Publications

Bulletin 10 Autumn 1995

The Ombudsman's Report

The Annual Report of the Pensions Ombudsman makes interesting reading and gives a clear pointer to the stance of the new Ombudsman. Trustees must ensure that full, accurate and up-to-date information is provided to scheme members if they are to avoid an accusation of maladministration.

A number of the cases determined by the Ombudsman during the year concerned appeals by scheme members who considered that their benefit entitlements had been incorrectly calculated as a result of excluding certain benefits which should have been regarded as pensionable. Examples from the Report include bonuses and leased cars.

As the Ombudsman stated in one particular ruling: "A lack of amendment to the rules [to give effect to new booklets] means that the previous definition of pensionable salary must apply. Trustees should act in accordance with actual rules not intended rules."

Trustees must ensure that scheme rules and booklets are consistent, up-to-date and reflect the way that benefits are calculated in practice.

Robin Tomkins

We are pleased to announce that Robin Tomkins has joined BESTrustees to service our growing list of trusteeship clients. Formerly Group Personnel Director of the Evode Group, Robin is a Chartered Engineer who combines 25 years of industrial experience in operational manufacturing and senior personnel management with more than a decade of experience at Board level. He acts as a trustee of and advises trustees of a number of Midland based company pension schemes and has particular experience of the pensions issues arising from amalgamations, mergers and both management buy-outs and buy-ins.

Trustees' Checklist

The Pensions Act has introduced a range of new responsibilities for trustees and expanded upon existing trust law responsibilities.

Some of these new responsibilities are already clear cut, the need for trustees to appoint a scheme auditor and a scheme actuary, for example; others require clarification from regulations yet to be issued such as member-nominated trustees or the establishment of an internal dispute procedure.

Pension schemes come in all shapes and sizes with assets ranging from a few thousand pounds to many billions of pounds and with membership from a mere handful to tens of thousands. Drawing up detailed regulations to satisfy the needs of such a diverse industry is no easy task, yet that is what the DSS must do in just a few months.

Many pension lawyers and consultants have already produced their guide to the Pensions Act and very useful they are to trustees who must ensure that everything is in place by the operative date for most of the Act in April 1997. But what trustees will need to assist them in their ever more onerous duties is the definitive guide to the Pensions Act. This can only be produced after all the detailed regulations have been issued, which is expected to be by April 1996.

This is not to say that trustees can rest on their laurels in the meantime. A lot of work needs to be done between now and April 1997. Trustees can do much of their own, but by the middle of 1996 we hope to see "the definite checklist".

Come on, advisers. Who will be the first to produce it?

Statement of Investment Principles

From an investment standpoint one of the most important changes introduced by the Pensions Act is the requirement that trustees must have a statement of investment principles.

This goes far beyond the investment objectives statement required for Financial Services Act purposes. This is often no more than a bland statement along the lines that performance should be at least equal to the median, or a target to meet some (often arbitrarily chosen and frequently unattainable) level of outperformance of the median or an index.

The Pensions Act requires that trustees "must secure that there is prepared, maintained and from time to time revised a written statement of the principles governing decisions about investments". It goes on to specify that it must include the trustees' policy on the kinds of investments, the balance between different kinds of investments, risk, expected return etc. The statement must also include the trustees' policy for ensuring that the minimum funding requirement is met.

Clearly the preparation of such a statement will require serious consideration, which is recognised in the Act. Before the statement is prepared or revised the trustees must "obtain and consider the written advice of a person who is reasonably believed by the trustees to be qualified by his ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of the investments of such schemes". The trustees must also consult the employer before preparing or revising the statement. The Act does not say so, but obviously this consultation should be formal and well-documented.

Trustees of large schemes often consider their investment objectives in some detail already and frequently have the services of an investment adviser to assist them. But the Act does not distinguish between large schemes and small schemes, between schemes with specialist benchmarks and those without, between schemes with segregated portfolios and those using managed funds, or indeed between self administered schemes and insured schemes. It does, however, give the DSS the power to exempt "any scheme which falls within a prescribed class or description".

It is to be hoped that when the DSS regulations are issued they will be lenient on small schemes whose liabilities are not significantly out of line with other such schemes and for whom the cost of an asset liability study leading to the preparation of a detailed statement of investment principles might well outweigh the benefits of an individual investment strategy.

Who's that actuary?

The Pensions Act creates a number of new civil and criminal offences, one of the more interesting of which is the heinous crime of impersonating a scheme actuary. Why would anyone want to impersonate an actuary?

Answers on a postcard...

The BA Affair

It is rare that the actions of a board of pension trustees make headline news unless serious malfeasance is involved. But that is exactly the situation that the trustees of one of the British Airways pension schemes found themselves in recently. In a well-publicised ruling, the Pensions Ombudsman, Julian Farrand, determined that the trustees were” in breach of trust and guilty of maladministration".

Yet this is no small, second line company whose senior executives dominate the trustee board. British Airways is a very major corporation; its schemes have had 50% member appointed trustees for many years. Those trustees are supported by a strong and well-resourced internal executive and have access to the best advisors. How then could they find themselves in such an embarrassing and potentially damaging situation?

In the BA case, the Ombudsman did not overturn or criticise a decision of the trustees. He did, however, direct that they should formally consider the exercise of one of their powers as outlined in the scheme's trust deed, recognising that the actual decision "must remain a decision not for me but for the trustees".

What was on trial was not the conclusions reached by the trustees but the process that led them to reach those conclusions.

Effective governance means ensuring that good decisions are taken by the right people at the right time having given due regard to all relevant factors. It also means being able to demonstrate, perhaps long after the event, that the proper procedures have been followed.

Pensions governance is in some ways more difficult than corporate governance because of the inherent conflicts of interest of the parties involved. The trend in corporate governance is towards greater independence on the board. Key board committees, specifically remuneration and audit, are dominated by independent non-executive directors who should be free of the conflicts of interest facing their executive colleagues. For pension schemes without an independent trustee the avoidance of such conflicts on the trustee board is not an option, so their management becomes even more important.

The lessons of the affair are that trustees must ensure that their decision-making process, including any consultation with the company, is fully documented and retained for future reference.