Publications

Bulletin 16 Winter/Spring 1999

Data Protection

Many boards of trustees will not be aware that they are required to register under the Data Protection Act in respect of scheme membership data.

Two points are relevant. Firstly, it is the trustees and not their administrators who must register; and secondly the trustees must register even if all administration is internal within the company and the employer is separately registered.

As the notes to apply for registration state: "Data Users registering this purpose will usually be the trustees of pension funds. Organisations whose business is the administration of pensions on behalf of trustees will be acting as agents, and will be Data Users in respect of the clients' data."

"Where a company fund is held by trustees, a separate application must be made by the trustees."

That is the situation under the 1984 Act. A new Data Protection Act has recently received Royal Assent, although it has not yet been implemented. An additional principle within this Act is of relevance to trustees; it concerns the need for measures to be taken to avoid unauthorised processing or loss of data.

Where an agent is used to process data - the administrators - there must be a written contract in place concerning the use of data and the giving of instructions. This should cause no problems with external administrators whose contacts should already cover these points, but will need to be addressed by trustees relying on company officers to process scheme data. The trustees must have a written agreement with the employer detailing the terms of their relationship.

Emerging Markets Revisited

Almost three years ago we wrote about the perils of emerging markets (Bulletin 11, Spring 1996). We compared them with venture capital stating: "they share the same volatility of returns, the same imperfect availability of information, and they both have the ability to attract or repel large flaws of capital causing major liquidity crises within the market from time to time."

We noted that the usual advantages of diversification across markets did not necessarily hold because: "success in venture investing depends not only on picking the winners and avoiding some of the losers; because it is a market subject to violent changes in sentiment, where investors tend fickle, timing is important as it is emerging markets."

We also made an analogy with riding a rollercoaster: "it can be rewarding, but it is safer to climb aboard as it crawls slowly and painfully from the depths than when it is flying high and perhaps about to hurtle down into the abyss. And if you miss it, don't worry, you may be able to catch it next time around."

Since then emerging markets have fallen dramatically, by well over half on average, at a time when developed markets have risen very strongly.

Whether pension schemes should be investing in emerging markets at all is a matter for discussion between individual trustee boards and their managers and should be subject to appropriate restrictions and guidelines.

We do not have the ability to foretell the future, nor do we make investment recommendations, but the argument has always been that the engine of the world's economic growth is in "the sweat shops of Asia". Clearly confidence needs to be rebuilt, and financial and banking systems need to be improved, but on a long- term view who knows when the engine will start firing on all cylinders again? The rollercoaster has certainly had an exciting ride and is clearly nearer the nadir than the zenith.

Pension Scheme Taxation

For many years this title would have seemed a contradiction in terms, for pension schemes were, supposedly, exempt from taxation. Times are changing. The Inland Revenue has discovered a new and potentially very rewarding generator of revenue.

The initial target has been investment activities. The Revenue has recently had singular success in a series of law suits establishing, in certain circumstances and subject to specific criteria, its rights to levy tax on underwriting and on the share buy-backs which proliferated in the mid-Nineties. Individual schemes are being approached and asked to provide information on these activities, followed by detailed questioning for the reasons behind the actions. The aim is to show that "dealing" has taken place and that tax is, therefore, chargeable.

The only counsel which can be given is to seek specialist advice if your scheme is selected for interrogation. More may be read into your casual answers than you think!

A precaution may be worthwhile. It is understood that, on investigation, the Revenue has the right to request details of all dealings by the scheme in the previous six years, and for even longer periods where the Revenue has reason to suspect that a tax liability has been incurred or fraud is involved.

Many schemes may not have retained more than six years worth of bulky investment managers accounting reports - and how many investment managers will have retained their records in an easily retrievable form? Charges may also be incurred for the work involved in satisfying the Revenue's requests. Where investment managers have been changed, and information and comment are required from a house no longer employed, in addition to cost there may be problems of co-operation.

Looking to safeguard the future, a sensible move may be to request each investment manager or custodian to provide all dealing and valuation information on a floppy disc at the end of each financial year. It may also be worthwhile incorporating into new investment manager agreements a clause to state that transaction data remains the property of the trustees. This may save costs and reduce problems in the future.

Direction of Investment?

John Denham, the then Pensions Minister, in a number of speeches last year referred to the need for pension schemes to "consider in a positive way how their funds are invested" - in other words, ethical investment. This has now been formalised in a Consultation Document 'Strengthening the Pensions Framework', where the DSS is seeking views on the proposition that the Statement of Investment Principles includes "....whether the trustees take into account any considerations other than financial considerations and, if so, what these are and how investment decisions are affected" - i.e. ethical or socially responsible investment.

With less publicity, the Chancellor in his pre-budget speech, and repeated in the Pensions Green Paper, said that there could be room for improvement in the way that the capital markets direct capital towards its most efficient uses.

He called for consultation on measures to ensure that: "trustees were expected to set out publicly their objectives and how they assess the performance of their investments; including in particular, their attitude towards venture capital investments and how they evaluate them; as well as how, and over what time period, they assess the performance of fund managers, and the basis on which they remunerate them."

For those of us old enough to remember the 1970s (and sadly that includes all of us at BESTrustees), this looks suspiciously like the proposed, but not implemented, directed investment of the Wilson era. Trustees should be wary that such measures may be introduced by stealth. Many trustees would be in favour of an ethical policy provided it did not obviously detract from investment performance. Such regulations could readily be modified without primary legislation to include other asset classes.