With the focus on workplace pensions and the multitude of auto-enrolment solutions available, many companies are adopting a 'look forward' approach to pension provision with detailed project planning taking place well in advance of 'staging dates'. But if auto-enrolment is the 'main picture presentation' is anyone paying attention to the trailer?
As you will read elsewhere in this edition, a focus on auto-enrolment is essential for all employers (whether small or large) and trustees. But where employer and trustee roles are interchangeable (as is often the case with smaller company pension schemes) this focus can be to the detriment of small 'legacy' pension arrangements which can be just as complex and time consuming to administer as a qualifying workplace pension scheme is to implement.
Large Defined Benefit (DB) schemes have often been administered by dedicated in-house teams or by employee benefit consultancies and should be in good administrative order. But, to continue the cinematic theme of this article, would smaller DB arrangements be quite so comely if held up for scrutiny on the silver screen?
A small DB arrangement is more likely to have been administered on an informal basis. This could well lead to future difficulties for trustees particularly if problems arise for a small, independently owned business which is simultaneously wrestling with auto-enrolment.
For these companies, one individual (fulfilling multiple roles as managing director, finance director, human resource manager and trustee) may be responsible for a legacy scheme with a modest number of deferred and pensioner members.
This individual may have considered the difficulties of administering a small DB scheme as a distraction from the seemingly more pressing pensions related task of auto-enrolment. Perhaps even more likely, the small business owner may have been fully occupied in the more prosaic task of keeping the company trading through a difficult economic climate.
'Thanks Mr Washington'
The Pensions Regulator expects all trustees to have sufficient 'trustee knowledge and understanding' (TKU) in order to discharge their responsibilities. Trustee training has been an industry 'buzz word' for many years now and, fortunately, the online training system accessed via the Pensions Regulator's website is infinitely less dangerous than Denzel Washington's crime ridden streets of LA in the 2001 cop classic, Training Day.
Small company decision makers will find themselves in a very different position today than when they first became a trustee (often virtually by default) of their DB scheme. Some lay trustees may understandably feel uncomfortable in meeting the Pensions Regulator's expectation that trustees have sufficient TKU in order to hold professional advisers to account.
Trustees will be expected to make decisions in what is likely to be a very different pensions landscape to that which existed at the date of appointment.
These changes are most evident in an investment context and trustee decision- making is particularly important for schemes which are closing down (or, to adopt the usual pensions terminology, winding up). With little likelihood of current investment surpluses, many small DB arrangements will need to seek support from the Pension Protection Fund (PPF) or the Financial Assistance Scheme (FAS). Progressing a successful application through an assessment period is a complex and time consuming process where lay trustees often require detailed support in dealing with issues such as Section 75 debt.
"You talkin' to me?"
Linking Robert De Niro's Taxi Driver with the Pensions Regulator might be a cinematic stretch but there is no doubt that engagement between the Regulator and small DB trustees is increasing. In order to encourage better administration and swifter (and therefore more cost effective) wind ups, various regulator driven themes can be identified as follows.
- Schemes already winding up should complete 'key activities' (including debt on employer calculations, securing pensioner benefits and obtaining buyout quotations) within two years. The regulator is keen to ensure legacy DB arrangements are wound up swiftly, encouraging a pragmatic and proportionate approach. The use of detailed project plans and prioritisation of key tasks (such as the reconciliation of Guaranteed Minimum Pensions (GMP) liabilities) is encouraged.
- Good administration is paramount. Deferred and pensioner members must be contactable especially when (often in relation to a PPF assessment period) a benefit audit is required in order to verify that scheme members will receive (or, in the case of pensioners, are already receiving) the correct pension benefit.
- Accurate record keeping is currently the subject of a Pensions Regulator 'themed' review with around 250 schemes being analysed and trustees asked to demonstrate that data standards, processes and controls are in place.
- Communication with members and with the Regulator is key. Regular updates to the Pensions Regulator must cover progress made with key tasks as well as performance against agreed budgets for schemes in a PPF assessment period.
Don't drop your popcorn
The Pensions Regulator has numerous ways in which it can influence a small DB legacy scheme and this can present substantial risks to a trustee and the scheme's sponsoring employer. As well as fines imposed on an individual trustee of up to £5,000, the reputational damage that can be inflicted on an employer may be significant. In 2012, the regulator banned three trustees for serious and persistent regulatory breaches in connection with the Hugh Mackay retirement benefits scheme, identifying each trustee by name. High visibility public accountability seems to be the new strategy for Government departments as well as regulators, as demonstrated by the recent 'naming and shaming' of individuals by HMRC for tax misdemeanors.
Where's the emergency exit ?
One strategy to accelerate the wind up of a small DB pension arrangement or put the administration of an ongoing scheme onto a sound footing (thereby reducing the likelihood of regulator involvement) is for trustees to seek support from specialist advisors in the employee benefit consultancy field.
An alternative approach, is to consider whether trustee capability more generally can be enhanced by the appointment of a co-trustee. By using the company and scheme specific knowledge that the lay trustees of small DB arrangements provide and complementing this with the skills and wider experience of a corporate trustee, a synergy between the skills of a corporate trustee and the knowledge of a lay trustee can be achieved.
Smith & Williamson Trust Corporation Limited's reputation in the small DB arena owes much to this collective approach to trusteeship. To return to the theme of the article, whilst the importance of dealing with legacy pension issues (DB or otherwise) can easily be seen as incidental to the auto- enrolment feature, lay trustees should ensure that the DB 'trailer' doesn't derail the main feature.
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.
