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Trustees and Pensions Professionals: impact of economic pressures on pension schemes

In its Annual Report and Accounts 2009/2010 the Pensions Regulator referred to the ‘huge pressures’ being put on private pensions due to the economic climate. Over the last year the Regulator has suspended more than 100 trustees of defined contribution pension schemes, the highest ever number, to protect over £30 million of assets. In its annual report published this week, the Pensions Ombudsman has also reported an increase in the number of complaints.

The Regulator’s Report

The principal legal requirement for trustees is to ensure that the assets invested on behalf of pensioners are sufficient to continue paying the fund’s pension commitments for the foreseeable future. The Pensions Regulator believes that an increasing number of employers under economic pressure may be trying to avoid their commitments, thereby putting at risk the fund’s ability to meet those commitments. For example, the regulator is looking at an unprecedented number of complex cases – 30 anti-avoidance cases were being investigated at the end of March 2010 alone – and reporting a further increase in potential avoidance activity. There has also been a record level of suspensions of trustees of defined benefit schemes, in order to protect over £30 million of assets, and steps have been taken to recover over £35 million of misappropriated assets.

The Annual Report emphasises the difficulty of the pension scheme trustee’s role, but it also demonstrates how critical it is that trustees keep their knowledge and training up to date to ensure that the employer is not taking them for a ride. Crucial areas to keep under review include: understanding the employer’s legal obligations; measuring the employer’s covenant; understanding a group’s legal structure; the employer’s financial position; the value of alternative forms of scheme security; whether and when to appoint external covenant assessors; and what action to take if the essential regular monitoring of the pension fund’s position indicates a potential problem. Legal requirements for record-keeping have also increased and this aspect of the trustee’s role should not be taken lightly either. A recent review found that only 19% of schemes surveyed had checked that they had all the fundamental common data required.

The Pensions Regulator is undoubtedly becoming more aggressive in pursuit of dilatory trustees. Its focus is primarily on defined benefit schemes, which accounted for over 2,000 of the 2,500 cases considered during 2009/2010. However as most new fund members are enrolled in defined contribution schemes the Regulator is increasingly concentrating on the risks applying to such schemes.

The Pensions Ombudsman’s Report

The PO also released its latest Annual Report. The number of cases investigated during the year 2009/2010 rose to 950 (out of 3,632 new written enquiries), an increase of 22% over the previous year, supporting the Regulator's view that the economic climate is causing increasing problems for schemes.

The largest number of complaints related to ill-health pensions, in part due to the scope for conflicting medical advice. Complaints concerning misleading pensions advice, the category of most concern to Insurers, were not far behind, rising to 77 complaints, 9% of the total, from 65 the previous year. Whilst most misselling issues are handled by the Financial Services Authority rather than the Pensions Ombudsman, where advice related to Additional Voluntary Contributions to occupational pensions schemes, the FSA has no jurisdiction and it is left to the Pensions Ombudsman to investigate. Other areas to show increases in the number of complaints include payments to spouses and dependants and early retirement benefits.

The Pensions Ombudsman Service also handles complaints regarding the Pension Protection Fund levy and its calculation. It dealt with 45 such cases during the year, finding in every case that the calculations had been correctly made, albeit not always very clearly explained.

Conclusion

As anticipated, the tough economic climate is resulting in an increasing number of problems faced by pension fund trustees. For Insurers the message is clear. Pension trustees who regularly participate in training and who can demonstrate the implementation of robust, risk-based procedures, are likely to be the more attractive risks.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com

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