Publications

Bulletin 20 Summer 2002

The BESTrustees Service - and New Faces

BESTrustees plc is one of the UK's two leading independent pension trustee companies. It combines the security of a financially sound corporate trustee, with the talents of experienced individuals, who are well-known experts in the pensions industry. Our team has a great deal of hands-on pensions experience. This covers all aspects of trusteeship including investment, scheme administration, actuarial, accountancy and management issues.

We also provide statutory independent trustees as required under legislation.

Professionalism and independence are key to our role and our credentials are first class in both. We believe in offering a high quality service in all we do.

We are pleased to announce two additional recruits to the BESTrustees team, Margaret Steward and lain Urquhart.

Margaret is a fellow of the PMI and a member of its Council. She founded H.S. Administrative Services in 1984. Having sold the business to Aegon in 2000, she remained as Managing Director until October 2001.

Margaret has been in pensions for over 30 years; her experience ranges from being group pensions manager to a major UK plc to working for one of the large actuarial firms before setting up H.S. She is an acknowledged industry expert on all administrative aspects of pension schemes and a regular speaker at pension conferences. She has been a mentor for PMI students on their investment paper and has published numerous articles and technical papers.

lain is currently working with BESTrustees on a non-executive basis. He is Group Pensions Director of Trinity Mirror plc and a Director of the three principal trustee companies in the Group. He has extensive expertise in occupational pension schemes spanning 25 years, including British Shipbuilders, J. Bibby & Son and BBA Group. Following a short time in consultancy he joined Mirror Group in 1994. A member of the Benefits Council of the NAPF, he is an Associate of the Chartered Insurance Institute and a Member of the Institute of Management.

Simplification - Eventually

The long awaited reviews on clarification and simplification of financial services were published in July. The Sandler report looks at insurance and retail savings companies. It criticises the 'complexity and opacity' of the UK savings industry and concluded that lack of transparency in savings products discourages people from putting enough money aside to pay for their retirement. Whilst that may well be true, the report does not fully address the fundamental problem. Most people's failure to save has nothing to do with transparency, it is because they have higher priorities for their limited funds - they don't have enough money to save.

Two days later, Alan Pickering's report on pension simplification was published. With broad support from the industry he made a number of bold proposals for radical simplification of pensions regulations which include:

Repealing the Pensions Act 1995 and replacing it with a lighter regulatory environment.

Enabling employers to reshape and reduce benefits. This may seem an odd way to protect members, but, on the basis that half a loaf is better than none, he suggests that it is far preferable to simply closing schemes.
Making membership of an occupational scheme a condition of employment. This received support from both the TUG and the CBI, but elicited a rather less than enthusiastic response from the Government.

Following a period of consultation it is expected that new regulations will be introduced (and, hopefully some existing ones scrapped). The Myners report -which increased the burden of regulation - was accepted in full by the Government immediately. The Pickering enquiry which proposes lightening the regulatory burden will be subject to delay and further consultation. Is there a message there? In any event, as primary legislation will be required, change is some years away.

It is unfortunate that the terms of reference of the Pickering enquiry precluded him from commenting in detail on the horrendously complex inter-relationship between State and private pension provision - the State second pension and contracting out. These are, after all, at the heart of the problem of administrative complexity.

Whatever happens, it must be better than the last attempt at simplification. Clive Gilchrist, Managing director of BESTrustees, represented the pensions industry on Michael Heseltine's Financial DeRegulation Task Force which achieved precisely nothing for pensions - largely as a result of Treasury intransigence and concern at potential tax loss.

Trust Busting

There have been a number of instances recently of people transferring benefits out of occupational schemes into schemes established to facilitate improper transfers - 'trust busting'.

The Inland Revenue has amended its requirements to try to prevent this; but trustees are at risk - as the Revenue states they "will not hesitate to withdraw the approval of an occupational scheme that pays out benefit in a manner not compatible with approval."

Trustees should ensure that their administrators are vigilant and are complying fully with the revised regulations. They should also consider adding to the transfer request pack a note informing members that a receiving scheme that purports to be able to release a large cash sum from a transfer is likely to be acting illegally and the pension is at risk.

Job Mobility

One of the reasons cited for the current move from DB schemes to DC schemes is the increase in job mobility - short term contracts, self employment, more part timers, portfolio careers, no more jobs for life etc. Anecdotally it appears to be the case that people stay less time with one employer and have more jobs during a career than hitherto. However, this is not borne out by statistics.

The Office for National Statistics carries out a regular workforce survey which has produced the following interesting results. A decade ago 10% of the working population were self employed, this has fallen to just 8.8%. The proportion of temporary workers, which increased from 5.3% to 6.5% through the 1980s, remained at that level throughout the 1990s. The average length of time with an employer was six years and one month in 1975, reduced to five years and five months by1985 and has remained steady since.

There us much talk of a workplace revolution, and certainly one could think of examples of change, but it is astounding just how little has actually occurred. But never let facts get in the way of a good story - or perhaps it is the statistics that are wrong.

Lies, Damned Lies and Statistics

Whilst on the subject of statistics, the Government has announced 'problems' with the way that pension contributions are calculated in national statistics. The effect has been to seriously overstate the level of contributions being paid into occupational pension schemes.

An official has disclosed that money transferred from one scheme to another has been double counted; although it appears that the problem is much wider than that.

When, for example, schemes appoint a passive manager, which is generally done through an insured arrangement, the purchase of the passive funds appears to be counted as an insurance premium representing new contributions. The sale or transfer of securities to fund it is not counted.

With the growth of indexation over the past few years and the universal move to adopt an insurance wrapper, the amounts involved are enormous. From BESTrustees clients alone this can be measured in billions of pounds; across the whole industry the sums amount to many tens of billions of pounds.

The Office for National Statistics has admitted that there is a problem, but declined to apologise.

It is reported that one option the Government is considering in response is to amalgamate pension contributions with other forms of savings for reporting purposes. This is potentially very misleading, ISAs are taken out for a variety of reasons not just retirement provision, but also including saving for a car, a major holiday, school fees etc. Even where ISAs are initially intended for retirement, they may subsequently be used for other purposes. Pension savings, whether into an occupational scheme, a stakeholder or a personal pensions are special, the funds can only be used for the purposes intended. The future welfare of a generation of prospective pensioners depends on society not being lulled into a false sense of security as to the level of pension pre-funding.

Bear Markets

Bear markets are no fun for investors. A few months ago the consensus was that equity markets were on the road to recovery; 2002 would see a modest rise, taking the FTSE 100 index up to around 5,500. As we write it is over 25% below that. So where do we go from here?

Having been bullish at the higher levels, commentators are, irrationally but inevitably, more cautious following such a dramatic setback.

What we have seen so far is nothing compared to the misery of 1973-4. Being grey of hair most of us at BESTrustees can remember the power cuts, the three day week, Burmah's insolvency etc. Between the peak in 1972 and January 1975 the UK equity market fell by 70% (as far as the technology heavy NASDAQ index has dropped) - but far more in real terms, with inflation then well into double figures.

Markets tend to overshoot - both ways. Whilst equity markets are, on some measures at least, fair value, they are not yet amazingly cheap. With increasingly mature pension schemes reducing their equity content and insurance companies seeking to match assets against liabilities, institutional support for UK equities needs to come from overseas investors or from companies purchasing their own stock. For that to happen the market needs to be cheap, not just fair value.

Model Pensions Administration Agreement

The PMI, in association with the NAPF, the Association of British Insurers, the Pensions Research Accountants Group and the Association of Pensions Lawyers has recently launched a model pensions administration agreement.

The model agreement gives trustees and their administrators a framework around which to establish service standards and to document the roles and responsibilities of both parties. It is very comprehensive and designed to be used with both third-party and in house administrators.

It is hoped that the PMI agreement will provide the basis of an industry standard.

Even where trustees and their administrators decide to use alternative frameworks, it can provide a very useful checklist of what should be contained in a pensions administration agreement.

Copies of the model agreement can be downloaded from the PMI website at www.pensions-pmi.org.uk or obtained by calling 020-7392-7400.