Publications

Bulletin 8 Winter 1995

Angus Matheson

We are pleased to announce that Angus Matheson has joined BESTrustees as an Associate Director. Until his retirement in December, he was Managing Director of Bothwell Asset Management Ltd and investment manager of Coats Viyella Pension Plan.

Angus is a Vice President of the NAPF and immediate past Chairman of its Investment Committee. He is an Associate of the Institute of Investment Management and Research and a former Chairman of its Scottish branch. He is also a Fellow of the Royal Society of Arts.

He holds a number of non-executive positions including independent investment adviser to the Strathclyde Regional Pension Plan.

Readership Questionnaire

We were delighted with the response to the readership questionnaire enclosed with the last issue of the Bulletin and we thank all of you who participated. We had an excellent response - well above average according to our communications consultants. Even more rewarding was the general consensus that for the most part we have more or less got the Bulletin right! We expected to have to make a number of changes but it would seem we cover the topics you want and that the whole thing is just about the right length. Of course there were some people who wanted more and some less

- you can't please everyone although we do try. We have been able to donate £210 to charity - all thanks to you!

Pensions Governance

Corporate governance, a much-used and frequently abused term, may appear an odd phrase in the context of occupational pension schemes; after all, they are not even corporations.

But, effectively, trustees are to pension schemes what non-executive directors are to public companies. The framework of governance applicable to companies was formalised in 1 992 by the publication of the Report of the Committee on the Financial Aspects of Corporate Governance - more commonly known as Cadbury.

As Sir Adrian Cadbury said in the preface to the Report, the attention it received was unexpectedly high and "reflects a climate of opinion which accepts that changes are needed and it presents an opportunity to raise standards of which we should take full advantage".

The present situation is very similar as regards pension schemes. The climate is right for change and whilst not everyone will agree with the detail of all the proposed changes, the general thrust must be right and must be in the interests of a better-managed industry.

It is possible to draw a direct comparison between the code of best practice which summonses the conclusions of the Cadbury Report and the Goode Recommendations, as shown on the opposite page.

There are many similarities between Goode and Cadbury. Differences, where they occur, are technical and concerned with specific issues rather than differences of principle.

What Cadbury tried to do for companies, Goode tried to do for pension schemes. The work is being built upon in the Pensions Bill and in the industry codes of conduct which are currently in draft form and should be released later this year. In their present draft form, they are too long: the Cadbury report runs to 60 pages excluding appendices, the draft pensions codes are more than twice as long. But the idea is a good one. There are at present no requirements for competence, knowledge, experience or training on the part of trustees and something must be done about it.

The principal characteristic of trustees (independent trustees excepted) is that generally their experience lies in areas other than pensions. Being a trustee is frequently a four day a year Job - or even less in many instances, and their knowledge and experience on taking up their position is all too frequently negligible. They are amateurs, in pension terms at least.

A trustee's responsibilities are wide-ranging and complex. A lot can be left to the advice of professionals, but only if the professionalism of the trustee body is such that it can manage its advisers efficiently. Having a professional, independent trustee sitting alongside them is certainly one way of doing that. Better trustee training is another and is needed in any event. Goode recommended that all member appointed trustees should be given time off for training. Thank goodness the Pensions Bill will widen that to include all employee trustees.

All trustees should be more professional.

Cadbury Goode

1.1 The board should meet regularly, retain full and effective control over the company and monitor the executive management.
8
Trustees should meet as necessary to review funding, investment strategy and benefits and to deal with other matters requiring their decision.

1.2 There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority.
38
Active members should be entitled to appoint from among their number at least one-third of the trustees, with a minimum of two, and the employer should be entitled to appoint the remainder.

1.3 The board should include non-executive directors of sufficient calibre and number for their to carry significant weight in the board's decisions.
No direct equivalent, but in essence similar to 38 (above).

1.4 The board should have a formal schedule of matters specifically reserved to it for decision.
46
Certain rights need to be reserved to the trustees, irrespective of what the trust deed provides.

1.5 There should be an agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary.

No specific recommendation, but implicit in a number of recommendations, and accepted as a principal duty of trustees that they should take expert advice when appropriate.

1.6 All directors should have access to the advice and services of the company secretary.

No equivalent. Not all schemes have a scheme secretary and his powers are not laid down as they are for company secretaries.

2 & 3 Deal with non-executive and executive directors respectively. No direct equivalent.

4.1
It is the board's duty to present a balanced and understandable assessment of the company's position.

144

The trustee board should approve the accounts and authorise their signature by at least two trustees.

4.2
The board should ensure that an objective and professional relationship is maintained with the auditors.

86

The scheme auditor should be appointed by the trustees.

4.3
The board should establish an audit committee of at least three non-executive directors.

No equivalent. Trustees will usually consider the accounts as a body rather than by establishing a sub-committee.

4.4 The directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities.

Trustees already do this in scheme accounts, although not necessarily next to the auditors' statement.

4.5
The directors should report on the effectiveness of the company's system of internal control.

The precise content of this has not yet been agreed for companies let alone pension schemes.

4.6 The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary. This sounds like minimum solvency, etc! Trustees already state that the accounts are prepared on a going concern basis.

A New Service

We are delighted to announce that as an extension to our trustee services we have joined forces with Towers Perrin, one of the world's largest independent firms of actuaries, consultants and administrators, to provide a new Pensions Governance Consultancy.

Good governance means having operational practices which ensure that all parties recognise their responsibilities and accountabilities and discharge them according to standards of best practice.

The Pensions Bill addresses key issues of governance by giving scheme members new rights and facing trustees with new duties and sanctions. This means that both trustees and employers must be prepared to justify both the spirit and the letter of their actions. However, the Bill is inevitably silent about the way that good governance can be achieved in practice.

Our new service will enable trustees and companies to review their governance structures and operations so that:

internal procedures can be amended if they are judged likely to produce decisions that are at odds with the trustees' and company's responsibilities and objectives:

inefficiencies in decision making may be identified which, if corrected, will reduce the time and resources spent on scheme management;

the way professional advisers and delegates are used can be examined and compared with the needs of trustees and employer; and

financial risks for the employer or trustees can be identified, possibly requiring more fundamental changes to the scheme.

Our service is not a packaged compliance audit or simply a review of internal financial controls.

By putting in place the right governance structures and practices it is possible, without introducing unwelcome bureaucracy, to demonstrate that:

trustees have acted in accordance with the particular powers given to them under the trust;
the pensions manager, administrators, or scheme secretary have acted under properly delegated powers; and
all trustees' decisions have been taken in the best interests of the members; and have been based on advice that recognises those interests.

1.1	The board should meet regularly, retain full and effective control over the company and monitor the executive management.	8	Trustees should meet as necessary to review funding, investment strategy and benefits and to deal with other matters requiring their decision.
1.2	There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority.	38	Active members should be entitled to appoint from among their number at least one-third of the trustees, with a minimum of two, and the employer should be entitled to appoint the remainder.
1.3	The board should include non-executive directors of sufficient calibre and number for their to carry significant weight in the board's decisions.		No direct equivalent, but in essence similar to 38 (above).
1.4	The board should have a formal schedule of matters specifically reserved to it for decision.	46	Certain rights need to be reserved to the trustees, irrespective of what the trust deed provides.
1.5	There should be an agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary.		No specific recommendation, but implicit in a number of recommendations, and accepted as a principal duty of trustees that they should take expert advice when appropriate.
1.6	All directors should have access to the advice and services of the company secretary.		No equivalent. Not all schemes have a scheme secretary and his powers are not laid down as they are for company secretaries.
2 & 3	Deal with non-executive and executive directors respectively.		No direct equivalent.
4.1	It is the board's duty to present a balanced and understandable assessment of the company's position.	144	The trustee board should approve the accounts and authorise their signature by at least two trustees.
4.2	The board should ensure that an objective and professional relationship is maintained with the auditors.	86	The scheme auditor should be appointed by the trustees.
4.3	The board should establish an audit committee of at least three non-executive directors.		No equivalent. Trustees will usually consider the accounts as a body rather than by establishing a sub-committee.
4.4	The directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities.		Trustees already do this in scheme accounts, although not necessarily next to the auditors' statement.
4.5	The directors should report on the effectiveness of the company's system of internal control.		The precise content of this has not yet been agreed for companies let alone pension schemes.
4.6	The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary.		This sounds like minimum solvency, etc! Trustees already state that the accounts are prepared on a going concern basis.