Publications

Bulletin 5 Autumn 1993

Goode Enough?

The long-awaited report of the Pension Law Review Committee chaired by Professor Roy Goode was published on 30 September. This issue of the Bulletin is devoted entirely to the Goode report.

The Committee, which took fifteen months to produce its report, considered almost 1,700 items of written evidence, took oral evidence from numerous organisations and held public meetings. The result is a report the size of two telephone directories and a summary extending to 56 pages!

The principal conclusions are the following:

· Trust law is broadly satisfactory and should continue to provide the foundation for pensions law, but that some of the principles of trust law require modification in their application to pensions.

· A Pensions Regulator should be appointed with overall responsibility for the regulation of occupational pension schemes.

· Some shift in the distribution of powers is necessary - scheme members should have the right to appoint trustees.

· There should be a reduction in detailed prescriptive legislation and a move towards simplification of statutory and other rules.

· A compensation scheme should be established to protect members' assets and should be limited to loss resulting from fraud, theft and other misappropriation.

· The security for members' entitlements should be strengthened by minimum solvency requirements and improved monitoring.

The overall tone of the report is generally one of evolutionary change rather than revolutionary change. Indeed the report comments that most of the recommendations do little more than reflect best practice and it hopes that they will add few, if any, financial burdens to a well-run and properly funded scheme. These are only recommendations; wide-ranging discussions will take place during the next few months and legislation, the proposed Pensions Act, is well over a year away.

"Outside corporate trustees can offer a high degree of professionalism and have the added advantage of continuity." (Volume 1 Paragraph 4.5.35)

Trustees

The report recognises the crucial importance of the role of trustees in the administration of schemes. It notes the concerns that were expressed to it about the composition of trustee boards, their qualification, level of knowledge and training and it makes the following recommendations:

A person should be automatically disqualified from acting as a trustee on grounds similar to those relating to company directors. (Surprisingly at present an undischarged bankrupt is considered unfit to manage his own financial affairs, but able to act as a trustee for others)
The scheme auditor and actuary should not be allowed to act as trustees and it should be good practice to exclude the scheme administrator from acting as a trustee.
For earnings-related schemes, active members should be entitled to appoint at least one-third of the trustees with a minimum of two and the employer should be entitled to appoint the remainder.
For money purchase schemes active members should be entitled to appoint at least two-thirds of the trustees, again with a minimum of two, and the employer should be entitled to appoint the remainder.
Schemes should be able to retain their present arrangements for the appointment of trustees unless the members exercise their right to make appointments.
Irrespective of what the trust deed provides, decisions on certain matters should be reserved to the trustees by legislation. In particular:
- to appoint the scheme auditor, actuary, fund manager and other professional advisers;
- to decide, in consultation with the employer, on the investment strategy of the fund;
- to decide on the distribution of any unallocated surplus on winding-up of the scheme.
It should be obligatory for trustee boards to meet as often as required and in any event at least once a year. The annual report to members should state the number of meetings held during the year.
Employers should be required to allow member trustees reason able time off for training without loss of pay (oddly there is no equivalent requirement in respect of employer-appointed trustees)

By highlighting the onerous responsibilities of trustees and identifying the need for training and competence, it must cause many existing trustees, employers and members alike, to question whether they have the relevant skills and experience and whether they can afford the time necessary to acquire them.

"Many schemes operate successfully using corporate trustees and we see not reason why this should not continue."
(Volume 1 Paragraph 4.5.36)

Fund Management and Security of Assets

The report makes a number of sensible recommendations but does not attempt any radical shake-up of existing arrangements. It is unlikely that a well-managed scheme would need to alter its present procedures as a result of the report. The principal points are:

A statutory prudent investment standard "to exercise, in relation to all matters affecting the fund, the same degree of care and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide and to use such additional knowledge and skill as the trustee possesses or bought to possess by reason of the trustee's profession, business or calling".

A statement by trustees in the annual report that they have carefully considered the investments and are satisfied that they conform to the statutory criteria.

Stock lending conducted in a regular manner through the market and in conformity with established practice and regulatory requirements should not be prohibited.
No change to the present arrangements regarding "in-house" fund management.
An extension of the self-investment rules to ensure that all employer-related investments are disinvested down to the 5% limit within five years. The major impact of this will be in respect of employer-related property investments.
No requirement for the segregation of scheme assets between those responsible for their management and those responsible for guarding them and no requirement for independent custodians.

"One person suggested that the wages clerk was probably the trustee, whilst another had forgotten that he himself was a trustee of the scheme." (Volume 11 page 183)

Deregulation

BESTrustees, through Clive Gilchrist, has been involved in the government initiative to reduce the burden of unnecessary legislation. We welcome the report's comments in this area which will ensure that the matter continues to receive the attention it deserves.

The report states that:

There should be a move towards more general statements of principle in the primary legislation and a reduction in the amount of detailed prescription.
In recent years government departments have made substantial progress towards simplifying official forms and reducing the numbers in use. A similar approach should be taken towards statutory and other rules affecting pension schemes.
It is better to have a relatively small number of rules which are vigorously enforced than a proliferation of regulations which are regularly broken through want of adequate monitoring and enforcement.

The plea for simplification, clarity and an avoidance of overprescriptive rules appears elsewhere in the report which calls for the necessary Pensions Act to confine itself to the laying down of principles and for better and simpler disclosure to members.

Schemes should be encouraged to consolidate their trust deeds and rules at least every five years.
Basic information and annual statements should be set out in a simple format and in plain English.