

"We require no qualifications, no training. We require no separation of functions or positions on the part of trustees."

"Many insiders say - it works. To an outsider it smacks of a typical British mix of amateurs, experts, multiple hats, pragmatism, high-falutin' but elusive and unenforced principles, dispersed power, dispersed responsibility, common law, statute law and black letter law."

"What assures the physical security of assets? Where are the checks and balances to control multiple role-players? Where is the professionalism? The clarity of rights and duties? The accountability? The competence? The training? Who has the power to step in when things go wrong? To investigate? To enforce high standards? To sanction unprofessionalism? To protect the members and beneficiaries? Where is the compensation when financial loss is suffered?"

"In brief, the result of Goode must surely be to find effective, practical but economical (in that order) ways of professionalising the operation of pension schemes, of clarifying the functions, rights and duties of those on whom the security of the beneficiaries depends (itemised by the Goode Consultation document) and of delivering, on a continuing basis, adequate standards; adequate compliance with those standards; and mechanisms of investigation, intervention and enforcement which enable problem situations to be dealt with effectively and expeditiously."

These views are obviously personal and, whilst many trustees will feel that he is playing devil's advocate, nevertheless as a regulator that is precisely what he must do. As an industry we must respond positively to such criticisms.

Evidence to the Goode Committee

Professor Goode has been quoted in the press as noting the concern that any change to legislation should not discourage employers from making the pension provision.

BESTrustees, in its submission to the enquiry, made just this point in the following terms, "Employers are not compelled to provide occupational pensions and, in limiting their powers, care must be taken to ensure that regulators are not so onerous as to dissuade employers from encouraging the provision of retirement benefits. It is in the national interest that the partnership between State and private pension provision be encouraged."

A number of significant organisations referred in their submissions to a compensation scheme for occupational pension funds. In view of the press criticism of the NAPF's widely-publicised position, it was, perhaps, surprising to see similar views expressed by others. The Occupations Pensions Board said, "We consider that there is now a clear need for a compensations scheme for pension funds. We believe that such a scheme would provide an essential underpinning to any new regulatory system for occupational pension schemes."

The Society of Pensions Consultants came out in favour of a limited form of compensation scheme, as did the Association of Consulting Actuaries and also the CBI, whilst noting that, "Employers would consider it grossly unfair if they had to subsidise the pensions benefits of other employers - especially of those who may have gained some competitive advantage from deliberate under-funding."

It is difficult to see how, in the light of these comments from such illustrious bodies, the Committee can do anything other than recommend the introduction of a compensation scheme. However, when it comes to the form such a scheme should take, the extent of coverage, the method of funding or the structure, the unanimity of views quickly disappears.