Updated and streamlined RATS rules came into force on 31 December 2015. Whilst these on the whole represent a welcome development, trustees should nonetheless think carefully about how to operate RATS in light of these.
A Retirement Annuity Trust Scheme ("RATS") is a type of Guernsey domestic personal pension scheme. These pension schemes must comply with various requirements, including, in cases where the member is a Guernsey resident or has made Guernsey tax-relieved contributions, the requirements set out in rules published by the Guernsey Financial Services Commission (the "RATS Rules"). The RATS Rules have from 31 December 2015 been replaced with new rules which are intended to be more streamlined and help providers offer a more flexible and cost effective product. Nicholas Donnithorne and Anna Gray of Babbé consider some of the key changes.
Summary of changes under new RATS rules from the position under the old RATS rules
This is a summary only for illustrative purposes
- Advice at outset: no longer necessary to assess suitability of product or request a copy of the advice to the member on this, but existing regulatory laws including rules and codes of conduct requiring advice to retail clients on controlled investments or long term insurance products to be given by a Financial Adviser continue to apply. The RATS Rules no longer require trustees to give a specified statement to members regarding investment and mortality risk. However, we suggest it is still helpful for trustees to consider making such a statement.
- Investment options: 3 investment approaches are now possible. (1) Member self-directs investments with trustees having no role; (2) investments are made on the advice of an appropriate advisor from a range of investment types listed in the RATS Rules; or (3) the traditional approach with trustees satisfying themselves of the suitability of investments and investment strategy. There are different formalities for each approach.
- Assessment of the level of drawdown payment for RATS in payment: broadly similar requirements apply, but the wording has subtly changed. Trustees should familiarise themselves with the new requirements.
- Fee commission/disclosure: broadly the same requirements, but wording is more streamlined. There is no express exclusion of arm's length transactions where fees are not shared with any other party.
- Transfers from defined benefit pension schemes: same requirements, but trustees must also ask members to sign to confirm they understand the consequences of such transfer.
- Gearing: same requirements, but trustees must also ask members to sign to confirm they understand the implications of borrowing.
- Annual statement to members on financial position of RATS: same requirements.
- Advertising and promotions: same requirements.
- Compliance with income tax requirements: same requirements.
More streamlined: A number of prescriptive provisions have been removed and/or streamlined. For example, it is no longer mandatory to assess the suitability of a RATS product for members and/or obtain a copy of the advice to members on this. However, other existing requirements in regulatory laws and also existing rules and codes of conduct on advice to retail clients on controlled investments or long term insurance products to be given by a financial adviser still apply.
The change to the wording on disclosure of charges and commission payments is interesting. Broadly, the same requirements apply. Whilst the new provisions are more streamlined, the burden on trustees has not been reduced. Commission is a complex area, as is illustrated by the recent consultation in the UK, which is currently seeking to ban member-borne commission altogether in relation to certain UK pension schemes. This consultation highlights the difficulty that some commission is hidden and not fed directly through the pension scheme, so trustees may not be aware of such payments. RATS trustees may wish to seek advice on what the RATS Rules commission requirements cover.
Evolution of existing requirements: Certain of the existing requirements remain in place but have been updated to reflect the changing world and practice in pensions and are by and large sensible developments. For example, the rules when members take transfers from defined benefit pension schemes in excess of £30,000 or wish to borrow funds continue to apply, but in addition, the RATS Rules require trustees to ask the member to sign a statement confirming they understand the impact of what is proposed.
New approach - investments: The RATS Rules outline a new 3-tier approach to investment of member benefits, envisaging that when a trustee accepts trusteeship of a RATS or admits a new member, the way investments will be managed will be agreed to fall into one of three approaches:
1) Entirely member-directed;
2) Investments from a specified range of investment types set out in the RATS Rule, made only with the advice of an appropriate financial adviser; or
3) Traditional approach whereby trustees bear the overall responsibility for investments and their suitability.
The introduction of options 1 and 2 creates the possibility of a structure where trustees have no or less responsibility and therefore liability in relation to investment decisions than under the traditional approach. The intention is that this may allow trustees to control their risk and offer more cost-effective products. So, for example, a sophisticated member who is happy to assume responsibility may prefer to make investment decisions rather than trustees. Previously, whilst trustees in such cases may have invested pension scheme assets in accordance with a member's instructions, they typically nonetheless have ultimate responsibility for investment decisions and could be criticised for failing to intervene where investment decisions turn out to be inappropriate.
However, even though a reduced role should mean that trustees have less potential liability, any trustee offering these new innovations should consider how to do so carefully:
- Do the scheme rules reflect the investment approach required? Trustees should check these carefully. For example, they might think the investment decisions are fully member-directed, but if the rules in fact do not reflect this, there is a risk that trustees may be criticised for not intervening where they consider investments inappropriate or no longer appropriate.
- Where the pension scheme has more than one member, extra care should be taken to ensure the drafting of the scheme rules reflects who has investment discretion. From an administrative perspective too, if different approaches are taken for different members, trustees should ensure their procedures are tailored accordingly.
- Can an existing pension scheme change the investment powers?
This is a difficult question:
- Clearly a new scheme can be set up with the investment powers intended in that case. The position is less clear for existing schemes.
- It is not clear, but the RATS Rules envisage that the investment approach is established when a pension scheme is established or the member joins, so do not envisage the possibility of change at a later date.
- For existing pension schemes, as a matter of trust law, it may not be possible to change the investment powers this way. This will depend on a number of factors, including the rules in question, and we recommend advice is sought on a case by case basis.
- If amendment to an existing scheme is not possible, the member may be able to transfer to a new pension scheme which has been set up with the appropriate investment powers. However, tax advice is essential, especially if UK tax-relieved funds are involved.
- Does option 1 mean that trustees can entirely evade all
liability should the member's investment decision lead to a
huge loss? This is a complex question, on which trustees may wish
to seek further advice
- There must be a strong argument if the loss was caused only by the member's decision to make that particular investment, that the trustee is not responsible for this, and Guernsey trust law supports this.
- Trustees may nonetheless wish to check that communications to members are very clear and manage member's expectations on this point. This is required by the RATS Rules in any event. Trustees should also note that their obligations relating to the making of investments continue to apply.
- Analogy with other jurisdictions as to best practice may also be helpful. We note that the UK's Financial Conduct Authority has recently written to providers of UK self-invested personal pensions raising concerns on this point and suggesting such providers have procedures in place to monitor high risk and unusual investments. In particular, they note the risk of financial crime and member detriment, as well as the reputational risk to the provider if it facilitates unsuitable investments. It remains to be seen what approach the GFSC and the new Channel Islands Financial Ombudsman ("CIFO") will take where complaints are made (and, particularly, if a recent decision of the UK Pensions Ombudsman on a complaint concerning trustees' responsibilities in this area is followed by the CIFO), and how market practice develops in this area.
- In light of the issues set out above, it may be wise for trustees offering the new investment approaches to obtain a contractual indemnity from members to cover any potential liability in the event of investment losses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.