Publications

Bulletin 4 Summer 1993

Independent Custodians

The Pension Law Review Committee, having been inundated with submissions, has been given an extension of three months and will produce its report in September. Amongst the submissions was one from the newly-formed Forum for Independent Custodianship. This grouping believes that the custodian plays a vital role in ensuring the security of pension fund assets.

In a statement of principles, they recommend:

Appropriate segregation of duties between those responsible for moving pension fund assets and those responsible for guarding them.
A direct contractual relationship between the custodian and the trustees which clearly sets out the custodian's duties, responsibilities and accountability to the trustees.
The right for trustees to demand separate designation if such procedure provides greater security.
The direct regulation of custodians' management of pension fund assets by an appropriate regulatory authority. Such regulation to address:
- fit and proper management;
- appropriate capitalisation and insurance coverage for the levels of business undertaken;
- maintenance of appropriate accounting records and effective procedures and controls;
- acceptable operational standards.

BESTrustees fully supports their aims. As Clive Gilchrist said in a recent article for Pensions Management: "Trustees have a fiduciary duty to ensure that the assets under their control are held securely. If they were required to use an independent custodian subject to appropriate documentation and rigorously enforced regulations, that would provide additional safeguards against fraud and remove temptation from potential miscreants."

Further information about FOIC can be obtained from Benjie Fraser on 071 623 0921

Trustees Should Be Authorised

John Morgan, Chief Executive of IMRO, spoke at the NAPF Investment Conference in February. Three weeks later, accompanied by colleagues from IMRO, he met the Goode Committee. An extract of his views appears here; the full text is available from IMRO.

"Pension scheme management under trust law has been developing over very many years. The Financial Services Act is a late entrant and is concerned with only a part of the business-fund management."

"Section 191 of the Act requires trustees to seek authorisation unless they have delegated day-to-day investment decisions to a permitted third party. Interpretation of the day-today criterion has caused some difficulty. The wording of the section lacks clarity and has so far not been tested in the courts. This is a thoroughly unsatisfactory situation, given the burden of responsibility for looking after the assets of their funds which all trustees carry. Here is one aspect where existing legislation needs amendment."

"Management of pension fund assets requires definitive regulation designed for that function. Trust law does not offer that. Clarification of s.191 should be directed towards defining the boundary between the two legal systems so that they fit neatly together but do not interfere with one another."

"This brings us to the problem the s.191 draftsman wrestled with: how to let pension fund trustees have something of a say in the disposition of the assets without authorisation. In fact there is no compromise to be found. You cannot be a little bit authorised. Trustees who decide, for example, on the strategic disposition of a fund should be fit and proper to do so under the test of the Financial Services Act. And should be authorised. If they wish to avoid that, they should delegate the entire investment function under competent advice."

He then went on to argue for a Pensions Regulator - as opposed to, and in addition to, IMRO as regulator of investment managers.

"Matters falling within the scope of the Regulator would include:

the eligibility and appointment of trustees;
the role of the employer and his relationship with the trustees;
regular reporting by trustees and scheme administrators to the Regulator's office;
regular reporting to beneficiaries.

"My preference would be for a Pensions Regulator with its own free-standing powers. I suggest that the important elements for such a body would be these. First, whatever the statutory niceties, it must be able to act, in defined circumstances, on its own motion - that is, without political direction and without being answerable to ministers or Parliament for that individual decision, whatever the reporting requirements for its general performance."

"Second, its decisions must contain a sizeable element of practitioner participation."

"Third, it must be explicitly able - indeed required - to co-operate with other regulators. The exchange of confidential information is an obvious necessity, but we also need a close working relationship."

"It need be no surprise that most of what I suggest looks like an enhanced Occupational Pensions Board; but enhanced out of all recognition."

What Would the New System Provide?

"We would get independent trustees who could expect that independence to be supported by a powerful Regulator and who could look to him for authoritative guidance in case of need."
"We would get the capability to bring trustees speedily to book if they fell down on the job."
"We would get clarity of responsibilities and a separation of functions to do away with the confusion inherent in overlapping roles."
"We would avoid the undue influence of an unscrupulous employer whose motives become more questionable when times get hard."
"We would have whistle-blowers in no doubt about where to direct their concerns."
"We would have well-informed beneficiaries who were able to get their worries set to rest."
"We would have professional fund management, professionally regulated."

In response to a question from BESTrustees, he reiterated that in his view any trustee involved in a decision regarding asset allocation or strategic investment should require authorisation; and similarly that any stock transaction decision should be regarded as "day-today", however infrequently it occurred.

The message was clear: trustees should completely absolve themselves from all investment decisions or obtain authorisation and IMRO favours authorisation and regulation of trustees. Whilst against any increase in bureaucracy, BESTrustees would support any move to increase standards in the management of pension schemes.

Independent Directors and Independent Trustees

Pro Ned has recently updated and re-issued its guide to recommended practice on non-executive directors. The analogy is sometime drawn between the non-executive director and the independent trustee. The following extract from the guide illustrates the point: by simply ignoring those words that relate specifically to directors or to companies, the contribution of the non-executive director becomes the contribution of an independent trustee to an ongoing scheme.

["Non-executive directors share the same legal responsibilities and are subject to the same legal constraints as executive directors.] Their independent role [vis-à-vis the company] means, however, that they have a special contribution to make [to the board] in situations where a degree of objectivity is particularly important, viz:

a) in the discussion and evolution of [the company's] strategy, where their experience of other organisation can give a broader perspective;

b) in ensuring [the] financial probity and high standards [of the company] and that [the company's] results are fairly and accurately reported;

c) in seeking that the interests of all [the company's] stakeholders are kept in acceptable balance;

d) in taking the lead in providing an objective view on occasions where a potential conflict of interest could arise between these stakeholders [eg over takeover bids, board succession or directors' emoluments."]

The independent director is now accepted in the boardroom not as an interloper, but as a valued member of the team. In the years to come the same will apply to the independent trustee.

Financial Deregulation Task Force

The Government has established a task force to advise ministers on priorities for the repeal or simplification of regulations in an attempt to reduce red tape. The task force, which is chaired by Sir Sydney Lipworth..., includes respresentatives from all aspects of the financial business community. The pensions industry is represented by Clive Gilchrist.

Any example of problem legislation should be sent to Clive Gilchrist at BESTrustees as soon as possible.