Publications

Bulletin 6 Spring 1994

Compulsory Independent Trustees?

In 1990 the DTI commissioned a report into the affairs of Bestwood plc. Although now history, the report has only recently been published. Bearing in mind the events of the recent past this report, written four years ago, makes interesting reading. The report makes four pensions-related recommendations.

On self-investment it recommends the introduction of a 5% restriction - this was actually introduced in 1982.

The report recommends greater access to a powerful pensions ombudsman - could this be a forerunner of the pensions regulator as envisaged by Goode?

The report recommends that a pension fund investment manager should be wholly independent of the sponsoring employer. Goode recommended that "in-house" fund management should continue, subject to a strengthened monitoring regime. Industry best practice is moving in the direction of greater independence whilst recognising that independence can be a matter of management organisation and controls, not necessarily of ownership - it is really just the word "wholly" that makes the recommendation appear Incongruous.

On trustees, the report noted the potential weaknesses of a trustee board comprised solely of management and member representatives. It recommended that, as a legal requirement, pension scheme trustees should include at least one wholly independent trustee.

The first three recommendations are here or on their way. How long before the fourth? Not long according to The Association of Corporate Trustees.

Regulation…

The months since the publication of the Report of the Pensions Law Review Committee have been hectic ones. In November the Government announced that there would be a short period for discussion and debate about the Report's recommendations and related topics, prior to the drafting of a Pensions Bill. This was followed in December by the issue of a series of consultation documents by the DSS requiring a response early in the New Year.

The Association of Corporate Trustees (TACT) in its response to the DSS argued. that the cost of regulation would be huge. A comparison with other regulated industries indicates that direct costs could well turn out to be in the hundreds of millions of pounds. Whilst the Goode report proposed that the pension regulator should be state funded. The authorities in other industries have expressed a clear preference to funding from within the industry itself.

Even after incurring all these costs there is no guarantee that the regulations will be effective. TACT argued that regulators tend to be "backward looking" in their approach, reviewing information that is often considerably out of date; they also lack the devious and unethical instincts of the potential wrong-doers they are trying to identify and control.

In welcoming better regulation, TACT noted that no amount of regulation can compensate for poor governance. TACT proposed a system of approval for independent trustees and the introduction of a regulatory system that would allow an approved independent trustee to assume some of the roles suggested for the pensions regulator.

It argued that:

this would result in more professional governance of pension schemes;
it would be in keeping with the Government's preference for private sector solutions;
it would ensure automatic market testing of the cost of regulation; and
it would place much of the cost of regulation within the industry, rather than the taxpaper.

TACT believes that their proposal would be efficient for both the pensions regulator and for pension schemes who would be free to choose whether or not to appoint an approved independent trustee.

...and Deregulation

The Government has recently published its proposals for reducing the burden of regulation following the work of the Deregulation Task Forces.

The 605 proposals cover all major areas of business including 38 aimed specifically at pensions and a further 27 on the Financial Services Act, many of which concern pension schemes as investors.

Simplification of regulation was the principle theme of the pension proposals and, whilst they will not necessarily be included in the Deregulation Bill now beginning its progress through Parliament, they have not been rejected but will be considered as part of the overall review of pensions legislation. As Lord Sainsbury, deregulation adviser to Michael Hesletine, said in announcing the proposals, "Government departments will be responding in public to the details and will of course be consulting widely before taking appropriate action".

He added, "... as well as making proposals on specific regulations, the Task Forces have put forward three principles which it had been agreed should guide Government departments in reviewing existing regulations and for the future:

make sure you start out by measuring the impact on small firms of new regulations;
avoid regulations that are out of proportion to the benefits to be obtained;
make regulations goal-based, rather than over-prescriptive.

The second of these points is, of course, very relevant to pensions administration where increasingly onerous regulations have been introduced to preclude overprovision of benefits, frequently in circumstances where such over-provision would not in any event occur

Personal Pensions Poor Advice or Poor Communications

Press reports over the past few months have been full of horror stories about apparently poor advice given by financial intermediaries to members of occupational pension schemes, persuading them to switch to alternative pension provision.

The reports followed an announcement by the Securities and Investments Board (SIB) in December of the results of a pilot study conducted on its behalf by KPMG Peat Marwick into transfers and opt-outs from occupational pension schemes. The study found that in less that 10% of cases evidence was available to show that proper account had been taken of existing occupational pension arrangements and the clients' personal circumstances. An astonishing 91% of files examined were found to be "unsatisfactory" or "suspect".

SIB is co-ordinating a full scale study into transfers and opt-outs. It has established a Steering Group to examine this and suggest a series of guidelines and benchmarks for the financial services industry to follow.

An estimated half a million people have transferred from a previous employer's scheme or opted out of their present employer's scheme into a personal pension.

Clearly the scale of the problem is enormous but, if comments in the press are representative, its impact has been uneven throughout the industry. Schemes that spend time and effort (and money) in communicating with their members appear to have suffered fewer defections than others. There may be a message here for Trustees, sponsoring employers and scheme members. A good occupational pension scheme forms an important part of most company benefit packages. Its provision is not cheap and that cost could be wasted if members who are not well informed elect to make alternative, and probably inferior, arrangements. A little more time spent on communications should ensure that members more fully appreciate what is being done on their behalf.