Publications

Bulletin 15 Summer 1998

Delegation

A recent ruling by the Pensions Ombudsman, Kennedy v Barnardos Ltd., has highlighted the need for trustees to ensure that powers of delegation are properly drawn up, unambiguous and adhered to. The case concerned the allocation of lump sum death benefit, but of more general interest is the narrow view that the Ombudsman took of the trustees powers of delegation.

The trustees had an established practice of delegating to a sub-committee the discretion to allocate lump sum death benefits where there were "no difficulties in establishing the rightful beneficiary" - a very common practice. The sub-committee allocated the lump sum in respect of Mr Kennedy (a deceased member) to his second wife, in accordance with his expression of wish form.

Following a complaint from other potential beneficiaries the Ombudsman investigated the decision making process and found it wanting. Two points are of particular note.

Firstly the Ombudsman found that the trustees had been "unduly influenced" by the member's expression of wish form and had failed to take account of the financial circumstances of the member's relatives. On this ruling even when an expression of wish is in favour of a spouse the trustees must show that they have given due consideration to other potential beneficiaries.

Secondly the Ombudsman looked at the wording of the power of delegation and decided that its meaning was not completely clear and unambiguous. He ruled, therefore, that the sub-committee had acted without the appropriate authority.

When setting up sub-committees it is important to ensure that their status and authority is clear and that any discretions exercised by the committee are ratified and fully minuted at a subsequent full meeting of the trustees.

Sub committee procedures are important.

Dealing & commission

We recently conducted a survey of institutional investors in conjunction with the Tradepoint stock exchange. The purpose of the survey was to gauge the attitude towards the new Stock Exchange "SETS' order-book trading system. We also took the opportunity to look at the level of commissions being paid. Remember, every time your investment managers deal on your behalf they (in other words your fund) incur dealing costs which must be recovered before you see any performance for the fund.

The results of the survey were as follows:

61% of investors found it either considerably or slightly more difficult to deal in size compared with 32% who found no change (2% thought it was better and 5% didn't respond).

Yet the overwhelming majority, 84%, were in favour of order-book trading for FTSE 100 stocks. This was reversed for small cap where only 16% favoured the order book system. Unsurprisingly, investors were split on mid-cap stocks, 47% in favour and 53% against. 60% of managers also thought that they spent more time managing orders with only 5% spending less time.

In terms of commission, exactly half of respondents pay at the rate of 0.2% on FTSE 100 stocks with the balance generally paying less; for mid and small cap stocks 57% pay 0.2% with a sizeable minority, about 20%, paying more.

What conclusions can we draw from this? There is clearly a significant level of disquiet about the functioning of the SETS system in terms of the ability to deal and the time taken to manage and execute orders. It is also interesting that, over a decade after Big Bang, the proportion of managers who deal net (pay no commission) is still in low single figures. One of the main reasons for paying commission is to recompense brokers for their research, yet no-one considered all research to be valuable, only 22% thought that most of it was valuable and 8% thought none of it was any good. If 8% of managers consider the research to be of no use why do they pay commission - only 2% deal net?

Remember that dealing costs come out of your funds.

Clarity at last

Change to the Minimum Funding Requirement(MFR)

The "pensions minister", John Denham MP, has recently agreed a change to the MFR requirements, effective from June 15 1998, as follows:

The Market Value Adjustment in relation to equities should be in the ratio of 3.25% to the net dividend yield on the FT-SE Actuaries All-Share Index.

What does that mean in practice?

Transfer Values

For cash equivalent transfer values the statutory miniumum underpin is reduced. For most schemes this will mean a reduction in the transfer values they pay.

It is difficult to give a guideline as to the amount of the reduction as it will vary. Scheme actuaries should be consulted to determine the effect on individual schemes, but it is likely to be approaching 10%. This reduction in what had become an artificially high statutory minimum is to be welcomed. It had led to many schemes refusing to accept transfers into their schemes to stop members effectively exercising an option against the scheme. These prohibitions are now likely to be removed, restoring flexibility once again.

MFR Valuations

The change applies to MFR valuations signed after June 15 1998, regardless of the effective date of the valuation. It also applies to Schedules of Contribution certified after June 15 1998, even if the formal valuation on which these are based has already been signed on the old basis.

The change will ease the pressure many schemes were facing. MFR funding levels are set to be between 5% and 10% higher than on the old basis, with schemes having a high pensioner content being at the lower end of this range. However, this will still push many schemes beyond the critical 90% and 100% funding levels at which corrective actions are required.

Winding-up Deficiencies

The change applies to deficiency calculations carried out at effective dates on or after June 15 1998. This is of lesser interest and reference should be made to the actuary concerned as to the effect it will have.

We understand that the Faculty and Institute of Actuaries, in discussion with the Government, are carrying out a fundamental review of the MFR basis. This may result in significant changes to the structure of the MFR, but don't hold your breath for an announcement in the short term!

A pointer to an independent trustee

Chancellor Brown's removal of the ACT reclaim is starting to have at least one of its predicted effects, notwithstanding the recent change in the MFR basis. Those contribution holidays that companies have so enjoyed in recent years are coming under threat!

All the old questions are rearing their ugly heads when the end of the holiday comes into sight.

"Who says the actuarial assumptions should change?" "Who fixes the actuarial assumptions anyway?" "Who appoints the actuary and who does he report to first?".

The company's concern breaks through. "In this economic climate we can't afford to start paying contributions again." "An increase in costs like this will make us uncompetitive."

And the pressure is put back on. "The Board will have to give serious consideration to the introduction of a money purchase scheme to replace this expensive final salary arrangement."

"Production will have to be moved to overseas facilities where costs are lower."

It is at times like these that employee-elected trustees wonder if their job is one of those going overseas, and management-nominated trustees have a fiery finance director breathing down their necks. Not the best of feelings to have as you walk into the trustee meeting with the decision to reintroduce contributions on the agenda.

Just the time to have an independent trustee at the table. Someone whose reputation and livelihood depends on not bowing to pressure, someone who knows exactly whose responsibility it is to set the terms of the actuarial valuations and who will make the contribution decision.