Life Gets Serious For UK Pension Trustees As New Pensions Legislation Comes Into Force

This article was contributed by Martyn Shaw of MacRoberts, a firm of solicitors in the UK. Being put in a position of trust carries a moral obligation to know what you are supposed to do. The more complicated the tasks,

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This article was contributed by Martyn Shaw of MacRoberts, a firm of solicitors in the UK.

Being put in a position of trust carries a moral obligation to know what you are supposed to do. The more complicated the tasks, the greater the burden of that obligation.

But if the law also actively specifies what that knowledge must be, with sanctions and penalties for those not having it, then you are really going to have to start getting to grips with the role.

Come Spring, the Pensions Act 2004 comes into force. Implementation is in stages. The first in April will see, among other provisions, the existing Occupational Pensions Regulatory Authority replaced by the new Pensions Regulator with stronger powers, and the setting in motion of the Pension Protection Fund’s machinery to provide at least some comfort for members of occupational schemes that go bust.

The Pensions Regulator’s objectives, expressly set out in the Act, include not only protecting the benefits of schemes’ members but also “to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund”. As well as taking over OPRA’s powers, it will have new ones to make others play their full part in this. Which is where a scheme’s trustees come in.

They, as well as the employer and scheme advisers, will individually risk fines if they neglect, never mind refuse, to provide information requested by the Pensions Regulator. They will also have a statutory obligation to report to it any breaches of the law they come across, with civil penalties of up to 5,000 for any individual failing to do so.

At the same time, the excuse that they didn’t understand what was happening or weren’t aware that it was wrong will substantially disappear. By April next year the Government intends to have in place, as well as the requirement for at least a third of a scheme’s trustees to be nominated by members, the Act’s requirements for the knowledge and understanding trustees must have.

The Pensions Regulator is due by then to issue a code of practice on precisely what this should be. Essentially, however, each individual will have to be fully conversant with the scheme’s trust deed and rules, its statement of investment principles and any other policy document adopted by the trustees for running the scheme, and must also have a knowledge and understanding of pensions and trust law and the principles of pension scheme investment and funding that is appropriate to allow the individual properly to exercise his functions as trustee. That applies both to member trustees and those appointed by employers.

For those trustees subsequently found not up to the task, the Pensions Regulator will have the power to suspend them and even ban them from taking up the role again. Any member, as well as the employer and trustees, will also be able to ask the Pensions Regulator to appoint a trustee, at the employer’s or scheme’s expense.

Trustees will have to come quickly up to speed or be more willing actively to ask questions and seek expert support from advisers and it is likely that the practice of appointing professional trustees will continue to increase in popularity. The Pensions Regulator will take a dim view of any scheme where the trustees are found not to have fulfilled their responsibilities and it is in all parties’ interests, including employers, to have well administered schemes with properly educated and informed trustees.

As is currently the case, trustees will have to act in best interests of scheme beneficiaries, including when considering whether to refund any surplus funds to employers or to alter their scheme in a way that might be beneficial to the employer. In addition to this obligation on trustees, from 6 April, the Pensions Regulator will have the power to review and even order restitution to the scheme if it still believes a transaction was not in the interests of scheme beneficiaries.

This “moral hazard” will, by its nature, be retrospective. It will therefore have, for example, a knock-on effect on corporate deals where purchasers are likely to look to warranties and even indemnities, in case actions of the previous owners are later jumped on and reversed by the Pensions Regulator.

One way to prepare for this, and the other provisions of the Pensions Act, is to have trustees who are well-informed, challenging and on top of what they have to do – and so are also able to confirm that whatever is done by the employer is right and reasonable. While April 2006 is still some way off, the sooner everyone learns to play their part properly, the better.

Martyn Shaw is a senior associate with MacRoberts, specialising in pensions law.