New pensions act puts the spotlight on trustees

The UK seems to leg­is­late on pen­sions with metro­nom­ic reg­u­lar­i­ty, with a new act arriv­ing every three years on aver­age since 1993. The lat­est of these, which came into force in Feb­ru­ary, promis­es to be more rad­i­cal than most. 

Along with immi­nent new reg­u­la­tions, the Pen­sion Schemes Act 2021 is set to impose greater respon­si­bil­i­ties on trustees, while oth­er changes include a new fund­ing regime for defined-ben­e­fit schemes; new crim­i­nal offences; and pro­vi­sions designed to tack­le cli­mate change.  

The leg­is­la­tion also pro­vides for the intro­duc­tion of a new type of pen­sion called a col­lec­tive defined-con­tri­bu­tion (CDC) scheme. 

“This is a mash-up of an occu­pa­tion­al defined-ben­e­fit pen­sion, which pro­vides an employ­ee with a set amount of mon­ey each year of their retire­ment, and a defined-con­tri­bu­tion scheme, where a mem­ber retires with an invest­ment port­fo­lio that may or may not last them through­out their old age,” explains Annabelle Williams, per­son­al finance spe­cial­ist at Nut­meg.

It’s hoped that CDC schemes, which are already com­mon in the Nether­lands and Cana­da, will draw on fea­tures of both pen­sion types to form a hybrid with the poten­tial to bridge the gap between the haves and the have-nots of retire­ment.

The act also intro­duces mea­sures to tack­le scams. Accord­ing to fig­ures pub­lished in July by the Finan­cial Con­duct Author­i­ty, more than £2m had been lost to pen­sion fraud in the pre­ced­ing five months alone.

Most sig­nif­i­cant­ly, high-pro­file pen­sion scan­dals in recent years, such as those affect­ing BHS and Car­il­lon employ­ees, have fuelled demand for reforms to the trustee’s role. In par­tic­u­lar, the per­ceived lack of will­ing­ness or abil­i­ty on the part of trustees to report con­cerns to the Pen­sions Reg­u­la­tor (TPR) has drawn a lot of crit­i­cism.  

The crim­i­nal offences cre­at­ed by the act apply prin­ci­pal­ly to employ­ers, but they could also affect trustees, accord­ing to Anthea Whit­ton, pen­sions part­ner at law firm Ever­sheds Suther­land. 

“The offences have become much broad­er in scope,” she says. “For instance, the offence of wil­ful or reck­less behav­iour in rela­tion to a pen­sion scheme, as out­lined in the government’s white paper of March 2017, was said to be intend­ed to tack­le reck­less boss­es. Crim­i­nal lia­bil­i­ty would not be imposed on a per­son with a ‘rea­son­able excuse’, but the act gives no detail on what this means. The uncer­tain­ty is like­ly to cause con­cern for direc­tors, trustees and third par­ties, giv­en that the penal­ty is an unlim­it­ed fine or up to sev­en years’ impris­on­ment. There’s also the pos­si­bil­i­ty of a civ­il sanc­tion of up to £1m.”

Nigel Down is search direc­tor at Trust Asso­ciates, a con­sul­tan­cy spe­cial­is­ing in the recruit­ment of trustees and invest­ment advis­ers for pen­sion funds. He believes that it’s “too ear­ly to tell what spe­cif­ic impact the act has made on the role of the trustee, but it is clear that the over­all inten­tion is to make them more account­able for the deci­sions their schemes make and the effects these may have on their mem­bers. For exam­ple, the new offence of ‘fail­ure to act’ shifts the bur­den of respon­si­bil­i­ty fur­ther on to trustees.”

Although the aim of the act is to encour­age all those involved in man­ag­ing pen­sions, espe­cial­ly defined-ben­e­fit schemes, giv­en recent scan­dals, to act more respon­si­bly, many experts point to the fact that it is broad­ly drawn. In light of the wide­ly crit­i­cised han­dling of the BHS pen­sion scheme as part of the company’s sale in 2016, the leg­is­la­tion has been extend­ed to cov­er a num­ber of cor­po­rate trans­ac­tions. How­ev­er laud­able the inten­tions of that move are, it means that the act will almost cer­tain­ly ush­er in a peri­od of uncer­tain­ty as trustees, advis­ers and share­hold­ers wait to see how courts inter­pret the new pro­vi­sions and what actions TPR takes.  

Claire Carey a part­ner and pen­sions spe­cial­ist at law firm Sack­ers, says: “There’s always the risk that par­ties such as trustees and their advis­ers could get caught in the cross­fire when hav­ing to con­sid­er any com­pa­ny pro­pos­als relat­ing to defined-ben­e­fit schemes. Gen­er­al­ly, trustees are very much going to have these new pro­vi­sions in their minds. There are many shades of grey, which will lead to a much more cau­tious approach.”

The act also paves the way for new oblig­a­tions relat­ing to cli­mate change. From 1 Octo­ber, trustees of occu­pa­tion­al pen­sion schemes man­ag­ing assets worth more than £5bn will be required to mon­i­tor and man­age the impact of cli­mate-relat­ed risks on their schemes.  

Will the extra respon­si­bil­i­ties and poten­tial penal­ties deter peo­ple from becom­ing lay trustees? 

“We antic­i­pate that lay trustees may feel con­cerned about the risk of action against them, pos­si­bly to the point that it will be hard­er for some schemes to find mem­ber-nom­i­nat­ed trustees,” says Jo Myer­son, a pro­fes­sion­al inde­pen­dent trustee and direc­tor at Ross Trustees. “For expe­ri­enced pro­fes­sion­al trustees who are well advised and are ask­ing the right ques­tions, the risk is man­age­able. Indeed, we have long been used to act­ing robust­ly. Our sense is that the most cru­cial piece of the jig­saw will be the audit trail to prove that any actions tak­en were rea­son­able.”

It does seem like­ly that lay trustees will find them­selves becom­ing more reliant on pro­fes­sion­al guid­ance from experts. Three-quar­ters of those respond­ing to a recent sur­vey by the Pen­sions Man­age­ment Insti­tute said that they need­ed bet­ter access to infor­ma­tion, for instance.

Ulti­mate­ly, the goal of the gov­ern­ment and the pen­sions indus­try alike is sim­ply to ensure that trustees do all they can to safe­guard pen­sion pots, so that their con­trib­u­tors get back what they deserve in retire­ment.  

With this in mind, Gail Izat, work­place MD at Stan­dard Life, says: “With this increased focus on gov­er­nance encom­pass­ing the whole pen­sions land­scape, it’s like­ly that employ­ers will be engag­ing ear­li­er and more often with the trustees of the schemes they par­tic­i­pate in.”

‘I feel a level of personal involvement as a trustee’

“One ele­ment of my new job that’s sur­prised me some­what is the lev­el of respon­si­bil­i­ty I feel for the mem­bers of my schemes.” 

So says Tiziana Per­rel­la, an actu­ary who joined Dal­ri­a­da Trustees, an inde­pen­dent provider of trustee ser­vices, as a pro­fes­sion­al pen­sion trustee at the end of last year.  

Per­rel­la believes that the Pen­sion Schemes Act 2021 will increase the demand for greater pro­fes­sion­al­ism on trustee boards, with more inde­pen­dent spe­cial­ists being appoint­ed along­side employ­er- and mem­ber-nom­i­nat­ed mem­bers. She also fore­sees that a pro­fes­sion­al trustee com­pa­ny will be appoint­ed as a scheme’s sole cor­po­rate trustee in an increas­ing num­ber of cas­es.

Giv­en her actu­ar­i­al back­ground, Par­rel­la is par­tic­u­lar­ly inter­est­ed in how the new leg­is­la­tion will affect pen­sion gov­er­nance. She envis­ages that it will have a ben­e­fi­cial effect in at least one respect

“A lack of clar­i­ty on endgame objec­tives leads to insuf­fi­cient prepa­ra­tion, mean­ing that schemes miss out on mar­ket oppor­tu­ni­ties and the secu­ri­ty of their mem­bers’ ben­e­fits is not max­imised as a result,” she says. “I there­fore believe that the require­ment in the act for schemes to have a spe­cif­ic long-term strat­e­gy designed to deliv­er an agreed long-term objec­tive is a pos­i­tive devel­op­ment.”

A compliance checklist for trustees

Pen­sion trustees need to act now to com­ply with both the cur­rent reg­u­la­tions and those com­ing down the line.

1. Update your risk reg­is­ters and review them reg­u­lar­ly. TPR rec­om­mends the use of an agreed eval­u­a­tion process to rate risk events based on the like­li­hood of their occur­rence against their impact if they were to tran­spire.
2. Obtain pro­fes­sion­al advice on every aspect of your work and con­sid­er fur­ther train­ing to improve your knowl­edge. The Pen­sions Man­age­ment Insti­tute offers an award in pen­sion trustee­ship based on TPR’s indica­tive syl­labus.
3. Check reg­u­lar­ly whether any pro­posed action could, under the terms of the Pen­sion Schemes Act 2021, be con­sid­ered “con­duct risk­ing accrued scheme ben­e­fits” or “a noti­fi­able event”.  
4. Ensure that you have a clear fund­ing strat­e­gy for the long term, as well as a pol­i­cy on cli­mate-change report­ing.  
5. Keep your report­ing struc­tures under con­tin­u­al review. “Trustees will need to rethink inter­nal process­es to ensure that any­thing which needs to be report­ed under the act is cap­tured – and that the spon­sor­ing employ­er doesn’t acci­den­tal­ly cause an offence,” advis­es Anthea Whit­ton of Ever­sheds Suther­land. “In short, trustees have more report­ing respon­si­bil­i­ties under the new act and, if they fail to com­ply, more lia­bil­i­ties.”