OPDU Report 32
The Pensions Insurance Specialist
Protecting Trustees, the Scheme, Members & the Sponsoring Employer
OPDU IS MANAGED BY THOMAS MILLER Contents Report 32 News OPDU A journey to better retirement outcomes OPDU’s Annual Meeting 30 January 2014 News
02 OPDU Annual Meeting 2014 Ruston Smith, Chairman of the National Association of Pension Funds, 04 Annual Pension Risk Conference 2014 might like to speak first.
06 OPDU Advisory Council Arriving just as the clock struck six and as Ruston finished his address, 07 Diary Dates 2015 Membership Tips Ronnie told the audience that his Some key issues for trustees journey in the lift from the 2nd to the 32nd floor of Reed Smith’s 09 News from the Pensions Archive offices was the fastest he had travelled all day! 10 Q & A’s on pension trustee liability
12 Insurance protection: a brief guide Retirement Planning is often referred 14 Insurance for schemes winding up to as a journey, where it is important to know your objective, how you are going to get there and be able to adapt to changing circumstances. Comment
16 Data – be diligent or face the dangers Louise Howard Senior Counsel, Taylor Wessing LLP
19 ‘We do not need 80% of active management’ Michael Johnson Research Fellow, Centre for Policy Studies
20 How to improve DC outcomes Sarah Smart, Chair Anthony Charlwood, Investment Officer The Pensions Trust Ronnie set out five steps to sustainable pension provision and how trustees could use their influence in helping Annual Pension Risk Conference 2014 improve member outcomes. Whilst the Government, Regulators, Employers 22 The Draft Code - “good in parts”? and Trustees were much improved or Matthew Demwell improving, the Providers, with some Partner, Mercer’s Financial Strategy Group For Ronnie Bowie, First Past President notable exceptions, had, in his view, 25 Dealing with Investment Risk of the Institute and Faculty of been disappointing. He suggested Paul McGlone Actuaries, his objective was to address three changes: an extra 0.5% pa Partner, Aon Hewitt OPDU ’s Annual Meeting in London return without a lot more risk at 5pm on 30th January. Unfortunately, (including pressure on charges); 28 On target for a smooth journey the Glasgow to Euston “Express” had increasing member contributions by
Tim Banks other ideas. Calling on all his actuarial 1% a year between the ages of 40 and Managing Director, Pensions Strategies Group AllianceBernstein skills, he forecasted correctly that he 45 and targeting retirement income would arrive at 6pm and suggested at State Pension Age rather than 30 Practical legal risks: a review of claims and how to avoid them Robert West Partner, Baker & McKenzie LLP
32 DC Sector insight Andrew Warwick-Thompson Executive Director for DC, Governance and Administration, The Pensions Regulator
34 Guide to OPDU Elie Policy wording
All views expressed in this publication are those of their authors and do not necessarily reflect the views of OPDU Ltd, ACE European Group Ltd, Thomas Miller & Co Ltd or any employees or agents of those companies. The articles do not necessarily deal with every aspect of the topics covered and are not designed to be professional advice. Report 32 OPDU “excellent meeting” “very good indeed” “high quality & interesting” “superb venue” “excellent speakers”
He confirmed that OPDU continues to provide the most comprehensive cover and support, with the provision of lifetime cover for retired trustees proving popular. OPDU ’s membership continued to grow and there were now over 800 schemes holding assets valued in the region of £210 billion.
age 65. If these changes were made, Diversification of investments was modelling work undertaken indicated also a theme for defined contribution there would be a big difference schemes but there was further work in improving member outcomes to do to help members understand and in the numbers achieving the their options and to get better value Pension Commission target income when taking their benefits. Ruston replacement rates. believed that opportunities would arise from increasing confidence in the economy and improving confidence in pensions, partly as a result of many more employers enrolling automatically their employees into pension schemes. The challenge There was an extensive question and for the industry was to build further answer session, followed by a reception, confidence, with more people saving with Reed Smith’s offices offering a for retirement. panoramic view of London’s ever changing skyline. Jonathan Bull, OPDU ’s Chief Executive, had opened the Meeting welcoming the audience of over 100 delegates with several eminent people from the pension’s community Earlier, Ruston Smith had looked including the Chairman of the ahead to the trends, challenges and Pensions Regulator. Peter Murray, opportunities in 2014, drawing upon Chairman of OPDU ’s Advisory a recent NAPF survey of 890 pension Council, then summarised the work funds covering 6.8 million members. that OPDU had undertaken in the For defined benefit schemes, the last twelve months highlighting the rate of closure was stabilising and wide range of circumstances which diversification of the underlying had given rise to notifications and investments continued. claims.
03 MARCH OPDU Report 32 2014 ANNUAL PENSION News RISK CONFERENCE Annual Pension Risk Conference
Bell, Vice President in the European a review of claims and how to avoid Portfolio Strategy Team at Goldman them”. Robert was followed by Andrew Sachs. This was a wide ranging review Warwick-Thompson, Executive Director, of the economic backdrop and its DC Governance and Administration implications, particularly for the at The Pensions Regulator who different equity markets around the examined the key areas on which world. Sharon was followed by The Pensions Regulator was Matthew Demwell, Partner in the focussing in 2014, including the issue Financial Strategy Group at Mercer, of “pensions liberation”. Finally, Paul who examined “The Pension Trickett, Advisory Board Chairman, Regulator’s Draft Code of Practice Muse Advisory talked about “A on Scheme Funding “ and the issues practical Approach to the New which it raised for trustees and Regime”. An extensive discussion sponsors, including the need for between the panel and the audience integrated risk management. then took place touching not only
The OPDU Annual Pension Risk Conference was held at CBI Centrepoint on March 20th 2014. The theme of the conference was “Key risks and practical solutions in a changing pensions world” . The reference to “a changing pensions world” turned out to be remarkably appropriate as, on the day before the conference, the Chancellor announced sweeping changes to the DC pension provision in the UK in his Budget speech. We were able to modify the conference program to enable an extensive discussion of the implic- Paul McGlone and Tony Baily, on the governance issues raised in the ations for DC pension schemes and Partners at AON Hewitt, then presentations, but also the their trustees once these changes take examined “Investment Risk in DB implications of the new DC regime. place. Schemes” and the options available to trustees and sponsors for managing As I write this, further details are The conference program commenced that risk. Tim Banks, Managing emerging from the Government with the keynote address on “The Director Pensions Strategies Group at about the new DC regime and it is Current Economic Climate and Alliance Bernstein looked at “How clear that this will have profound Investment Risk” given by Sharon to improve DC outcomes”. Based on implications not just for DC briefing documents issued by members and trustees but, in all consultants at legal firms overnight, I probability, funded DB schemes also. then summarised the new proposals Clearly this is likely to be one of the for DC schemes outlined in the topics covered at the 2015 OPDU Chancellor’s speech and an extensive Pension Risk Conference which will discussion on the implications of be held at a new venue given that the these for members and trustees then CBI Centrepoint conference centre took place between the panel and the has now closed. The next OPDU audience. Annual Pension Risk Conference will be on 3 March at our new Following lunch, Robert West, Head venue, 8 Eastcheap, Monument of Pensions at Baker McKenzie EC2A 2RS, and I recommend that talked about “Practical Legal Risks – you attend. Peter Murray
04 OPDU Report 32
“It’s a great credit to OPDU that it attracts such high calibre speakers” “Excellent speakers”... “A quality event”... “A fascinating discussion”
05 OPDU Report 32 News OPDU Advisory Council
Changing of the guard
services. Until his recent retirement, trustees are exposed during the last 6 Terry was Group Head of Pensions at years, for example, while administr- Rexam plc, a long standing OPDU ation errors remain the largest single member and he was also Chairman area of claims, during recent years the of the NAPF from 2003-2005. proportion of these relating to DC schemes rather than DB schemes has OPDU Advisory Council: The increased sharply. Also there have Advisory Council is elected from the been significant increases in claims OPDU membership to represent the arising from areas such as investment, interests of the insured schemes and member communication and sponsoring employers to ensure that deficient execution of changes to OPDU is as pro-active as possible in Trust Deeds and Rules. Members of meeting the needs of its membership the Advisory Council are very and in helping to raise standards in experienced and are drawn from all the management of pension schemes over the industry and their advice is generally. invaluable to OPDU in improving its policies.
Peter Murray Terry Faulkner Having reached 72, I have decided to Peter Murray has announced his retire from all my trustee and retirement as Chairman of OPDU’s Terry Faulkner retired as Rexam investment adviser positions and, in Advisory Council and Terry Faulkner plc’s Group Head of Pensions at view of that, to retire also from has been elected as his successor. the end of June 2014. His career in OPDU. I am delighted to tell you The Advisory Council and Managers occupational pensions spans a number that Terry Faulkner has agreed to express their gratitude to Peter of senior pensions’ appointments become my successor. As a former Murray for his invaluable contri- before joining Rexam and he has NAPF Chairman, Terry will be well bution to OPDU’s continued success. served as a trustee/fiduciary on a known to most of you and, with his number of UK and International experience and expertise, is ideally pension plan boards and Investment placed to take things forward. I wish Committees. Terry was Chairman of him every success. Finally, I would the National Association of Pensions like to thank my colleagues on the Funds (NAPF) from May 2003 to Council for their support over the May 2005 and is a Fellow of the years and also to thank Jonathan Bull Pensions Management Institute. and the OPDU team. I wish them well for the future. Peter Murray
Retirement Advisory Council Terry Faulkner In 2008, when Jonathan Bull asked Chairman me whether I would be interested in Yally Avrahampour becoming the Chairman of OPDU’s Consultant Advisory Council, I was most Steve Balmont interested. As well as the Council, the The Association of position involves chairing the Annual Corporate Trustees Meeting and the Annual Pensions Phil Casson Risk Conference and representing AstraZeneca UK Limited Terry Faulkner OPDU at conferences such as the Julie Cook NAPF Investment Conference and BAE SYSTEMS plc OPDU is delighted that Terry Faulkner Annual Conference. Dermot Courtier has accepted the post and his wealth Kingfisher plc of experience and standing in the As the name implies, the Advisory Frank Curtiss RPMI Railpen Investments pensions’ community will play a Council monitors changes in the Robin Ellison major role in ensuring that OPDU risks to which trustees, schemes and Pinsent Masons LLP continues to lead the market in sponsors are exposed and advises John Greenfield protecting trustees, pension schemes OPDU so that the OPDU policies NOW: Pensions and sponsoring employers with its can be updated to cover these risks. Richard Thornton unique combination of compre- There have been significant Milk Pension Fund Trustees hensive insurance and advisory developments in the risks to which
06 Report 32 OPDU
Diary Dates 2 015 Some key issues for Trustees Here is our latest update on some of the issues Annual• Meeting: that are currently receiving attention by trustees Wednesday 28 January 17.00 - 20.00 Venue: Reed Smith LLP Pension Schemes Bill (1) Pensions Act 2014 - Charges (1) The Broadgate Tower Primrose Street EC 2A 2RS The changes announced originally in Do the Defined Contribution Scheme the Budget certainly give plenty of charges comply with the revised food for thought. Have the key changes requirements from April 2015? Are • been communicated to members and there any issues to address relating to Annual Pension Risk Conference are procedures in place to comm- active member discounts, commission, Tuesday 3 March unicate clearly with those who may or consultancy charges which will be 09.30 - 16.00 be considering taking their benefits banned in qualifying workplace “Managing Changing prior to April 2015? What further pension schemes from April 2016? and Emerging Pension communications are required for those Scheme Risks” within ten years or so of their Selected Venue: 8 Eastcheap Pension Date, and further ahead, all Pensions Act 2014 - Charges (2) EC 3M 1AE members of the Scheme? How can engagement be harnessed effectively? What form will the legal duty to In accordance with OPDU’s aims of disclose transaction charges take from helping to raise standards of pension April 2015 and will transaction charges management and administration, both Pension Schemes Bill (2) be included in the overall charge cap events are free to attend and please when it is reviewed in 2017? What register your interest at: What will the guidance guarantee level might the cap be and to what actually mean in practice? How will extent is there political consensus? [email protected] this dovetail with the existing support There will be an announcement provided to members taking their shortly with the full programme benefits and what will actually be Automatic enrolment and speakers. expected from the trustees? With larger employers having staged, trustees of these Schemes will want Pension Schemes Bill (3) to ensure that all scheme documen- Membership Tips tation and communication material, To what extent does the scheme including deeds, booklets and websites Contact details: please advise of need re-designing? What are the is up-to-date. Those employers who any changes in contact details including employer’s views? How should the staged first will be considering their personnel and office moves as soon as default fund be reconfigured and re-enrolment requirements. For those possible. how do we best understand how employers who have yet to stage, the members may take their benefits? Are trustees’ focus should also be on Trustee appointments: similarly, target date funds preferable? What ensuring that documentation is being it is important we maintain accurate brought up-to-date and that the records of current or former trustees. other investment funds should be Scheme is well placed to cater for the This will ensure they receive their offered, particularly in the period membership User Cards and Hand- before benefits begin to be taken? needs of its new members. books which are part of the benefits Will the trustees offer drawdown of OPDU and that retired trustees within the Scheme or simply facilitate have the benefit of lifetime cover. a transfer to another arrangement? 31 DC quality features This applies also to named company What support should be offered to pension personnel who have the same those members who opt for the Trustees should have undertaken a benefits of cover. uncrystallised funds pension lump review of compliance with the 31 sum and how will this be regulated? DC quality features outlined in the Claim notifications: please notify Code of Practice No.13, preferably any circumstances that may give rise utilising the template provided by the to a claim us as soon as possible. We Pension Schemes Bill (4) Pensions Regulator. Compliance would also encourage the use of the with the Code is not mandatory but OPDU Advisory Service which Is there a structure in place that will trustees should be able to explain provides general guidance and advice allow swift decision making? What how their approach complies with on matters affecting the day-to-day implications will there be for Defined the Code or if not, be able to justify administration of the pension Benefit Schemes now that it is any departure from the Code. scheme. Matters that are discussed with known that transfer values are to be Occupational pension scheme the Advisory Service will deem to permitted and how should this be trustees will need to provide an have been notified if they subsequently factored into cash flow, investment independently audited statement that materialise as claims which, in and de-risking considerations? they have met the new governance practice, can be sometime later. requirements.
07 OPDU Report 32 News
Pot follows member is not to “outlaw trustees” and that the specified period can be expected Commission “understands the role the to spend a specified proportion Following the Pensions Act 2014 trustees play in the UK system”. It is (expected to be no more than one- receiving Royal Assent, there is the possible there will be a Pensions Act third) of their adult life in retirement. power to introduce regulations to 2016 in the UK to implement the provide for an individual’s DC changes into UK law. Trustees will pension fund to be automatically need to keep appraised of developments . PPF Levy transferred into a new employer’s pension arrangement when they Experian has replaced Dun & change jobs. This is only likely to Regulator’s new statutory objective / Bradstreet as the insolvency risk apply to funds of up to £10,000 and DB Funding Code of Practice provider. The development work for is expected to be introduced in 2015. calculating insolvency risk took The new statutory objective for the longer than anticipated but the details Pensions Regulator requiring it are now available and trustees and DC communication “to minimise the impact on the employers should be considering the sustainable growth of (a scheme’s) implications for their levy and what The DWP has amended regulations employer(s)” in the exercise of its action can be taken to reduce the on member communications. The scheme funding functions is now levy for 2015/16, so far as they are changes include a requirement for in force. The revised Code sets able. In addition, the Pensions Act trustees to tell members about their out the Regulator’s expectations 2014 provides for an increase in open market option at least four for the trustees to have regard to an the current compensation cap for months before their Selected Pension employer’s business plans and to anyone with 21 or more full years’ Date and if they are invested in a make use of the flexibilities within pensionable service, up to a lifestyle profile, that members are the scheme funding regime when maximum of twice the current notified of this on at least two agreeing funding arrangements for compensation cap. occasions. Other changes include the their scheme with the sponsor(s). greater potential use of email and Trustees need to take this into websites and more flexibility to tailor account now when considering Pension Administration Statutory Money Purchase Illustration s. scheme funding issues. Standards Association (PASA) In May, PASA published a draft consultation on “Guidance for Short service refunds End of DB contracting-out Pension Administrators on Recording and Reporting Errors”. The Where an individual is entitled to The introduction of the new single intention is to set out a common money purchase benefits only, the tier state pension will lead to the definition of errors and a common Pensions Act 2014 provides for their abolition of contracting-out for way of reporting errors. It is also rights to vest after 30 days’ qualifying defined benefit pension plans. exploring producing an industry service. Once in force, which is Trustees of schemes that are affected benchmark with an average error expected to be some time in 2014, it will need to consider proposals from rating, so that trustees can measure will mean that money purchase plans the sponsoring employer and ensure themselves against an industry standard. and money purchase sections of any changes are planned and hybrid plans will no longer be able to implemented appropriately. pay short service refunds where an Pensions Liberation individual has been in the Scheme for 30 days or more. Single tier state pension How will this be affected by the recent Budget proposals and is there The new single tier state pension will any sign that recent HMRC and European Pensions Directive apply to individuals who reach state other regulatory action is making a pension age on or after 6 April 2016. difference? The Pensions Advisory The update to the Institutions for The pension will be no less than Service has expressed concern after Occupational Retirement Provisions £148.40 a week and individuals will having received almost 1,000 calls in directive, which will come into effect qualify for the full state pension once the last 12 months and suggests there in 2017, has revisions including a they have reached state pension age is evidence that specific schemes requirement to continually evaluate and have accrued 35 qualifying years. or people who have just lost their environmental risk, introduce new The minimum number of qualifying jobs are being targeted. Meanwhile, governance requirements for schemes, years for a partial state pension will HMRC has introduced new encourage investment in long term be set out in the regulations. State legislation relating to the fit and assets and require cross-border pension age is to increase from 66 to proper status of scheme admin- schemes to be fully funded. Some 67 for men and women between 6 istrators, requiring all scheme industry commentators have April 2026 and 5 April 2028. In the administrators of registered pension described the revisions as too future, the Secretary of State will be schemes to be a fit and proper person. prescriptive and potentially adding required to review state pension age increased costs. There is also a at least once every 6 years and lay a Following the Budget announcements, stipulation that trustees should be “fit report before Parliament stating this is not quite the period of reflection and proper” and have professional whether or not there should be any and stability some had hoped for, qualifications. However, recent change. The first report is due by 7 with plenty of issues to be considered comments from Saskia van Ewijk May 2017. A key factor will be and action taken ahead of April 2015 from the Insurance and Occupational whether, on average, a person who and in some cases April 2016. Pensions Unit state that the intention reaches state pension age within a
08 Report 32 OPDU News from the Pensions Archive
Stephen John Pegg and will now be taking up the place George Ross Goobey collection she has been offered at University which consists of 44 boxes of papers The directors of the Pensions Archive College London to study Archive which he hopes to complete during Trust (PAT) record with very much Administration. She had recently his internship. This will facilitate the regret the death of Stephen Pegg added to the website a section on integration with the first part which on 16 May 2014 at the age of 68. Retail Sector Pensions to PAT’s has already been catalogued. Stephen had joined the board of Directory of Archives holding PAT in March 2009 following his pensions material, following a survey retirement in June 2008 after over 35 she had organized across a number of Friends of PAT years in pensions management. Stephen company archives in the retail sector. had been Corporate Pensions Director The Boots collection covers pensions PAT was invited by the organisers of of The BOC Group plc, a long-term material over one hundred years, the Pensions and Benefits Show to insured member of OPDU. 1911 – 2011, Sainsbury covers the have a display area at the Show in 1920s -1990s and Mark & Spencer May to illustrate the work of PAT in the 1930s – 1990s. We wish her well recording the history and develop- Board appointment for the future. ment of occupational pension provision in the UK. We were very grateful for The Board of PAT was very pleased We welcome her successor Joe this opportunity. We want to encourage to welcome David Robertson as Williams who will be working with those who work in pensions to a director during the year. LMA/PAT for the next 12 months. regard the Pensions Archive very Joe has had some interesting assign- much as their archive which records David since 1992 has been the head ments since graduating from University the part they and their predecessors of the Permanent Secretariat at the College London, with BA (Hons) in have played in developing pension Association of Consulting Actuaries Ancient World Studies and a Masters provision in the UK. (ACA) and has acted as the joint in Cultural Heritage. external secretary to the All-Party Subscriptions or donations from Parliamentary Group on Pensions. On graduating from his MA, he individuals who wish to support the He has also served as a member of completed a 6 month project for Trust’s work by becoming a Friend two pension trustee boards for over UNESCO in Mozambique, at the of PAT are very welcome. The Trust 25 years. World Heritage Site of Mozambique can claim Gift Aid on donations from Island. He assisted with cataloguing individuals who pay Income Tax David Robertson is a graduate in and photographing museum collections, and/or Capital Gains Tax in the UK. politics from the London School of staff training, exhibitions and museum For queries about Friends of PAT, Economics. His early career was as a accessions. contact Malcolm Deering: specialist in industrial relations, where malcolm.deering@ he worked for the Local Authorities’ On return from Mozambique he btinternet.com National Employers, the Engineering completed a postgraduate diploma in Employers London Association and Heritage Management, focusing on For all other questions about PAT, then subsidiaries of De La Rue and heritage marketing, interpretation contact Alan Herbert: John Brown plc, where he was a and conservation. This was undertaken alanherbert@ Personnel Director. He moved into a at the Ironbridge Institute, University btconnect.com public relations and public affairs role of Birmingham. in the mid-1980s and has been a director of the specialist financial Since graduating from Ironbridge Newsletter services consultancy, Underline Group, Institute he has worked as a cataloguer since then to date. for the Transport Trust; in visitor PAT produces a quarterly newsletter services for the Sussex Archaeological which gives updates on the Trust’s Society at Lewes Castle, as a work and collections; to receive Interns volunteer for the East Sussex Record future copies please e-mail me at the Office at The Keep outside Brighton, address below. PAT has been pleased to participate and as a researcher and assistant in the LMA’s intern scheme over for the Royal Anthropological the last year which assists young Institute (digitising an extensive people develop careers in Archive collection of glass plate negatives Administration. taken in early C20th Nigeria). Alan Herbert Chairman, The Pensions Archive Trust Sarah Thiel completed in August her His main project for PAT will be 01438 869198 year’s internship with LMA/PAT cataloguing the second part of the [email protected]
09 OPDU Report 32 Q& A’s on pension trustee liability
Why do we need insurance We have been told that we post retirement situation may make when we have an indemnity do not need trustee liability them particularly vulnerable. and an exoneration clause insurance as we are covered Problems in pensions often take a to protect us against under the company’s considerable time after the event to claims? Directors & Officers policy, materialise. It is important, therefore, is that correct? to check that the position of retired An indemnity may be given by the trustees and pension managers is scheme or the sponsoring employer The answer depends on the poIicy properly protected. The solution is company and many trustees will have wording and terms of cover. for retired trustees to have the the benefit of exoneration clauses However, Directors & Officers guarantee of cover in the event that within the trust deed and rules (D&O) policies will often contain an the scheme ceases to be insured. They excluding them from liability. exclusion for any acts or omissions can then rest assured that they have However, it is not always appreciated while acting as a trustee or cover personal to them, irrespective that such clauses are subject to administrator of the pension scheme. of what the employer or trustees have statutory limits. For example, an Generally, it is not recommended that done, or not done, about insurance exoneration or indemnity from the reliance be placed upon a D&O since they retired. It is again fund cannot operate for any breach policy of insurance as the cover will important to check the extent of of trust relating to investments and it not be tailored to meet the cover provided in this respect as is also prohibited for the scheme to specialised circumstances relating to policies do vary (the OPDU Elite indemnify trustees for civil fines and pensions and potentially there will be Policy provides lifetime cover for penalties. It should also be appreciated competing calls on the policy which retired trustees and named pension that an indemnity from the employer are outside the control of the personnel from the date of expiry of would be of no value upon an trustees. the main policy of insurance thus insolvency when the trustees are still giving valuable peace of mind). having to manage the scheme. Are we covered for past However, if the main policy of Exoneration clauses are also subject actions that were taken insurance is renewed each year then to several other limitations including before the date that we the cover for retired trustees should not affording protection from claims take out insurance? remain in place. involving third parties and moreover, they will always be construed Trustee liability insurance operates restrictively by the courts. In on a “claims made” basis which Have claims been made addition, the problem with relying means that there is potentially cover against trustees? purely on exoneration and indemnity for claims made against the insured provisions is that they merely transfer during the policy period irrespective OPDU’s own claims experience has any liability between the trustees, the of when the event giving rise to the seen issues which have involved beneficiaries and the employer. claim occurred. Therefore, this is individual claims sums of up to £20m Pension trustee liability insurance, another reason to consider taking out to date. One common feature is, as however, will normally provide cover insurance sooner rather than later to one would anticipate, the importance for the trustees, pension scheme and give protection for mistakes that of the accuracy of data and we sponsoring employer. might have already occurred in the encourage trustees therefore to past. However, this will be usually ensure that regular data healthchecks Insurance provides an external source subject to not previously having had are undertaken. Other issues which of protection and should stand in insurance and being unaware of the have given rise to problems and front of such indemnity and exoner- circumstance likely to give rise to the potential liabilities include: incorrect ation clauses. In today’s environment, claim when purchasing insurance. formulas used for calculating benefits; trustees do not usually wish to interpretation of Trust Deeds; “hide” behind exoneration clauses overpayment of benefits; misapplic- when facing valid claims from What is the position when ation of Scheme Rules; seeking court pension scheme members. a trustee retires – are they directions; early retirement & ill- still covered? health disputes; rectification proceedings, accounting irregularities; A trustee’s personal exposure does DC choices of investment funds; not cease when they retire and their Pension Sharing Orders; general
10 Report 32 OPDU
administration errors; TUPE issues; Claim 4 The Insured benefited from the misrepresentations by trustees; transfer This information is in the public policy for cover for costs and the values; incorrect quotations; discrepancies domain. The Insured received a balance of the levy over and above between scheme documentation and Pension Protection Fund levy what it originally expected to pay. administration practice; delays in invoice for the period 2010/11 transfer and payments of benefit which calculated the levy to be Claim 5 assets; and PPF levy issues. £175k. The levy is calculated in two The Insured took out cover parts namely, the Scheme based levy predominantly to guard against the and the Risk based levy. The Risk risk of claims by missing Some recent claims paid based levy is calculated by use of beneficiaries. Despite efforts to find failure scores applied by ratings the beneficiaries, including Claim 1 agencies when calculating the advertising, several hundred members Two Scheme members received solvency of an employer: the higher of a particular scheme could not be unauthorised benefits in that they the risk of insolvency, the higher the traced. Whilst individual Scheme received a cash sum of 25% of their Risk based levy. members have accrued modest total benefits rather than 25% of their benefits the combined value exceeds Lifetime Allowance. The Scheme From 2007 to 2010, the Insured's £1.5m. members could not return the Risk based levy was nil based on overpayment as they had arranged the strength of the principal In recent weeks two Scheme their affairs accordingly. As a employer. However, when the PPF members have come forward to consequence HMRC levied penalty calculated the 2010/11 levy, the claim their benefits. It remains to be charges of £140k which were ratings agency, did not take seen whether others follow. covered under the policy. account of the financial statements that had been filed at Claim 6 Claim 2 Luxembourg’s companies’ registry. TThe Insured were contacted by a The Insured failed to ensure pension D&B had expected to be provided person claiming to be the Scheme benefits were invested when Scheme with the financial statements rather member. After satisfying the security members opted to transfer their than having to chase them down. criteria over the phone, the Insured benefits from one scheme to another. As a consequence the ratings were satisfied that they were speaking The members completed the agency did not take account of the to the member who had requested necessary documentation which was strength of the principal employer that his pension entitlement be received by the Insured. All of the hence the enormous increase in released early. The Insured sent the Scheme members requested that levy from c. £6k to c. £175k. member the appropriate forms their accrued benefits be invested in which were returned duly completed a variety of equity funds. The Insured appealed to the PPF and the funds were released. It Ombudsman which found in the transpired that the funds were Unfortunately the Insured overlooked Insured’s favour and directed the released to a crook who was the documentation and the funds PPF to recalculate the levy. The subjecting the member to mental and languished in a cash account and Insured was also awarded costs. physical intimidation. The alleged failed to benefit from large equity However, the PPF appealed to the perpetrator had access to the gains over the given period. The High Court essentially citing that member's property and papers Insured’s maladministration resulted the PPF had followed the rules on because he had initially presented in losses exceeding £450k. which the levy is calculated and it himself to the member as a foreign was unreasonable for the PPF attorney. The matter is under Claim 3 Ombudsman to have interfered criminal investigation but final losses The Insured was subject to an with the decision. In a very are likely to total approximately investigation by the Pensions technical judgement handed down £30k. Regulator and potentially faced the on 23 January 2014, HHJ Spink prospect of a Financial Support QC found in favour of the PPF Direction or a Contribution Notice. and concluded that the PPF This matter perfectly illustrates the Ombudsman made an error of law need for cover given the very high in its reconsideration of the PPF’s investigatory costs. decision.
11 OPDU Report 32
Insurance protection: a brief guide
Liability for breach of trust Insurance Protection reliance be placed upon a Directors is a personal liability and a & Officers (D&O) policy of In these circumstances, insurance is insurance as the cover will not be trustee is liable to both the playing an increasingly important tailored to meet the specialised scheme beneficiaries and role in protecting trustees and circumstances relating to pensions to scheme creditors. pension scheme assets. It provides an and potentially there will be external resource of protection and competing calls on the policy. Professional advice should should stand in front of such be sought when appropriate indemnity and exoneration clauses. and failure to do so may in The purchase of a properly drafted Retired trustees itself be held to be a and comprehensive insurance policy can be a cost-effective means of A trustee’s personal exposure does breach of trust. If trustees protecting members benefits, not cease when they retire and their are uncertain as to how to individual trustees, the sponsoring post retirement situation may make exercise their powers, they employer, pension managers and them particularly vulnerable. The internal administrators from losses solution is for retired trustees to have can also apply to the court resulting from claims, be they well- the guarantee of cover in the event for directions. The risk is founded or not. that the scheme ceases to be insured. potentially greater after a They can then rest assured that they If the decision is taken to adopt have cover personal to them, winding up where there insurance, however, it is important to irrespective of what the employer or may be missing have a policy specifically designed to trustees have done, or not done, beneficiaries or other respond to the needs of trustees and about insurance since they retired. other individuals involved in the It is again important to check contingent liabilities and no management of pensions. This is the extent of cover provided in assets. A trustee or trustee highlighted by the potential conflicts this respect as policies do vary director is also potentially of interest which commonly exist (OPDU Elite Policy provides lifetime cover for retired trustees at at risk of having to pay a when a trustee is also a director of the sponsoring employer company with the date of expiry of the main policy civil fine for breach of duties to the company and its of insurance thus giving valuable pensions’ legislation. Fines shareholders. As a trustee, however, peace of mind). for individuals range up to there is an overriding duty owed to the scheme beneficiaries which is What should be covered? £5,000 and for corporate paramount. Accordingly, as noted Below is a guide to the main headings trustees £50,000 . above,it is not recommended that of cover which can be included:
12 Report 32 OPDU
Court Applications In addition, the conversion from Conclusion defined benefit schemes to defined Trustees and pension schemes can contribution schemes has also By taking out insurance, trustees can also incur significant legal expense in continued. This has generally meant be confident that they have going to court to seek directions or potentially lower benefits under new protection against the liabilities that if they are joined by another party schemes which has also given rise to might arise in performing their who is seeking the court’s directions. closer scrutiny from members and duties while also giving members Insurance can be obtained to cover trade unions with more issues arising comfort that their interests are being these expenses which do not for trustees to deal with as a result. looked after properly in preserving necessarily involve a legal liability the fund assets which is particularly upon the trustees but the scheme will With this continued growth in important today when deficits are usually be responsible for the legal defined contribution (DC) schemes, common. expenses of all the parties involved. it is important to recognise that the There have been several high profile trustees of such schemes face cases involving costs in excess of £1m different legal risks and exposures which have had to be met from from those of defined benefit Claims pension scheme funds. (OPDU Elite schemes. DC trustees have ultimate Some typical examples of the subject provides an extension to reimburse responsibility for the accuracy of matter of claims in which OPDU such costs – it is important to note statements, market valuations and has been involved: that this type of legal expense would increasingly important, the selection G not usually fall within the scope of and monitoring of investment Incorrect formulas used for “defence costs” as defined in many vehicles offered. These factors calculating benefits insurance policies). increase the risk for claims occurring G Interpretation of Trust Deeds which has been borne out by claims G Overpayment of Benefits experience G Misapplication of Claims Scheme Rules Wind up G Seeking Court Directions The value of insurance cover is G Early retirement & probably best demonstrated when it Separate discontinuance and “run ill-health disputes comes to claims which can affect off” policies of insurance can be G Rectification proceedings even the best managed schemes. purchased to protect trustees once a G Accounting irregularities Regrettably, there has been a recent scheme has wound up. Cover can be G DC choices of investment substantial increase in claim provided to protect trustees against notifications which demonstrates that loss for liability or defence costs funds errors can occur even in the best arising from breaches of trust whilst G Pension Sharing Orders managed schemes particularly in the the scheme was ongoing. Another G General administration errors increasingly dominant environment relevant consideration is that there G TUPE issues of defined contribution schemes. may be missing or overlooked G Misrepresentations by beneficiaries who surface when all trustees In particular we are seeing an the assets of the scheme have been increase in matters relating to distributed. (For further details see G Transfer Values investment issues. As noted above, it opposite page 13). G Incorrect quotations is not possible for a scheme's rules to G Discrepancies between excuse a trustee from personal scheme documentation and liability in respect of the discharge of Cost administration practice their investment duties. Importantly, G Delays in the transfer and investment issues for pension The cost of trustee liability insurance schemes have become much more will naturally vary according to the payment of benefit assets complex and diverse. Classes of assets size of the scheme but it is also G PPF levy issues have widened and investment dependent on several other factors. G Equalisation issues strategies have become more However, the cost starts at a few G Scheme amendment issues intricate with trustees making thousand pounds for a small scheme decisions relating to matters such as and an approximate indication of cost The issues have involved individua l hedges, swaps and buy-ins. These should be able to be obtained easily claim sums ranging up to £20m. factors have increased the potential for any size of scheme without for claims. having to complete a full application.
13 OPDU Report 32 Insurance for schemes winding up With the regrettable increase in the Who is included in the G Misleading statements number of schemes winding up, definition of trustee? G Maladministration OPDU has a separate Discontinuance G Financial loss resulting from damage, Policy of insurance to cover trustees G Any natural person, including a loss or destruction of pension for the liabilities that can still poten- director or officer of a corporate scheme documents. tially arise following completion of trustee company, who was appointed the wind up. as a trustee. What is included in the definition of loss? Even if a scheme or company has Who is included in the totally discharged its future liabilities definition of employee? G Damages in relation to the pension scheme, a G Judgments past trustee remains personally liable, Any natural person who provided G Settlements potentially for their lifetime, for any services in relation to the pension G Awards (including distress awards acts they undertook whilst in the role. scheme whilst in the employment of or compensation as determined The following is a brief summary of the sponsoring employer company, by the Pensions Ombudsman) the cover provided and please email corporate trustee company, trustee or G Defence costs [email protected] for further pension scheme, including: G Costs for legal representation in information: relation to an official or fact G Directors and officers finding investigation instigated G Committee and / or board members during the policy period (i.e. What is covered? G Administrators where there is no requirement for G Pension scheme managers. an allegation of a wrongful act) by the Pensions Ombudsman, G OPDU Elite Discontinuance will pay the loss a past trustee or Pensions Regulator or other What is included in the employee is legally obliged to pay equivalent body. definition of corporate as a result of a wrongful act in trustee company? relation to the named pension scheme(s). What is included in G Any company appointed to act as defence costs? G It provides cover for wrongful acts committed prior to the a trustee, regardless of whether inception of the policy, from the that company was a subsidiary or G All reasonable third-party fees, date the scheme was first not of the sponsoring employer costs and expenses that are incurred established company. to defend or appeal a claim. G G It will also pay all reasonable legal Provision for full advancement of costs incurred in relation to an defence costs, where required. What constitutes a claim? official or fact finding investigation by the Pensions Ombudsman, G Pensions Regulator or other A written demand alleging legal Additional features of equivalent body. liability Elite Discontinuance G A civil or arbitral proceeding G A criminal suit G Limits of liability to £10m and G Who is covered? An administrative or regulatory higher if required proceeding G Small retention might be G An official investigation. G Past trustees applicable G Employees G Policy periods ranging from 1 G A corporate trustee company year to 15 years are available What wrongful acts are G Lawful spouses, estates, heirs or G Optional extensions are available covered? legal representatives of past trustees to provide cover for: or employees in the event of G Civil fines and penalties (where death, incapacity, insolvency or OPDU Elite Discontinuance offers insurable and the premium is not bankruptcy protection against a comprehensive being paid for out of the scheme range of allegations, including: G Any other natural person or assets); and entity who acted as trustee as G Member nominated trustees in G attached by specific written Breaches of trust, duty and the event of innocent non- endorsement. statutory provision disclosure or misrepresentation. G Negligence G Administrative errors OPDU Elite Discontinuance is G Wrongful omissions underwritten by G Misstatements ACE European Group Limited.
14 OPDU
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15 OPDU Report 32 Comment Data – be diligent or face the dangers Louise Howard Senior Counsel, Taylor Wessing
Did you and your advisors get your not assist with calculating any pension see the return of the forceful messages scheme data in order by the end of entitlement, absence of correct data about compliance that we saw in 2012? Was that the end of the story could mean a person is not identified 2011 and 2012 again. But how scared or the beginning? The Pensions or traced, which would clearly be a do trustees need to be? There are no Regulator put record keeping on its major problem in providing scheme express sanctions that the Regulator “to do” list in 2012 thrusting it for benefits. can issue as regards poor record- the first time onto trustee agendas. keeping. Where the Regulator has But things appear to have stalled a bit Conditional data is the “crunch” data “teeth” is in being able to enforce the in 2013. Whether the Regulator is or – the vital information that means requirements of pensions legislation. is not making record keeping a the scheme can run. It is not possible In the past, the Regulator has chosen priority at present is really just the tip to be overly prescriptive at a general to particularly highlight s.249A of of the iceberg, so here we take a step level about what will or will not the Pensions Act 2004 which makes back and look at all the obligations count as this data as it will be it a requirement for trustees to establish trustees face in relation to the data conditional upon many things such and operate specific internal controls, and records they hold, what happens as the type of scheme, scheme design, adequate for securing compliance within when things go wrong, and finally a member’s status and also events that the rules of the scheme and legal require- what to expect next. may occur during the life of the ments. If the Regulator makes moves scheme, hence the name. to any enforcement action, indications so far are that this will be the most The Regulator steps in … Finally numerical data, which is likely statutory provision invoked. further information that may help put Trustees, administrators and other common and conditional data into pension professionals would all agree context. Examples include pensioner Why it is so that having the right information is type (member, spouse/civil partner, important to get it right? fundamental to the smooth running child), membership status across the of a pension scheme, whether it be scheme or perhaps data such as how Nothing is new here, the Regulator DB or DC. Yet, alarmingly, errors and many members have lifestyle invest- has just been tackling a problem that misinformation remained very pre- ment strategies or AVC records or has been around for years; poor valent in the first decade of this perhaps records of part-time workers. records and errors lead to mistakes. century. In 2010, the Pensions The impact of a mistake can be Regulator decided enough was The Regulator’s reports have indicated hugely inconvenient and costly for enough and rolled its sleeves up to that the response to the common schemes, trustees and service providers. clean up the mess. It set stringent data "cleanse" was very positive with targets for schemes to ensure that high levels of achievement. The One of the most common mistakes their basic data was accurate and up picture is less rosy with conditional that flows from incorrect member to date. Schemes were asked to data. Only one fifth of pension scheme data is overstatement or overpayment achieve 100% accuracy for “common members were in schemes having a of benefits. The legal position is that data” (eg: name, address and date of conditional data score over 90%. trustees of a scheme are required to birth) for records created after May When considered against the responses provide benefits in accordance with 2010 and, the not much lower target received in 2012 that nearly 90% of the scheme rules. As the Pensions of 95% for records created before schemes intended to score their Regulator acknowledges, they do not that. When one considers that some conditional data by the end of that have power to pay benefits higher schemes have been operating for well year, it is clear that that's pretty poor than specified in the scheme rules. over half a century, that’s a lot of in terms of action. The fact that someone has received records to tidy up. The Regulator’s misleading or incorrect information view was that poor record keeping This stalling was addressed in December does not, on its own, confer a right to can lead to significant additional costs when the Regulator issued an update benefits at the incorrectly quoted level. in a number of areas such as on record keeping. The update indi- administration, error correction, cated it was concerned about stalling When a problem is discovered, trustees claims from members, buy-outs, and planned to review its guidance find themselves having to seek recovery wind-ups and may even necessitate this year. The message was clear that of the overpayment to correct the the making of more conservative the Regulator does not expect historical position and also assure the actuarial assumptions. schemes to only take action when position is corrected for the future. targets were set and highlighted that There are obviously costs and So what are trustees and their trustees have a duty to maintain inconvenience associated with this, administrators supposed to be doing? adequate records. but things can be further complicated. Well, the three types of data common, conditional and numerical Members have the ability to are treated differently. Common data Enforce what? … challenge the trustees if they can is the most basic pieces of infor- legally establish that it would be mation such as name and address. If the Regulator steps up its interest unfair for them to have to pay the Whilst this basic information may in conditional data sprucing, we may money back. If there has been some
16 Report 32 OPDU
irreversible action (or spending) by were believed to represent the actual 1996. They state that "amounts of… the member in reliance on the entitlement. Prior to these regul- .benefits" must be provided to a information (or payment) which ations unrecovered overpayments member. It is perhaps arguable that turned out to be incorrect, then it would be “unauthorised” and result this has not been complied with, if might be possible for them to retain in tax charges of up to 70%. what is presented to a member is in what they were not technically entitled fact incorrect. A failure under the to, in turn causing loss to the scheme. A note of caution must be regulations can result in a civil penalty maintained, however, in respect of of up to £5,000 for an individual or Furthermore, incorrect benefit quota- payments made in error after death. £50,000 otherwise. Also, an employer tions are almost always viewed as Pensions should stop on the breaching its duty under the maladministration by the Pensions pensioner’s death, but where they Occupational Pension Scheme Ombudsman who can award compens - continue to be paid in ignorance of (Scheme Administration) Regulations ation which will attempt to put the the death, it is also possible to avoid 1996 to disclose to the trustees on member in the position they would being regarded as having made an request "such information as is have been if the correct information “unauthorised payment” but only reasonably required for the perform- had been provided, (NOT the where the payments do not extend ance of the duties of the trustees…" position he would have been in had beyond 6 months after the death. is punishable by a civil penalty of up the incorrect information been Outside of this you are into the tax to £5,000 for an individual or correct). There is likely to be a realm of unauthorised payments, so it £50,000 otherwise. The employer compensation element also for pays to get your information right therefore also has a vested interest in distress and inconvenience, which is and up to date. ensuring that the data it provided to generally in the region of a few trustees is robust and accurate. hundred pounds. Something that should prick any trustee’s ears up is whether faulty Maladministration should not just data could mean a discharge that the The ignored cousin? be ignored because the distress and trustee was relying upon is actually inconvenience awards are relatively invalid. Statutory discharges occur in As mentioned at the start of this small as the wider compensation a number of instances, such as on article, the member-data obligations element could be much more variable. making transfer payments, buying out and clean up that trustees have been In an Ombudsman claim (brought by benefits with insurers and on scheme focusing on over recent years are just Mr A Brown 83320/1) in 2012, the termination. These broadly discharge part of the picture. Ombudsman awarded nearly £5,000 the trustees from further liability to because of additional legal costs provide benefits. But there is debate Trustees, along with many other entities, expended a part of his divorce in the pensions industry as to the extent are subject to the requirements of the proceedings due to incorrect benefit they effectively discharge trustees in Data Protection Act 1998 and its information having been provided. respect of erroneous calculations. associated regulations. Despite being Certainly, Ombudsman cases regarding 16 years old, this legislation has not Another consequence of poor data incorrect transfer values have not been something trustees or indeed could have potentially catastrophic referenced the previous trustee their advisers have generally spent effects. That is, incorrect funding. discharges, which some commen- much time considering, certainly not tators take as an indication that the any deeper than at surface level. Well, The legislation and guidance around Ombudsman’s Office did not think with stringent new EU legislation scheme funding is now immense and there had been a relevant discharge just around the corner, this cannot lays down a very prescriptive route to in respect of the error. continue for much longer. More of a very well defined aim, but it relies that later, for now let us revisit the heavily on the data it is based upon. In the case of buying out benefits, the current requirements. What if that data is wrong? insurance wording will often be carefully presented so that the insurer Entities may either be classified as Changes in actuarial advisers can has accepted liability for that which either a “Data Controller” or a “Data prompt a thorough review of data, it has been told about – leaving open Processer”. The administrator of a often throwing up anomalies that the question about who is liable for pension scheme to whom all day to mean the scheme has operated on a something as yet unknown because of day duties are outsourced would be flawed basis for a number of years. an undetected error. the Data Processor. But, it is the trustees, as Data Controller, that bear Tax consequences of data errors have Aside from the Pensions Regulator all responsibility under the Data been less of an issue since the pointing to enforcement of s.249A of Protection Act, a fact that is Registered Pensions Schemes the Pensions Act 2004, there could frequently overlooked. (Authorised Payments) Regulations potentially be scope for liability and 2009 made it clear that payments fines under the Pensions Act 1995, As Data Controllers, the trustees are made in error will not count as the Finance Act 2004 and under required to notify this status to the "unauthorised payments" under the the Occupational Pension Schemes Information Commissioner’s Office Finance Act 2004, provided they (Disclosure of Information) Regulations (“ICO”) and renew annually. Failure
17 OPDU Report 32 Comment
to do so is a criminal offence. party, the ICO took a dim view. a very long time and for many The trustees are also responsible for different purposes. The right not to complying with the eight data Whilst security breaches have thus far be profiled – meaning a person protection principles under the Data been the main source of fines, there cannot be subject to any measures Protection Act: is a suggestion that things may be based on automated processes which changing. Also in 2012, Prudential use personal data to analyse, evaluate I fair and lawful processing was fined £50,000 when tens of or predict performance at work, I processing for specified and lawful thousands of pounds destined for one economic situation, location, health, purposes particular retirement account ended personal preferences, reliability or up in the wrong account because behaviour – could impact on matters I processing must be adequate and of a mix up due to two customers such as actuarial valuations or ill- not excessive sharing identical names and dates of health pension requests. I accurate and up to date data birth. This fine has generated a lot of interest in the industry as it represents In addition there are to be a number I data must only be held for as long the first use of the ICO’s powers to of extra administrative requirements as necessary fine outside of security breaches. which data controllers and processors I processing only in accordance will have to comply with. These may with rights of data subjects even require the appointment of a data The future is coming … protection officer for some schemes. I secure processing I data not to be transferred outside This seeming increased willingness to Failures will be much more strin- EEA unless safeguarded. use powers more punitively might be gently treated under the new regime, seen to dovetail with the EU changes with immediate notification obligations With quite onerous responsibilities on the horizon and the “beefing up” to the Information Commissioner on trustees, they should be checking of the ICO’s powers. One area set to and possibly even to the data subjects that these are adequately passed on to dramatically change is the level of themselves, and the much larger those handling data on their behalf. fines. The current maximum of penalties mentioned above. £ Contracts need to be clear to ensure 500,000 could increase to €100m that the same level of compliance with or 5% of worldwide turnover under Trustees will not be the only ones the data protection principles is passed most recent drafts. having to pay more regard to the new on and specifically and robustly cover requirements as the roles of data protection of data by the The changes will be implemented by controller and data processor have administrator. It is often the case that EU Regulation rather than by been redefined and for the first time, contracts contain quite superficial data Directive, meaning there will be no data processors will have direct protection wording, perhaps because opportunity for individual member liability for aspects of compliance in they tend to originate from the states to tailor the provisions. Many their own right. administrators who, as data processors changes are currently planned, but with no free standing legal those that may particularly impact on The new legislation has dragged its responsibility, have tended not to be pension schemes are as follows. heels, continually getting stuck in the as worried about the Data Protection EU legislative process but indications Act. Consent – consent requirements are that after the EU parliamentary become more explicit and valid elections in May the pace will pick Similar to the Pensions Regulator, consent is unlikely to be implied up and we could still be looking at the Information Commissioner has where there is an imbalance of power 2016 implementation. It's therefore powers of enforcement, including the between the data subject and the definitely worth considering what power to issue fines of up to controller. Schemes will have to think state you are in well beforehand as it's £500,000. It has usually chosen to about the consent they have from clear we can expect much more, not issue a monetary penalty where there members and consider what steps less, regulation, guidance and control. have been security breaches, such as they might need to take to be in the case of the Scottish Borders compliant, both in respect of new Louise Howard Council in 2012. members and existing ones. Senior Counsel [email protected] The Scottish Borders Council had Enhanced data subject rights – the www.taylorwessing.com taken on a third party to digitise its new regulations will bring in extra records but was issued with a rights for data subjects which may £250,000 fine by the ICO when 600 have an impact on the administration files of confidential information were of a scheme. There will be a new found in a recycling bin, having been right to be "erased" and have all dumped by the third party. As the personal data removed from records. Scottish Borders Council had not This could cause quite a bit of sought any guarantee as to security friction in the context of a pension and protection of data from the third scheme where data is usually held for
18 Report 32 OPDU
‘We do not need 80% of active management’ Michael Johnson Research Fellow, Centre for Policy Studies
Recently, robust, independent and pursuit of continually trying to the evidence that lays bare the damning evidence emerged that outperform one another. Worse, it is nonsense that is the active fund skewers any justification that active a giant negative-sum game in which management of listed assets. If private fund management of listed assets is the savers pay the price, their hard- sector schemes were to follow worth the candle. For dispassionate won capital persistently eroded by DCLG’s leadership and common observers, it has been long overdue, recurring charges and fees. sense, the implications would be but the source was unexpected: the profound. Millions of scheme UK’s Department for Communities Data shows us that the dominant members would benefit, and it would and Local Government (DCLG). contributor to total returns is the become apparent that we do not asset-class mix, not individual stock need 80 per cent of the industry. The The catalyst was a growing concern selection. In practice, some so-called remaining 20 per cent should focus for the sustainability of the Local active managers are actually “closet on adding value in the unlisted asset Government Pension Scheme trackers”. Once their high costs are arena that lacks the indices required (LGPS), a disparate collection of 89, deducted, the outcome of sub-index by (passive) tracker funds to replicate predominately sub-scale, funds in performance is no surprise. To investment performance, principally England and Wales. misquote Sir Winston Churchill: never “alternative” assets, property and is so much being taken by so few from emerging markets and smaller DCLG issued a consultation paper so many, and for so little in return. companies funds. proposing that all of the £85bn of externally actively managed listed But what of the so-called “star” Indeed, DCLG’s actions mark a assets should be moved to passive managers? Every quarter, F&C Fund seminal moment for all occupational fund management, to reduce costs. In Watch publishes consistency ratios pension schemes. Activity in the addition, all “fund of funds” arrange- measuring the proportion of funds in Twitter sphere would appear to ments should be replaced by one the 12 main IMA sectors in the UK corroborate this view. Jeremy investment vehicle for alternative that produced top-quartile returns Cooper, who chaired 2012’s review assets. Total cost savings of £660m per each year, over the prior three years. of Australia’s private pensions system, year are expected, and £6.6bn over In the first quarter of 2014, of 1,069 said: “What an astounding result. It the next 20 years – monies that funds, only 46 consistently produced will be a global litmus test.” DCLG would no longer reach asset managers’ top-quartile returns (ie 4.3 per cent). should be congratulated. pockets; a saving for taxpayers. Using blind luck, one would expect 17 funds to achieve this, which leaves Michael Johnson But even more important than this, 29 fund managers out of a universe Research Fellow the underlying research report, of 1,069, roughly 2.7 per cent, who Centre for Policy Studies independently produced by Hymans could legitimately claim that their [email protected] Robertson, has been put into the success was down to skill. Over the Twitter:@Johnson1Michael public domain. Sponsors, trustees and same period, only 188 funds (17.6 www.cps.org.uk members of private sector schemes per cent) consistently produced above- are now free to digest evidence average returns; 881 funds did not. Copyright The Financial Times Limited 2014. derived from both the huge LGPS data sample (the LGPS dwarfs any In addition, the last quarter’s results other UK pension scheme), and are towards the top end of historic internationally. They will find that, on ranges. A stunningly small number of average, any additional performance funds beat their peers on a regular generated by active management basis, but the crucial point is that at (relative to the benchmark indices) the start of any three year period, no is insufficient to overcome the one knows which funds they will be. additional costs. It is better to invest Hindsight being useless, this is active passively, tracking the appropriate fund management’s Achilles heel, and index. the crux of the debate.
Active fund management has finally Costs are controllable but, by and been revealed for what it is: a web of large, investment performance is meaningless terminology, pseudoscience not. This is not a recent revelation. and sales patter. For too long, active Warren Buffett said: “By periodically managers have been allowed to investing in an index fund, the know- shelter behind their standard disclaimer nothing investor can actually outper- concerning the long-term nature of form most investment professionals.” investing. But the long term never Meanwhile, by publishing the under- arrives. It merely shuffles forward; lying research, DCLG has introduced there is never a day of reckoning. In a degree of transparency hitherto the meantime, ludicrously expensive unseen in public service pensions. talent is deployed in the pointless But more significantly, it has acted on
19 OPDU Report 32 Comment How to improve DC outcomes Sarah Smart Chair Anthony Charlwood Investment Officer, The Pensions Trust
The Pensions Trust is the UK’s But all the preparation in the world The engine in the toolkit is the largest specialist provider of pension will not produce a good outcome unless investment choice. To manage the schemes for the not-for-profit sector what constitutes a good outcome is investment engine we need a in the UK. We have been providing clearly defined. The Pensions Regulator reasonable outcome and target. DC schemes since 1988 through a has laid out six principles, covering Retirement expectations are in master trust structure – a term which areas such as governance, administr- benefits framed in real terms has become familiar with the arrival ation and communications, which are (number of cruises, size of house etc.) of commercial master trusts. Last year supposed to lead to ‘adequate and so it is appropriate to frame the we re-launched our DC offering on retirement income’. But this good return objective of the member as, a new platform – SmarterPensions. outcome is not defined! Surely it’s say, CPI + 4% p.a. (as is the case with We moved to a Target Date Funds time to take a step back. The Pensions Trust’s SmarterPensions default investment strategy and also Target Date Funds). If a member offered an Ethical Target Date Funds So the first priority is to create a joins the scheme midway or later in range – the first of its kind in the reasonable expectation. We can talk their working life, the real return UK. We currently have over 60,000 about ‘income replacement ratios’, expectation will be lower (because members and 1,000 employers using but for the member it is really what the capacity for risk will be lower). the platform and in the order of £300 sort of life style they want in million DC assets. retirement. This is a personal choice The reality is that members are rarely but has to be anchored to a realistic in the same fund from its inception The Pensions Trust is a mutual organis- framework. That’s why we have to to its close – people come in part ation with a vision of ‘making member- engage with the member about way through and they leave part way ship worthwhile’. We believe in this contribution affordability, time to through as well (particularly once we passionately and will challenge accepted retirement and willingness and ability have moved to the ‘pot follows norms to achieve it. For DC this trans- to cope with a result that is different member’ world). Of course, it is lates into a real commitment to delivering from expectations. difficult and expensive to measure good outcomes for our members. the experience for each member, so Over our working lives our as an industry we don’t do that. What So what makes a good outcome? expectations change as do the factors do you do when you have two Certainly it’s getting from A to B as which affect affordability (e.g. members in the same fund – one efficiently and quickly as possible. children at university) and capacity travelling towards a great outcome Easier said than done if you are for risk. (How long can we afford to and the other (who has joined later taking part in a trans-Africa car rally! take to recover from a decline in the in their working life) on a rocky road Sand dunes and dust storms are likely value of our retirement savings?) We to a bad outcome? to be encountered. If you lose your need to develop tools to engage way you are in serious trouble – as heuristically with members when The old adage states that what gets Mark Thatcher found out when his they enter the scheme and then measured gets managed. Even if we mother was Prime Minister. engage on a regular basis. (This is not cannot do this cost effectively at the a simplistic approach to assessing individual member level, we can do What are the sign posts for a good attitude towards investment risk!) this for different cohorts of members. outcome? First, have a good idea of We are working with our fund the nature of the situation you are Creating a reasonable and provider to provide this information going to find yourself in. Second, appropriate expectation of income in in an accessible way. have the ability and the means to retirement which the member buys prepare appropriately for the into is hard, but until it is done how One way to reduce this likelihood of situation. In other words follow the can the pensions industry ‘deliver’? failing to meet expectations is to Scout’s motto ‘be prepared.’ Unfortunately tPR has focused just reduce volatility. The new generation on the delivery, not on defining and of Target Date Funds use tactical asset How does this relate to a good DC managing expectations. allocation techniques to dampen pensions outcome? It all relates to the volatility i.e. exposure to downside individual member’s experience. It One of the big challenges is that it is risk. This will help deliver returns starts with the member’s expectation not easy to engage with your whole more in a ‘straight line’, limiting the of the level of income they will have membership cost effectively – chances of a new member suffering in retirement. Then the tools must be particularly not as the focus continues a loss. available to give the members a good to be on driving costs down. The chance of achieving that level of government is pushing us into a low We need to return to the contentious income in retirement. Nothing is charges regime without regard to the matter of fees. While it is undoubtedly certain in life, and certainly not in implications for member engagement. true that the fees charged to the retirement; we are looking to At the Trust we have put a great deal member’s account will detract from maximise the likelihood in achieving of focus on developing scale in investment performance, another a member’s expectations. SmarterPensions so we can develop adage ‘you get what you pay for’ is great tools to engage with members also true. A low fee product will without costs becoming unviable. restrict the investment choices and
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this limitation may impact long-term employees can now continue exposed to growth assets for a investment performance and the working until they chose not to. For fraction of their time in the fund – ability to reduce volatility. To further this reason SmarterPensions Target 40 years at the most and then only reduce volatility we want to use so- Date Funds keep 20% of the fund in partially in later years. Using called alternative assets where the fees growth assets at the member’s drawdown when the member’s pot are higher than for, say, tracker equity expected retirement date. is only around £30,000 at retirement funds. (as will be the case for most of the However, there is a need for liquidity Trust’s members) is not an option. The government has proposed both at any time, because a member can a greater disclosure of fees and a leave the Scheme at any time. This Our investment provider is leading charge cap for DC products. Details does not mean every asset has to be the pension industry’s thinking on have yet to be revealed. However, the liquid, but illiquid assets can be rocks the bridge between saving for government sponsored DC provider along the road. A growing, decent retirement and taking income on NEST has already set a low defacto sized DC scheme can certainly cope retirement. The re-writing of the ceiling for charges. While it is with a modicum of illiquidity. For rules by the government underlines laudable in principle for charges to be Target Date Funds the need for the importance of delivering better made transparent, it is must be greater liquidity for those funds at the outcomes through retirement. No remembered that there is no such pre-retirement stage can be met by one wants to run out of money! thing as a free lunch. There is a ‘selling’ illiquid assets to funds at the danger of a dash to the bottom in young/adventurous stage. This does The big challenge for DC providers terms of charging which may not be raise the issue of how to value illiquid is to devise ways to measure whether to the benefit of all members. assets for such transfers and depends outcomes can be expected to be Limiting the investment choices to on a stream of new members ‘good’ or not. Then members need index-tracking passive funds may not entering the Scheme at an early stage tools to help them understand if the only dampen return expectations but of their working lives. outcome looks good for them. The may well restrict the ability to deal vehicle cannot just be driven in a with risk through diversification. The Now, to reiterate, the aim is to meet straight line – the whole process is overall fee for members in each member’s expectations for dynamic. The toolkit must be SmarterPensions DC is 45bp – this income at retirement. The sufficiently large to adjust to optimal covers governance, administration Chancellor in the Budget on 19 to help deliver these good outcomes and investment. March 2014 revolutionised pensions for the members. An adaptable 4 by (according to the headline writers) 4 may be a better choice than a A structure that we think is workable by abolishing the requirement to Porsche Boxster. If you buy a basic makes effective use of base fees and a purchase an annuity on retirement vehicle you may end up paying more properly structured performance fee and lowering the tax rate and to upgrade in order to avoid a very element. A fund with a 15-20bp base relaxing the rules on income unsatisfactory outcome for members. investment management fee which drawdown for members of DC Our advice: look under the bonnet comes out of the overall charge and schemes. Thankfully, members of DC of your DC scheme, know where the a performance element which comes schemes will be entitled to free members want to end up, take a map out of the return earned by the financial guidance on retirement and avoid those sand dunes! member is a much better structure from April 2015. It can no longer be than the flat fee cap proposed by the assumed that income in retirement Sarah Smart government. will be taken through an annuity. Anthony Charlwood Does this mean the structure of DC The Pensions Trust To stay with the motoring analogy, if funds need to be redesigned? It can you only pay for a Micra, you cannot be argued that if a member uses expect all the features of a Porsche. drawdown, the shrinking asset pot Perhaps we need to ‘pimp’ the Micra should be invested more aggressively – it is still low cost but you can pay a in growth assets. But can the member bit more for a better ride. cope with the higher volatility?
Your investment manager must have A DC pension is a truly long life a full toolkit at their disposal. As the product - 60 years or more from the member approaches retirement start of saving to when that last income generation will become an monthly payment is made into your increasing component of return over bank account. Unsurprisingly there capital appreciation. In the last few are no guarantees. Only through years before retirement liquidity (the exposure to growth assets which ability to readily realise the portfolio, deliver a return well in excess of at a stable value) will become a inflation can a member expect a paramount requirement. However, reasonable level of income in uncertainty has been introduced – retirement. Yet members are only
21 MARCH OPDU Report 32 2014 ANNUAL PENSION RISK CONFERENCE The Draft Code - “good in parts”? Matthew Demwell Partner, Mercer’s Financial Strategy Group The apocryphal curate was, of course, The Draft Code also emphasises the trying to be polite about his stale egg. importance of good governance. An egg, of course, can only be either Covenant assessment is a good good or bad. The Draft Code, example of an area in which a range however, really is good in parts – and, of shortcomings can be summed up as in the author’s view, not so good in poor governance. other parts. But, to mix metaphors, the good parts sometimes feel like needles Finally, I applaud the Draft Code’s in a very large haystack. Here are some recognition that member security of them… does not only mean cash contri- butions. This is potentially a hugely The Draft Code retains the existing important observation. Unfortunately, Code’s exhortation for deficits to be TPR goes on to undermine it made good “as quickly as the sponsor elsewhere, as I will explain later. can reasonably afford”. Some believe this goes dangerously beyond TPR’s The Balanced Funding brief and the legislative requirements. Outcome (BFO) and risk What I like about it is that it leaves trustees to decide what is “reasonable”. assessment If they agree that lower contributions and higher investment in the business The BFO is not intended to form any in the shorter term optimise the kind of funding objective for trustees. It is longer-term security of benefits simply part of an assessment process that without compromising the needs of TPR will use to determine whether to Scheme Funding – the scheme or requiring excessive or investigate schemes in more detail (in other the new Code of Practice unnecessary risks to be taken, then this words, to decide how to effectively allocate form of words enables them to make its limited resources). Under the Draft The Pensions Regulator (TPR) that call. TPR’s proposed new statutory Code, TPR proposes to calculate a has published and consulted on: objective is to minimize any adverse normalised deficit contribution amount impact on the sustainable growth of for an as yet undefined ‘medium term’ I a draft new Code of Practice the sponsoring employer in relation to recovery period based on a desktop on funding defined benefits how it regulates the funding regime. assessment of a scheme’s notional Technical schemes TPR’s encouragement to trustees to Provisions, which will be determined take this objective into account may based on its sponsor’s covenant and the I its proposed Funding Policy and , also help trustees to make such a call. scheme’s maturity. It will then compare this with the scheme’s actual recovery plan I its proposed Regulatory I also like that the Draft Code makes contributions in order to assess whether Strategy, “no presumption of conflict” between the plan meets its expectations. trustees and sponsors: this is surely a Collectively referred to as the mindset to be applauded. TPR also proposes to consider a wide Draft Code in this article. range of qualitative risk measures The Draft Code reiterates the including, for example, investment importance, highlighted previously by strategy risk, the funding assumptions TPR, of an integrated approach to for longevity and any reports of risk management. Mercer has been material poor governance. A decision using such an approach for some time will then be taken on whether to so it will be no surprise that I support investigate a scheme further. its wider application. However, it may mean different things to different As well as using the BFO to help people so I will return later to what it decide when to intervene, TPR says it looks like in practice. plans to use BFO data to inform the “impact of our approach”. There is considerable emphasis in the Draft Code on meaningful covenant It appears that TPR feels under assessment. Some trustees have pressure to be transparent so it has set historically relied on in-house out quite a lot of detail about the covenant views without external BFO and the above process. Some are challenge or confirmation. This may calling for even more transparency e.g. be appropriate if they have sufficient TPR informing each scheme what its experience, expertise and independence, BFO indictor is, whereas others feel but the bar is high and I fear some that a tool for allocating TPR’s trustees may limbo under it rather resources would more safely be kept than Fosbury-flopping over. as an internal tool, to avoid unintended benchmarking effects.
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A word about smaller schemes. I Encourage trustees, sponsors and security and the sponsor’s sustainable Overall, the Code is potentially advisers not to spend time and growth (or indeed how TPR itself burdensome and TPR recognises this money trying to second-guess their intends to balance its own conflicting in calling for proportionality. BFO indicator and instead objectives). However, in describing its risk-based concentrate on appropriate approach to regulation, TPR appears strategies for their own schemes. to send out a message that it is too I Ensure its caseworkers consistently Some other suggestions busy to investigate smaller schemes. recognise and apply the principle Members of smaller schemes may not that a scheme can fall below the I mentioned earlier the Draft Code’s find this very comforting (nor trustees “BFO bar” and still be appro- if they are hoping for support from recognition that member security priately funded and managed. TPR in challenging uncooperative does not only mean cash contri- sponsors). My suggestion would be I Avoid sending a message to smaller butions. I am a supporter of the that trustees of smaller schemes should schemes that they’re virtually exempt “as soon as reasonably affordable” continue to challenge themselves to from regulatory supervision. expectation. What I don’t like about it reach appropriate funding solutions is that it refers to funding the scheme : and to retain a rigorous audit trail for this could be improved by referring to their decisions, since this will be in Motherhood and apple pie funding benefits . Funding outside the their members’ best interests. Also, scheme can be a particularly powerful there can be no guarantee that they There’s a lot of these in the Draft way of aligning member security and won’t be subject to regulatory Code but they aren’t necessarily any avoiding damage to the sustainable scrutiny at some point and TPR has more palatable than the curate’s egg. growth of the sponsor because it can: made the point that it expects the For example, on risk taking, TPR says I Increase the sponsor’s willingness same standard of behaviour from small it has stopped referring to self- to commit funds by reducing schemes as it does from large schemes. sufficiency and accepts some risk is concerns about trapped surplus. permitted, but then says all risk My views? Technically, TPR should: should be managed and mitigated. Its I Enable funding to be used in the business, thus supporting the I Drop scheme maturity as a messages are not clear. Specifically, the Draft Code: covenant, rather than being component of the BFO metric. invested in competitors’ businesses What matters is whether the I Is far too long & repetitive and may and other investments of the overall investment, funding and not therefore receive the attention pension fund. covenant package provides enough it deserves from trustees and sponsors. security for the scheme and is I Enhance the sponsor covenant sustainable for the employer, I Contains too much detail which risks both because of the previous point regardless of scheme maturity. becoming quasi-legislation (we’ve and also by building in suitable seen this happening with the levels of security and bankruptcy I Include investment strategy in the existing code). remoteness (perhaps including BFO, which would appear to give elements of contingency e.g. it more prominence than its I Should set out principles and expected behaviour clearly and increased security in pre-determined current position in the circumstances). “miscellaneous” box. concisely (some of this is already there but is buried). I Explore ways of capturing those Consider the following example: miscellaneous risks more I Sponsor contributes 100 to scheme. objectively without being too resource-hungry e.g. a few simple “Whose new statutory I Scheme uses the 100 to purchase questions in scheme returns (or objective is it anyway?” an asset that promises an income elsewhere) and utilisation of expert stream and future capital payment. systems to evaluate the answers and Is it appropriate for TPR to fulfil its I So the scheme no longer has the probe more deeply where new statutory objective by delegating 100, only a promise – could the appropriate. responsibility to others? That appears trustees be criticised for buying to be what it is doing when it tells that asset rather than holding onto As to how the BFO is used in trustees they “should ensure that their the 100? practice, I think TPR should: decisions do not… unreasonably impact on the employer’s sustainable I Say less, not more, about it. Treat it Well, that’s what trustees do every growth plans”. Is this really something as merely an imperfect (but “good time they buy shares or bonds. But that can properly drive trustees’ enough”) internal desktop exercise alternative funding can provide funding strategy or is it up to sponsors that helps to inform when TPR comparable returns together with a to make their case? should allocate resources to level of security (e.g. protection from investigating a scheme further. sponsor insolvency) greater than that It might be more helpful to have some of many traded investments. I Avoid placing greater emphasis on the clarification of what sustainable growth BFO by using it as a way of measuring means and how trustees might balance TPR’s regulatory effectiveness. potential conflicts between member Compared with an unsecured recovery
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plan, alternative funding (such as asset Mitigations vary in their profile and Action-focused monitoring involves backed contributions, reservoir trusts impact. An integrated approach enable s identifying key metrics (e.g. based on and charged accounts) can simul- the value of alternative mitigations one or more of the above but possibly taneously provide more security to a (and combinations of mitigation) to also including historical data) and scheme AND support sustainable be assessed consistently. This involves setting triggers which, if breached, will sponsor growth. At the same time, I adopting a consistent approach to drive action. Broadly, “action” means fully endorse the need to have a valuing scheme assets and liabilities, the sponsor selecting from a pre- credible fallback funding plan if the investment risk and the sponsor agreed menu of mitigations and type of alternative funding chosen covenant. Key benefits of this are that: proposing one or more, which, when combined, will restore the scheme’s turns out to be legally flawed. I The sponsor and the trustees are level of security (measured using the So what should trustees and sponsors working with a consistent, pre agreed integrated approach described above) actually be doing? methodology, which reduces complic to within a pre-agreed acceptable ations due to differences in approach. range. Top tips for trustees and I It enables alternative mitigations sponsors such as additional funding, invest Triggers could include “amber light ment strategy de-risking and breaches” resulting in a lower level of DO the right thing contingent assets to be evaluated intervention such as implementing (independence, advice, consistently. negative pledges or putting contingent robustness, proportionality, assets in place, and “red light breaches” I It enables the sponsor to propose integrated approach, audit trail) that would trigger more concrete mitigations, where necessary, that mitigation. DON’T obsess with TPR reflect its own objectives and constraints (e.g. availability of cash, covenant grades and BFO: The key here is to have all the risk appetite, availability of reflect the unique (potentially difficult) negotiations and alternative forms of security) with circumstances of your scheme reach agreement before the problems a good understanding of how the and sponsor being anticipated arise and trustees will assess its proposals. independently of other discussions, DO remember: it’s not trustees’ I As well as meeting the trustees’ such as a triennial valuation. This is so role to discharge TPR’s requirement for an integrated much easier than waiting until a responsibilities (even if TPR approach (I am starting from the funding or covenant shock has tries to put that responsibility viewpoint that they should have occurred, which is usually the most on trustees as under the Draft such a requirement), it also satisfies difficult time to agree adequate Code) but they should be open TPR’s requirements. mitigation. TPR’s concept of to reasonable sponsor ‘contingency planning’ ideally proposals subject to not anticipates this kind of action-focussed compromising the needs of What does monitoring in relation to covenant the scheme nor taking “forward-looking and experience, and also in relation to excessive risks investment and funding experience. action-focused covenant DO practice integrated risk monitoring” look like Matthew Demwell is a Partner in management; consider in practice? Mercer’s Financial Strategy Group, forward-looking and action- which works with trustees and/or focussed covenant monitoring Much covenant monitoring relies on sponsors to determine pensions historical information and is, in a strategy and manage financial risks. sense, out of date as soon as it is What does “integrated risk considered. Forward-looking indicators management” look like in can provide early warning of potential Matthew Demwell problems and can thus enable Partner practice? mitigating action to be taken before it Mercer’s Financial Strategy Group is too late. Such indicators include: [email protected] A detailed treatise on integrated risk www.mercer.com management is beyond the scope of I Management forecasts. this article. However, the comments I Where traded, the price of credit This article reflects Matthew’s personal views below are designed to indicate its key default swaps on the sponsor’s and not necessarily those of Mercer Limited. features. corporate debt. There are many potential ways of I Commercially available indices. mitigating pensions financial risk, I Equity prices (and especially although they can mostly be grouped volatility relative to the market / under the following headings: peers) to the extent one believes I Additional funding from the sponsor. that this reflects all known (including forward-looking) I Covenant enhancement. intelligence. I Investment strategy de-risking. 24 Report 32 OPDU Dealing with Investment Risk Paul McGlone P artner, Aon Hewitt Looking further still, you will find The variety of risks can be broken refinements of this model – and in down in a number of ways, but for the particular, refinements of the “Retain” purposes of this article I have split option, including: them as follows: I Exploit – a deliberate retention to I Operational Risks : those associated gain some advantage with the physical activities such as trading or holding assets I Ignore – a ‘head in the sand’ approach or possibly an unconscious I Financial Risks : those associated retention if the risk is not understood. with the value of what you hold (relative to your liabilities), or being Investment risk is no different, and this able to access that value type of classification provides a helpful framework for considering how we deal with the various risks to which Operational risks investment exposes our pension schemes. It works in the context of both defined The combined assets of UK DB benefit (DB) and defined contribution Pension Schemes total over £1 trillion, (DC) schemes but the focus of this but around 70% of that is in just 200 article is DB investment risk. or so schemes. For those largest schemes, operational risk is very real. As the Pensions Regulator regularly Holding assets directly is fairly reminds us, the extent to which a commonplace, and the range of assets pension scheme can cope with that they hold is wide: gilts, bonds and Scheme Funding – investment risk depends crucially on the equities, but also swaps, options, the new Code of Practice strength of the sponsor. Risk is swaptions, and property to name just a mentioned no fewer than 84 times in few. With that activity comes a range If you search the internet for the draft Code of Practice issued by the of operational risks. Some relate to the articles on managing risk, you Regulator, and perhaps the biggest aim activity of holding the assets (eg will quickly find that there are of the new code is to drive the link dealing with custodians, managing four established ways of dealing between covenant and investment risk. collateral for derivatives, ensuring with risk. They are often quoted Paragraph 115 summarises the position suitable liquidity, stock lending policies as: nicely: etc) while others are more practical (eg I Avoid dealing with data security, legal issues, “If trustees choose to accept fraud prevention, key man risk etc). Of I Reduce investment risk this should be course, those schemes also have the supported by the employer greatest resources to call upon, and I Transfer have teams who will generally decide covenant unless the trustees are which risks to AVOID, REDUCE, I Retain satisfied that the likely risks to RETAIN and so on. members are otherwise The descriptions are pretty appropriately mitigated or are Most schemes, however, have (rightly) self-explanatory, and they apply justifiable. ” delegated those chores to someone to almost all types of risk. else. The remaining 95% of schemes, In that context, the six options for holding 30% of the assets, typically use dealing with risk take on new pooled funds, and the manager deals significance. If the amount of risk that a with most of the operational risks. The sponsor covenant can cope with is effect of this is certainly to REDUCE limited, how do we best decide which the risk (as the issues are being looked risks to avoid, reduce, transfer, retain, after by experts), but it is also a risk exploit or ignore? TRANSFER; if something goes wrong then schemes have paid a professional to look after it, and would A world of risks expect that a combination of their contract and the professional's It’s obvious to anyone who has been professional indemnity (PI) cover involved with pensions or savings that would protect them. any type of investment comes with risks. And different types of investment In practice, however, that PI cover is clearly have different types of risk. seldom called upon. Although Pension schemes also come with the operational risks exist, actual problems added risk that the investments are not are relatively rare in practice. That is in just seeking absolute returns, but stark contrast to financial risk, where returns relative to liabilities. every scheme in the country will have
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suffered, at one time or another, from Some schemes are, unfortunately, still the different shape of the benefits, assets not doing what they expected. in the IGNORE box – blissfully interest rate exposure and longevity ignorant either of the nature of the risk is also reduced as well. issue or the existence of the solution. Financial risk Some are happy to RETAIN it and Other than a PIE exercise, which has a have a full understanding of the modest impact on longevity risk, there Financial Risk is where pension situation. Another group is expecting are only two realistic ways to scheme trustees spend a lot of their to EXPLOIT the risk, as they believe TRANSFER longevity risk away from time - and as any actuary will quickly that yields will rise faster than the your scheme – a bulk annuity or a tell you, you have to consider both market is pricing. For that group, the longevity hedge. The former are sides of the balance sheet: assets and question is how long they maintain available to almost all schemes, but are liabilities. that position, and at what stage the risk not always affordable. The latter, stops being one that they believe they however, is only currently available to Managing liabilities is not considered can profit from. the largest schemes. Fewer than 20 as exciting as managing assets, but longevity hedges have taken place in before we discard them as dull, it is Inflation is a harder risk to deal with, the UK, and up to 2013 the smallest worth remembering two things. First, although the same principles apply – bespoke deal that took place was for liabilities are bigger than assets. And you can lock in to inflation by using £400m of pensioners. That will second, liabilities are more volatile than swaps or pooled funds. But here there change, but for now they remain the assets. What I mean by that last are added complications: preserve of the largest schemes. statement is that the volatility of a long I First, most benefits are not pure duration liability such as a typical RPI – they have caps and floors, active or deferred member is more Asset risk and different caps and floors pre and volatile than the UK equity market. If post retirement, and some of them you don't believe it, take a look – the Moving on to assets, the risk here is are CPI linked rather than RPI, and impact of yield changes when that return-seeking assets do not that cannot be transferred as easily. magnified over many years is huge. deliver what is expected, and that is I Second is the inflation risk usually characterised by short term So let’s start with thinking about the premium – there is a price to pay volatility and long term underper- liabilities, and three risks in particular: for protecting against inflation – an formance. interest rates, inflation and longevity. opportunity cost, if you like, as you How do schemes deal with these risks? expect inflation to be lower than Can we AVOID these risks? Yes, we the rate that you can lock in at. The can - but that involves not holding current inflation risk premium is in return-seeking assets in the first place, Liability risks the region of 0.5% per annum. and most schemes cannot afford to do That means that a scheme is paying that. Interest rate risk is often said to be a something like a 5% premium above measurement risk only – it changes the the expected cost of its benefits to Can we TRANSFER them? Schemes assessed value of the liability but does remove the inflation risk. The question can use derivatives to transfer not change the liability itself. In fact you need to ask is “is that a price downside risk to someone else, but that that's only partly true. If you want to that I'm prepared to pay?” has a cost which can be substantial over secure benefits with an insurer – and the long term (although it can be most schemes do at some stage - then As with interest rates, inflation is both useful short term). interest rate risk is very real. a real and measurement risk. It is real in the sense that we are exposed to The most effective way to deal with Historically the reason that schemes inflation on a year to year basis. The these risks is to REDUCE them did not remove this risk was 'we can't measurement risk comes in the sense through diversification across multiple afford to' – their assets needed to that expectations of future inflation markets – something that every generate return, and if they were drive the liability. And the ways of scheme is already doing to some generating return then they could not dealing with it are also similar to extent. Equities are commonly provide protection as well. That interest rate, with schemes regularly diversified across regional markets, but changed, however, with the use of deciding to TRANSFER, RETAIN or many schemes do not diversify as swaps and leverage in pension schemes, IGNORE it. much across asset classes (eg hedge which allowed schemes to fund, private equity, infrastructure, TRANSFER that risk to someone The other option that exists for property). else. Within a few years the concept inflation, which has a knock on effect had moved from the largest schemes to for other risks, is to REDUCE it Beyond market risk is manager risk - the mid market and now, through through a Pension Increase Exchange the risk that your manager pooled funds, to some of the smallest (PIE) exercise. A PIE exercise converts underperforms. For a typical scheme schemes in the country. There is no certain inflation-linked pensions to flat that selects a single active manager, it longer any reason for most schemes to pensions, and that means a number of feels like a 50/50 chance whether that retain this biggest financial risk – and things happen. First, the inflation manager outperforms the market or yet many schemes do. exposure is reduced. But because of not. In practice that's not far from the
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truth (if any consultant could pick consider how they deal with them. My scheme in full (ie by giving the outperforming managers say 80% of own view is that they have three fiduciary manager a mandate to the time then they would be sitting on choices: Get Busy, Get Simple or Get manage all of the scheme's assets) or in a gold mine), which is why so many Out. part (eg by asking the fiduciary schemes would rather AVOID manager to just manage a specialist part manager risk, by using the many index of the mandate such as emerging trackers out there. Get Busy markets). Either way the principle is the same – it's about paying someone But even if, for example, you only have to Get Busy for you. Schemes that want to deal with all or a 55% chance of picking a winning most of the investment risks tend to manager, that's enough when used in All three of these options are perfectly have big pockets or big problems. the right way. If you walked into a valid, and different options will be Either they are large enough that they casino and bet on a single game with a right for each scheme. Fiduciary can devote the time to investment, or 55% chance of success then you either Management is not the right option they simply cannot afford to not deal win or lose. But if you play all evening for every scheme (despite what some with them. For these schemes, busy with a 55% chance of success then you providers would have you believe), but can mean very busy - not just have a strong chance of coming out neither are the other two. Based on investment sub-committees, but far ahead. Similarly, if you put together a delegate responses at a recent more frequent meetings and suite of managers in a multi-manager conference, the split among schemes nominated trustees to spend a portfolio then that will substantially could be close to a third in each substantial amount of their time on REDUCE the manager risk. category. But regardless of what investment issues. For example, a everyone else is doing, the immediate £2.5bn scheme that recently decided In practice, constructing multi- action for trustees of DB schemes are to 'get busy' has an investment sub- manager portfolios is about much the same: committee chair who spends one day more than just picking winning a week on investment, and a consultant I Think about the various investment managers. It is also about selecting who spends 60-70% of their time just risks that you face managers that do different things. on that one scheme. Different market conditions will favour I Think about how you want to deal different strategies and managers, and with those risks - Avoid, Reduce, portfolio construction should allow for Transfer, Retain, Exploit or Ignore issues such as complementarity of Get Simple I Think about the resources you have managers. The optimal number of at your disposal to deal with managers will be different in different The option to Get Simple typically investment, and the importance of markets based on how much of an applies to schemes that are either small investment risk to your scheme opportunity there is in that market for in absolute terms (in which case active management. For most schemes, getting busy is not viable) or small I Decide which of the three that level of complexity is beyond the relative to the size of their sponsor (in categories you fall into – do you resources they have at their disposal. which case the risk is not a big Get Busy, Get Simple, or Get Out? concern). The investment structures tend to be made up of conventional Paul McGlone Dealing with asset classes (equity, bond, property) and passive managers. The time spent Partner the world of risks Aon Hewitt on investment governance is very low, [email protected] The Aon Hewitt 2012 Mid-Market and is best spent focused on the www.aon.com Survey asked respondents what investment strategy (rather than worried them most about their different asset classes or managers). For pension scheme. The answers were not example, a £20m scheme that recently related to funding, investment, decided to 'Get Simple' spends two to covenant or administration – they were three hours a year on investment issues, about issues such as time, resources, and has put in place a structure that cost and availability of knowledge. In can be managed within that time. other words, it is not just the pension issues that people are concerned about, but the operational challenges of Get Out dealing with them. Genuinely getting out is not really The quick canter through investment possible unless you pass the scheme to risk over the previous pages an insurer. What I mean here is to demonstrates this in detail. Investments delegate the issues to an expert third are complex and numerous – and party – a fiduciary manager. If you more complex and more numerous want or need to Get Busy, but do not than they were even a few years ago. have the resources to do so, then this is Faced with that reality, trustees need to the only option. It can apply to the
27 MARCH OPDU Report 32 2014 ANNUAL PENSION RISK CONFERENCE On target for a smooth journey Tim Banks Managing Director, Pensions Strategies Group at AllianceBernstein
The myths of points (bps) as an annual management Target Date Funds charge, our TDFs charge only 30 bps.
The importance of a good default fund has always been paramount. But But you don’t know it has become a higher-profile issue in when the investor the world of auto-enrolment. More is going to retire people are being enrolled into defined contribution (DC) schemes who have That’s true. None of us really knows never saved into a pension before. And the exact date on which we are going many of these are ‘accidental savers’ – to retire. And yet, that’s exactly what a in other words, they are reluctant and lifestyle fund requires you to estimate unprepared. Indeed, our research 30 or 40 years in advance. With a TDF, shows that more than 90% of people you’re only asked to estimate a 2-3 will delegate their investment decisions, year window in which you might or be guided by others i.e. their retire. That’s usually more than employers. adequate for effectively managing a glidepath to retirement. Given this context, it’s crucial for employers and scheme trustees to And what’s more, if an investor thinks understand the implications of the they might work on another few years, default fund they are selecting for their then they can switch to a fund with a members. The use of target date funds later retirement date range. (TDFs) is becoming increasingly popular as a default strategy, which is especially well-suited to the ‘accidental TDFs don’t consider saver’. There are still, however, a income number of myths being perpetuated that are preventing their proliferation. Again that’s not true – and certainly Here, we try to dispel those myths not in the case of our TDFs. Speaking once and for all. for ourselves, we proactively manage the duration of our funds in the same way as an LDI mandate or actively TDFs deny you access managed bond fund. to open architecture
Untrue. While it is possible to They’re operationally construct a single-manager TDF if you difficult to manage wish, why would you? We know that fund managers are better at some We seem to cope. Which is what things than others. Our TDFs embrace matters, because unlike lifestyle funds, the best of open architecture. TDFs take the burden of switching away from the scheme administrators. But they’re expensive, aren’t they? Aren’t they like NEST uses them. In other words, the supertankers: government-run pension scheme, tricky to change which has a ‘low-cost’ remit. asset allocation?
Put it another way, you don’t see Not true. When a lifestyle fund wants the same criticism levelled against to change one of its underlying diversified growth funds (DGF). But managers or shift the balance of its where DGFs often charge 125 basis portfolio, it can take months or
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sometimes years. Before making a cope with potentially disruptive events switch of one of the underlying in our ever-changing world, and their managers, the manager usually has to clarity of purpose to members make seek the approval of the trustee board, for a smoother journey. And in the and then write out to all fund investors new world of auto enrolment, for approval. providing a default strategy that can cater for ‘accidental savers’ should help In the case of TDFs, to use an analogy, future proof a pension scheme for the because the investor is simply buying long term. a ‘seat on the plane’ and doesn’t have to approve the change of every widget in the engine, they can leave that to the Tim Banks experts and that means they can make Managing Director, a change to any component in the Pensions Strategies Group, fund in a matter of hours. AllianceBernstein. [email protected] www.alliancebernstein.com They’re hard to benchmark
We think benchmarking is actually easier for a TDF than with a lifestyle fund. TDFs offer full transparency of both their dynamic asset allocation and also the underlying assets in each fund.
Are they really proactively managed?
Yes. In fact, TDFs are not only more nimble than lifestyle funds, they can take proactive steps to deal with events that are going on around them – whether that be changes in market sentiment, asset price volatility, financial regulations or government legislation.
Returning to the air travel analogy, while a TDF can manoeuvre the vehicle quickly if it sees a storm on the horizon, the pilot of a lifestyle fund is looking only in the rear-view mirror, and therefore won’t be able to respond to the storm until it’s too late.
Conclusion
We believe target date funds are an ideal strategy for a DC default fund. The combination of their dynamically managed asset allocation throughout the savings journey, their flexibility to
29 MARCH OPDU Report 32 2014 ANNUAL PENSION RISK CONFERENCE Practical legal risks: a review of claims and how to avoid them Robert West Partner Baker & McKenzie LLP
European Court to give further guidance may also be possible. The recent case as to how Barber was to be applied in of MNOPF v Watkins (2013) shows practice and this, allied with the that it is perfectly possible to obtain discovery that equalisation could not rectification of defective documentation readily be achieved retrospectively, has after the event. Indeed, in that case, led to many issues for schemes. the court was prepared to grant rectification on the basis of summary Some of the problems which are judgment, given the clear evidence surfacing now arise from the trend that the relevant documentation did towards buying out benefits with not reflect the true intention of the insurers. In buy-outs, both the trustees trustees at the time. and the insurer will want to be sure that the benefit structure is robust. A However, one of the potential detailed review of scheme rules - and remedies available to trustees - the some of the historical changes to those invocation of the so-called rule in rules - may well bring issues to light Hastings Bass - has been severely which need to be resolved. Similarly, curtailed. Prior case law had shown a scheme auditors now tend to ask willingness on the part of the courts more searching questions about scheme to overturn trustee decisions made in governance - and, in particular, whether ignorance of material facts, where full benefits have been fully equalised for knowledge either would - or even sex discrimination purposes. might - have caused the trustees to act differently. Unfortunately for trustees, We seem to be living in a claims- In many cases, the courts have been the Supreme Court, in the Pitt and orientated society. That trend certainly reluctant to accept the validity of rule Futter cases (2013), has severely manifests itself in pensions. amendments where trustees have failed limited the remedy. In practice, it is to observe the strict requirements now likely to be necessary for a trustee As a pension lawyer, I see many of the power of amendment. to be able to show that the trustee disputes and potential disputes crossing BESTrustees v Stuart (2001) acted in breach of trust - and not my desk. In this article, I look at some established that, if the power of amend- simply in error - before the court will of the problem areas and the light ment prescribes the need for a deed, intervene. This may be particularly which recent cases sheds on them. failure to use a deed will usually restrictive because, if the trustees invalidate the amendment. This may sought and followed professional The first group of claims tends to involve be particularly problematic where advice, it may well be impossible to what I would call structural issues for trustees have adopted the widely-used establish the necessary breach of trust. schemes. Typically, these issues are pre-Pensions Act 1995 approach of In such cases, the only hope may now addressed in the High Court and above. announcing a change but deferring be rectification of the documentation the formal rule amendments to a later or being able to demonstrate that a There are three main problem areas date. Similarly, in Walker Morris simple mistake has been made. that I tend to see confronting trustees. (2009), the court decided that the These skeletons in the closet frequently absence of an actuarial certificate There is ample evidence from the encompass defective attempts to (contrary to the strict requirement Courts that the trend towards equalise schemes after the Barber of the rules), invalidated a series of rule litigation is likely to continue. On 4 decision, defective conversion from amendments spanning nearly 20 years. April 2014, the High Court delivered its defined benefit to defined contri- judgment in an important case relating bution and, more generally, defective But, if there is a problem, all is not to the IBM Pension Plan. Following a attempts to amend the rules. necessarily lost. What is certainly 30 day hearing last year, Warren J ruled needed is careful consideration of all that IBM had been in breach of its In some cases, it may be difficult to of the angles, the taking of advice and duties to its employees in relation to the put things right. Often, the problem working with your insurer. The recent cessation of defined benefit accrual. The arises from what represented quite cases of Premier Foods v RHM ruling, which highlights deficiencies understandable practice at the time. (2012) and Dresser Rand (2014) in the communication processand the Looking, from the vantage point of found, respectively, that a deed of failure to meet the “reasonable 2014, at attempts to equalise benefits intention and a notice to members expectations” of Plan members, may in the immediate aftermath of Barber may be sufficient to effect a change, well cause other completed projects to puts scheme documentation under a depending on the nature of the be subjected to critical scrutiny, with degree of scrutiny which it sometimes scheme’s power of amendment. the potential for costly litigation cannot bear. It took some time for the Putting things right after the event arising as a result.
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Trustees are, of course, also vulnerable employer had played no part in the after taking action in reliance on the to claims from individual members. decision. The Ombudsman also overpayment. The member sold his Typically, these are heard by the criticised the trustees for failing to business, retired and gave lump sums Pensions Ombudsman, but they may, identify relevant considerations (for to his children, all following receipt of on occasion, be heard by the High example, the trustee had cited the the overpayments. The problem was Court (either initially or on appeal). need for consistency across the compounded by the fact that the As an aside, it is interesting to note scheme where no uniform practice member questioned the overpayment that, with effect from 6 April 2014, existed). Finally, the trustees failed to and believed that action had been a member who is unsuccessful with document either their reasoning or taken to adjust his overall benefits. The his claim before the Ombudsman their decision. Ombudsman was satisfied that the will need to obtain leave from the member had acted in good faith. He High Court, in order to appeal. This As a result, the Ombudsman ordered balanced the injustice to the member change in procedure has been the trustees to reconsider whether of having to repay the money against introduced, I believe, in order to to grant increases in 2012 and 2013. the injustice to the administrator of reduce the number of appeals from He also ordered the payment of £200 not being able to recover it. litigants in person who are to Mr Wood for distress and attempting to argue factual, rather inconvenience. There are some useful lessons to be than legal, points on appeal. learned from these member claims. Comparing this with some other It is vital, in particular, that trustees The Ombudsman himself has high- recent Ombudsman decisions, the should follow the correct process lighted many of the main problem award for distress and inconvenience when dealing with both applications areas for pension schemes in terms of was somewhat on the low side, no for benefits and complaints. member claims. Many of these points doubt simply reflecting the facts of the Compliance with all requirements are addressed in the Ombudsman’s case. The Ombudsman also reached a of the rules and internal dispute 2005 publication “How to avoid the very different conclusion in the resolution procedures should be Pensions Ombudsman”. Frankham case (2013). Dr Frankham checked carefully. Medical evidence was given a letter promising certain on ill-health applications should be Particular problem areas are inaccurate pension increases which were reviewed carefully in order to resolve benefit statements, incorrect payments, incorrect and subsequently not paid. any uncertainties. When applying lump the provision of inaccurate inform- The trustees did not respond to sum death benefits, trustees should ation and delays in crediting and Dr Frankham, the plan administrators fully inform themselves of the range switching funds in defined contri- or the Pensions Advisory Service and of potential recipients and should have bution schemes. In many cases, the sent a delayed response to the proper regard to the member’s wishes. claims arise from a failure to process Ombudsman. The Ombudsman Overpayment claims should be handled applications and take decisions in awarded compensation of £1,400 for promptly and unambiguously. accordance with the rules of the distress and inconvenience ( £400 in scheme (notoriously, in relation to ill- relation to the misleading information In summary, all complaints should be health retirements and the application and £1,000 in respect of the trustees’ handled quickly and informatively. of lump sum death benefits). poor communication). Members should be given full reasons for decisions and the outcome of their A graphic illustration arises from the Overpayments of benefits are another complaints in plain and simple very recent Ombudsman case of fertile area for complaints. The tests as language. Involving your professional Wood. The trustees decided in 2011 to whether the individual may retain advisors and your insurer can be key to end the provision of discretionary an overpayment are somewhat similar to both reducing and resisting claims. pension increases and notified in both the High Court and before members accordingly. However, on the Ombudsman. Last year, the Robert West review, the Ombudsman found a Ombudsman considered the case of Partner, Baker & McKenzie LLP number of problems with the way in Mrs McNicholas, who concluded a [email protected] which the decision had been divorce settlement on the strength of www.bakermckenzie.com approached. From a legal perspective, a misquoted statement of her pension the Ombudsman found that the entitlement. As Mrs McNicholas had trustees had unlawfully fettered their acted in reliance on the misquotation future discretion, in breach of the - and her divorce settlement could not requirement under the rules to review be reopened - she was allowed to keep pensions regularly. The rules also an overpayment of nearly £100,000. provided for the discretion to be Similarly, in the John case (2013), a exercisable jointly with the employer, scheme member was allowed to keep but the Ombudsman found that the overpayments amounting to £14,000
31 MARCH OPDU Report 32 2014 ANNUAL PENSION RISK CONFERENCE DC Sector insight Andrew Warwick-Thompson Executive Director for DC, Governance and Administration, The Pensions Regulator
will continue to rise steadily. At some For me the principles are of primary point in the future the DC market importance. If trustees have those in will overtake DB. No one is sure place – the characteristics, the clearly when it will be but with the increase defined governance structure, which in members and assets under is then monitored, good administration, management it’s not surprising that fit and proper people and communi- there is a lot more regulatory attention cation with members, then I believe focused on DC. that you have the tools to secure a good member outcome, which is In the past the regulator has what we are all striving for. highlighted – quite rightly – the amount of money in DB schemes as The first major step in embedding the part of the corporate plan and other code has been the introduction of the communications, but we have tended voluntary governance statement earlier to shy away from highlighting the DC this year. Whilst it’s not compulsory it market in a similar fashion as provides a template which trustees can information was limited. I hope to use to decide how their scheme stacks change this going forward and to up against the code. We expect this highlight this burgeoning sector. You statement to be renewed annually by may have seen our DC Trust trustees, perhaps as part of their annual publication recently. It highlights some reporting cycle. Once completed it of the current trends emerging and should be made available to members illustrates, for example, the average and employers, for example by retirement pot as well as giving more publishing it in the scheme’s annual detail in the breakdown of scheme report and accounts or on its website. As I’m sure you are all aware, this is an membership. I hope to be able to incredibly busy time for the regulator develop this in the future and make it It’s designed specifically to be a self- and I’m here today to give you all an even more informative. audit - something trustees who have insight into some of the many issues the requisite knowledge and under- involving the DC sector that we are We have also now published the standing of their own schemes can currently working on. results of our thematic review on undertake. They can ask themselves: record keeping standards and why it’s “are we doing the right things and do The reason that there is so much focus so important to have accurate data. we have the right features in place?” on the DC landscape is in part due to Record keeping is vitally important as It’s almost like a guide to a discussion the roll out of automatic enrolment. it underpins the running of the entire at a trustee meeting. Additionally it Three million people are now saving scheme. It is only with the right provides a paper trail, so that when the into a workplace pension scheme for records that you can ensure the right regulator asks what they are doing the first time – an incredible result benefits are being paid to the right they can easily demonstrate what when you stop to think about it - and members at the right time. Our actions have been taken. with many more millions still to go thematic review shows that there is through the process it means that there still a lot of work to do to ensure that The aim of the voluntary governance will be much more focus on DC schemes are adhering to their record statement is to help drive up standards schemes which most of these people keeping obligations. and it will help trustees to focus on will be enrolled into. Confidence in the their scheme, ensure any problems are marketplace is vital. We need to ensure The main focus for this year is to “bed identified and an action plan is drawn that these people have confidence in down” the code. The consultation up to deal with it. It also helps to their schemes and that these are run in process started back in 2011 – a long inform members of the health of accordance with our DC code, time before I joined the regulator. It’s their scheme and provides them with ensuring good member outcomes. very much a product of consultation. the confidence that any potential Our ultimate goal was to create clear problems are clearly being handled It also means that the DC market is guidance on what would create a in an appropriate and timely manner starting to catch up to DB in terms of “good member outcome”. After a by the trustee. assets. At the moment there are over great deal of consultation we turned £1 trillion of assets in DB whereas DC those responses into six principles and Although there are some elements of currently stands at around £400 31 quality features that are now the DC code which are prescriptive, billion, across DC occupational, encapsulated in the code of practice because they are underpinned by legal hybrid and workplace personal and guidance, which we published last requirements, an awful lot of the code pension schemes. But that number November. is about good/best practice and what
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it looks like. You might have a slightly Again, it was generally received London Police and DWP. It is through different approach and I want to positively. What we are encouraging, the concerted efforts of everyone that emphasise that there is room for this. on a voluntary basis, is for master trusts we can start to take a range of actions Providing you are complying with the to go through this process if they want to curtail some of the culprits’ law and providing you can evidence us to signpost a particular master trust undesirable activities. Action Fraud still that your scheme exhibits the 31 - like we do with Nest at the remains the single point of contact if quality features then we are happy. No moment. Trusts should see this as a people need to report suspicions or two schemes are the same and we are commercial incentive to seek concerns. Investigations are very much trying to create a situation where all independent assurance. We also hope underway although because of the schemes are focused on best practice it will act as a barrier to entry for less nature of these cases we are often and will be able to improve retirement viable master trust propositions. unable to go into the details as much incomes for their members. as we would like. The regulator is also working on So that’s the purpose of our voluntary additional assurance frameworks, for At the end of last year we held an governance statement. The response so example we are working with the industry summit to work through far from trustees has been broadly industry and stakeholders on a possible some of these challenges and discuss positive. We have had some criticism assurance framework for GPPs and we possible solutions. We will continue to about its usability and whether are working with PASA on work with industry stakeholders on trustees are really going to do this accreditation for administrators. I hope next steps and possible responses. themselves or get their advisers to be able to update you more about involved. I strongly hope that trustees this work in the months ahead. Going forward we will be focusing on will engage with this themselves. I “strategic” cases but I would continue think if you are a trustee you should So how does this all fit together? I see to urge everyone to be aware and have sufficient knowledge and under- it as a layered pyramid. Right at the vigilant. We have advice leaflets on our standing about your scheme and that base is pensions law which legally website and we are going to be this shouldn’t prove problematic for underpins all of this. We will then have launching an updated “scorpion” you. minimum quality standards when they campaign later on in the year. are announced by the DWP which Moving on to master trusts. These are will add another layer of law. After that Well that is a brief tour of current DC going to play a key role in the new we then have our voluntary issues that the regulator is involved DC landscape and should be able to governance statement which will with. Embedding the code is the key deliver good member outcomes bridge the minimum standards and area of focus for this year and I think through economies of scale, professional best practice. Above that we have our code and guidance have produced governance and the consolidation of master trust and other assurance a strong foundation for trustees, resources. There are potential risks frameworks that we’re working on focussing them on putting in place a associated with conflicts of interest, within the “educate and enable” solid structure which will ensure good complex investment structures and a space. At the very top of the pyramid outcomes for their members. potential lack of independent is a section where, should you refuse oversight in some as well as an absence to be educated and enabled then we of market entry barriers. Added to this will enforce. Andrew Warwick-Thompson we have seen a huge rise in these trusts Executive Director for DC, coming into the market – we believe One area that I know continues to Governance and Administration, that this number is now over 70, concern many here is that of pension The Pensions Regulator which we consider to be far too high liberation. We appreciate that trustees awarwick-thompson@ if we want good economies of scale and administrators can face a difficult thepensionsregulator.gov.uk and quality schemes. balancing act. Trustees have a duty to www.thepensionsregulator.gov.uk carry out members’ transfer requests In order to deal with our concerns we where the legislative requirements are have been working in conjunction met. Many trustees feel they can only with the ICAEW on producing a delay for so long due to the risk of voluntary independent assurance complaints from members to the framework. Designed around our DC Pensions Ombudsman. quality features, our master trust assurance framework focuses on both As I have said in the past we can only the areas specific to master trusts as help to prevent this activity by joining well as wider governance issues. This forces with a number of agencies such was subject to a public consultation as the FCA, HMRC, SFO, National which closed at the end of last year. Crime Agency, Action Fraud, City of
33 Report 32 OPDU Guide to OPDU Elite Policy wording Pension Trustee Liability Insurance
Who is covered? What is covered? What is included in G Past, present and future trustees The Policy will pay for loss resulting defence costs? and employees from a wrongful act, specifically on G All reasonable fees, costs and expenses G A corporate trustee company behalf of: that are incurred to defend or appeal G G The sponsoring employer company The trustees or employees for loss a claim G The pension scheme which they are legally obligated G Provision for full advancement of G Lawful spouses, domestic and civil to pay defence costs G partners, estates, heirs or legal The sponsoring employer company G Option to include the provision to represent atives of trustees or employees or pension scheme for all loss incur emergency defence costs if in the event of death, incapacity, resulting from indemnification required insolvency or bankruptcy G The pension scheme for all loss G Any other natural person or entity which has been suffered as a result Additional features of acting as trustee as attached by of exoneration the Policy: G The sponsoring employer company specific written endorsement. G The policy cannot be cancelled or corporate trustee company for without the insured parties’ all loss that they are legally obligated Who is included in the agreement (other than in the case to pay. definition of trustee? of non-payment of premium) G Any natural person, including a G A discovery period of 12 months director or officer of a corporate What wrongful acts are is available should either the insurer trustee company, who is or has covered? or insured parties refuse to renew been appointed as a trustee, The Policy offers protection against this policy a comprehensive range of allegations, G including a constructive trustee including: Ability to apply different retention G The Policy also allows for any amounts depending on whether G Breach of trust, duty or statutory other natural person or entity, provision the deductible is to be paid by the including a director or officer of sponsoring employer company or G Negligence that entity, to be specifically G Administrative errors the pension scheme itself included by written endorsement. G No deductible applies where G Wrongful omissions G Misstatements exoneration has been granted or the loss is the personal liability of Who is included in the G Misleading statements definition of employee? G Maladministration a trustee or employee G Overall authority for the policy can Any person providing services to the G Financial loss resulting from damage, pension scheme whilst in the employ- loss or destruction of pension scheme be granted to either the sponsoring ment of the sponsoring employer documents. employer company or to the trustee(s), company, the corporate trustee company, who then agree to act on behalf of or the pension scheme, including: each and every other insured party G Directors and officers What is included in the G definition of loss? Committee and/or Board members The Policy also responds G Administrators G Damages G to a number of changing G Pension scheme managers Judgments circumstances: G G Settlements Internal dispute managers. G Continuous cover for the remainder G Awards (including distress awards or compensation as determined by of the policy period in the event What constitutes a claim? that the sponsoring employer G A written demand alleging a the various pension regulatory bodies) G company: wrongful act (or, if no claim is being Defence costs G G merges with or consolidates into brought, the Trustee must become Costs (up to a specified sub-limit) incurred in relation to a fact-finding another entity (any subsequent aware of the Wrongful Act during the name changes to the sponsoring policy period and must have been investigation or proceeding (i.e. where there is not requirement for employer company and or pension advised that a claim could be brought) scheme must be advised) G an allegation of a wrongful act) by A civil, ombudsman, arbitral G enters administration the various pension regulatory bodies proceeding or mediation G commences wind-up of a pension G G Costs (up to a specified sub-limit) A criminal prosecution scheme G for expenses incurred in taking An administrative or regulatory G Automatic cover is granted for a action to prevent, limit or mitigate proceeding new or additional pension scheme G exposure to an actual or potential An official investigation whose total assets are 10% or less G claim. A contribution notice as issued by of the combined total assets being the Pensions Regulator under the covered (subject to endorsement). Pensions Act 2004 Schemes in excess of this have G An extradition proceeding. cover for a period of 60 days, after
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which cover must be specifically Optional Extensions OPDU Services agreed by the insurer include: The Advisory Service G Where a scheme has been wound G Court Application Costs (sub-limit Provides trustees and administrators up cover shall include those who as specified on request) with general guidance and advice on were insured, or would have been - Sometimes issues arise where the matters affecting the day-to-day admin- insured, at the time for wrongful trustees are advised to seek directions istration of the pension fund. It aims acts committed prior to the date or a declaration from the court as to facilitate good governance. The of such cessation, with the potential to future conduct of matters or confidential advice line is staffed by to provide an extended period of the interpretation of trust documents. lawyers and provides access to The cover of up to 15 years Normally several interests have to Advisory Panel Experts where be represented by separate lawyers appropriate. Extensions included: and all parties costs have to be met G Civil fines and penalties, where out of the pension scheme’s assets. The Advisory Service is complementary insurable The Court Application Costs to the services provided by members’ G Retirement cover: lifetime for Extension, reimburses costs ordered existing professional advisers. named “Users” - During a pension to be paid out of the pension scheme. scheme’s membershipof OPDU, G Third Party Service Provider The Claims Service all retired trustees and administrators Pursuit cover for the purpose of Provides the best possible claims remain covered. If a pension scheme establishing a breach of professional handling service through a team of leaves membership, retired trustees duty of care (sublimit £100,000). in-house barristers, solicitors and pension and retired named administrators G Any One Claim – This cover will professionals who deal with claims in have insurance cover for their convert the aggregate limit of sympathetic and professional manner. lifetime should no alternative liability under the policy to an They are experienced in managing cover already be provided. This Any One Claim basis. complex, sensitive disputes with due gives individuals valuable peace of regard to the adverse publicity that mind in their retirement when Key Policy Exclusions: litigation can attract. they no longer have any say in G Fraud or dishonesty or intentional whether their pension fund should breach of law - Where established Trustee Risk Management purchase insurance cover by judgment or other final adjudic Provides a risk-based approach enabling G £ Costs (sub-limit 1m) incurred in ation or by formal written admission trustees to focus on the key risks relation to a fact-finding investigation G Personal profit or advantage requiring appropriate internal controls or proceeding (i.e. where there is G Pollution - However defence costs to comply with the latest legislation no requirement for an allegation included up to £1m for a claim and regulation. Topical one-day of a wrongful act) by the various brought seminars are held in conjunction with pension regulatory bodies G Direct bodily injury or property ACE European Group, The Pensions G Brand damage and reputation damage Regulator and other leading pension £ protection (sub-limit 100,000) G Failure to fund / procure funds / practitioners. TRM was established to G Cover for extradition proceedings collect contributions (save where achieve OPDU’s aim of promoting G Prosecution costs this is a Wrongful Act of the Trustee) good governance. Its services are G Emergency costs provision (sub G North American litigation. However, available to all pension funds regardless £ limit 100,000) where urgency with OPDU’s agreement, the of whether they are members of OPDU. dictates that OPDU or insurer’s exclusion shall not apply to North consent for incurring costs cannot American litigation in respect of Other facilities: be obtained Wrongful Acts of the Insured OPDU can provide access to a G Employee benefit programmes undertaken outside the U.S. or number of other insurance facilities, and/or employee share ownership Canada in respect of the Scheme for example: winding-up insurance; programmes which are governed exclusively by crime and fidelity insurance; cover G Costs incurred in replacing or English Law. for trustees following mergers, buy- restoring pension scheme documents out and protection against costs risks in the event of their loss, damage £ inherent in pursuing claims for or destruction (sublimit 100,000) damages against third parties such as G Theft of pension scheme assets fund managers and other service providers. If you have novel insurance requirements we can work with you to seek to develop a policy to meet your needs.
35 Members www.opdu.com
A. Bilbrough & Co Ltd Charter Central Services Ltd Inspec Fine Chemicals Ltd P&O Steam Navigation The Fleetwood Fishermen’s Abacus Holdings Ltd Church of Scotland Intercontinental Hotels Company Pension Scheme Adas Holdings Ltd CN Group Ltd Group plc Panasonic System Networks The Glenmorangie Admin Re UK Ltd Coats Holdings Ltd IPA Portable Pension Plan Company (UK) Ltd Company plc Advanced Technologies Conservative & Unionist Isola Werke UK Limited Parity Group plc The Goldsmiths Company (Cambridge) Ltd Agents J Sainsbury plc Pell Frischmann The Hull Fish Merchants Aggregate Industries Continental UK Group Jabil Circuit UK Ltd Consultants Ltd Protection Association Agility Logistics Ltd Holdings Ltd James Fisher & Sons plc Perivale-Gutermann Ltd Pension Scheme Airbus Defence and Coventry Building Society John Laing plc Philips Electronics (UK) Ltd The Industrial Dwellings Space Limited Cumberland Building Society Jones Lang LaSalle PNPF Trust Co Ltd Society 1885 Ltd Airflow Developments Ltd Daily Mail & General Trust plc Kingfisher plc Portman Settled Estates Ltd The Institute of Marine Alfred Bagnall & Sons Ltd Damovo UK Pension Plan KLM Royal Dutch Airlines Ltd PricewaterhouseCoopers Engineering Science Allied London Properties De La Rue plc Lafarge Tarmac LLP – (DH&S) & Technology Management Ltd Dechert LLP Landmarc Support PricewaterhouseCoopers The IPA Portable Pension Plan American Embassy Dixons Group plc Services Ltd LLP – (PwC Fund) The Ironmongers’ Company Andrews & Partners Ltd Downlands Liability Lehman Brothers Pension Protega Coatings Ltd The Joint Industry Board Antalis McNaughton Ltd Management Ltd Scheme PWS Holdings plc The Law Society AP Racing Ltd Dr Martens Airwair Leyland Bus Trustees Ltd RAC plc The Leicester and County ARCO Ltd Group Limited Life Assurance Holding Radiocentre Convalescent Homes Armstrong Group Pension DSSR Corporation Railways Pension Trustee Society Pension Scheme Scheme DT Assembly & Test-Europe Ltd Lloyd’s Register Co Ltd The Mayflower Corporation plc Arqiva Ltd Du Bois Limited Retirement Lookers plc Rank Leisure Holdings plc The Oriental Club ASSA ABLOY Ltd Benefits Scheme No.2 Lovells and Lovells Services Rayovac Europe Ltd The Pensions Trust Assa Ltd Pension & Life Dynacast International Ltd Lummus Consultants Really Useful Theatres The Retail Motor Industry Assurance Scheme East London Bus & Coach International Ltd. Group Ltd Federation Ltd Association of British Company Ltd Maersk Line (UK) Ltd Reliance Security Group plc The Royal Households and Travel Agents E H Mundy Holdings Ltd Maersk Oil North Sea UK Ltd Renew Holdings plc The Privy Purse AstraZeneca plc Eisai Europe Ltd Mansell plc Rexam plc The Royal Society Atos IT Services UK Ltd Electricity Pension Services Ltd Marlon Management Richard Irvin & Sons Ltd The Saddlers’ Company Aveva Solution Ltd Electrolux plc Services Ltd Royal Air Force Benevolent The Salters’ Company Axiom Consulting Ltd Energy Institute Martin & Son, Edinburgh Ltd Fund The Scottish Trawler BAA plc EPC United Kingdom plc May Gurney Integrated Royal Institution of Great Fishermen ’s Pension BAE SYSTEMS plc Equiniti Ltd Services plc Britain Scheme BALPA Euler Hermes UK McGraw-Hill International Saipem Ltd The Shipowners Protection Ltd Bank of New York Mellon Evonik Degussa UK (UK) Ltd Samsung Electronics UK Ltd The Stamford Group Barnardo’s Holdings Ltd Merchant Investors Assurance Sara Lee (UK) Holdings Ltd Retirement Benefits Scheme Battenfeld Gloucester FirstGroup plc Co. 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