We’re delighted to have experienced Trustee and MND, John Heatly, provide his take on some of the issues Trustees can face when working with Pension Administrators as well as providing some advice on how to work in harmony.

“Why hasn’t it been done? – it was obviously important….” A frustration Trustees sometimes feel with their pension administrators. Can anything be done or is this “just the way it is?”

All pension administrators I’ve ever come across are a particular ‘life-form’ whose major operating mode is “procedure”.  Thinking for themselves, thinking in stimulus and response terms, using imagination, exercising judgement etc is not high on the job spec – following procedures, rules, systems is.

“The urgent always gets in the way of the important” is a management truism and, on Planet Admin, the important tends to be that with a deadline attached.  In Pension Administration culture this means the urgent and the important are the same thing.  Elements that don’t have mandated timetables attached are, by definition, less important and can be got round to as and when.

To get the best from the beast one needs to feed it in language it understands.  Unfortunately, on Planet Trustee, the inhabitants don’t always set clear, precise briefs and deadlines.  Probably because they’re used to dealing with people who can exercise independent judgement about relative importance, its distinction from the urgent and they’ve mostly been trained to brief for outcomes and leave method to the “experts”. 

But it’s been my experience of over 20 years dealing with Planet Admin that unless one is absolutely clear about the processes to be followed and the deadlines required, one will get drift.  Either one can continually chase them (in their eyes unreasonably ‘cos they haven’t “missed any deadlines”) or one sets a clear action plan with dates for each stage and lets the system do what it does best – follow procedure.  In my view the latter is the less exhausting course all round.

Recently our Trustees became frustrated that an “obviously” important project was dragging on.  Yes, a bit of judgement on  priorities from the administrators would have helped – but so too would have been Trustee insistence at the outset on a clear calendar of deadlines about when we wanted the results.

Once we laid down a “procedure” – a concept familiar to Planet Admin – we’ll get what we want ‘cos, in the words of the song, “we’ve got a system.”  If it’s got a deadline it’s important; if not, not.

Recently, I happened to be relaxing before bedtime watching News at Ten, only to be shaken into complete disbelief as a public sector employee stated that “we’re being robbed of our pensions and it’s the bankers’ fault”.

Obviously blissfully unaware of the last two decades of decline in Defined Benefit pension provision in the private sector. Or indeed the fact that Britain’s retirement ills cannot be justifiably blamed on Sir, perhaps soon to be plain old Mr, Goodwin, or indeed his successors’ handsome bonus.

It served to highlight in simple terms one of the biggest problems in the pension industry and a continuing source of frustration for pension trustees and members alike – communication.
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Just a few months into the New Year and we are already making history! Dalriada managed the first ever transfer of a contracted out scheme to the Financial Assistance Scheme.

It’s May now and tPR urges trustees to seek professional help to understand the employer covenant. Claire McGruer explains how this potentially costly exercise need not break the bank with some careful management from the trustees.

As we head towards Autumn, more tPR guidance, this time on the importance of identifying your statutory employer. Paula Cunningham gives some advice on how to pick yours out of the identity parade. Chris Roberts also considered environmentally sensitive investments and whether ‘going green’ is really a viable funding option.

As Winter closes in it’s time to reflect that there is just one year to go before trustees will be meeting tPR’s expectations on pension scheme data accuracy. All we want for Christmas is a data audit tool!

Time to draft trustee’s New Year resolutions now!

Tom Nimmo looks at the changing landscape of data management and urges trutees to recognise where there is still room for improvement.

It is now over twelve months since the Pensions Regulator (tPR) published its Guidance on Record Keeping.  The guidance emphasises the importance that tPR places on scheme data quality. For many in the industry, this publication merely confirmed what they already knew – that the member records for most schemes were in poor health, but very little was being done to tackle the problem.

With this guidance tPR did more than just mention the elephant in the room, they shouted about it for all to hear and addressed a warning to those who thought that they could continue to ignore that pesky pachyderm. The message was clear: scheme member data needs to be audited and brought up to a prescribed standard before December 2012.

TPR was particularly concerned about the quality of Common Data which includes items such as the members’ names and dates of birth. They stated that Common Data for all current member records created after June 2010 must be 100% complete and 95% complete for all records created prior to this date. Trustees and administrators that fail to get a grip on their data issues by the end of 2012 may face censure.

Dalriada Trustees had made a pre-emptive strike against poor data with the development of a data audit tool towards the end of 2009. After tPR’s announcement in June last year, updates were made to the audit tool to ensure that it met the criteria that had been laid out in the guidance. Since then, we have audited the Common Data for all the schemes that we administer and have also offered our services to the trustees of schemes outwith our own roster. For most trustees and administrators, an audit report showing that their Common Data is at the desired level of completeness will suffice, but why stop there?

Our experiences over the past 18 months have shown that the power of an in-depth and objective audit tool can transform many of the administration processes that we carry out on a daily basis. No better place has this been demonstrated than with the development of an audit tool tailored to schemes entering the Pension Protection Fund (PPF).

We have taken our already comprehensive data audit tool and enhanced it with a range of tests designed specifically for the processes and data requirements faced by schemes moving through the PPF Assessment Period. We drew upon our extensive knowledge and experience in this area to ensure that the audit tests we developed closely matched the extremely fastidious data requirements of the S143 valuation and the Data Interface Layout (DIL). 

The focus that the PPF specific data audit has provided is enormous. The results of the tests quickly and clearly highlight if there are any areas in the data that need to be improved. It can reveal errors in the data that may otherwise have been missed until the PPF provides its DIL feedback. When you consider the complexity and cost involved in producing each DIL, this early insight can prove invaluable.  

In recent months the PPF has placed greater importance on commencing the S143 valuation as early as possible in the Assessment Period. By conducting a PPF specific data audit at the start of the Assessment Period, trustees can get an instant overview of the data improvements and timescales that need to be put in place in order to meet the impending valuation requirements, but the use of the audit doesn’t expire here. The audit tests can then be used as a guide to whether the data has reached a point where it is fit for purpose.

Typically, we use the audit to measure the data quality at several points throughout the Assessment Period. Our aim is to reach a 100% pass in both the S143 and DIL test scores prior to completing these processes. Combined with the other technology based solutions that we have implemented in this area, we have been able to reach new levels of excellence in our management and administration of PPF schemes.

The heart of tPR’s motivation for encouraging improved data standards within the pensions industry was to make sure that scheme members receive the benefits that they are entitled to at retirement. The PPF specific data audit has helped us to steer four schemes to transfer over to the PPF this year, with half a dozen more schemes in the pipeline, ensuring that tPR’s aims are realised for thousands more members .

Chris Roberts of Dalriada Trustees considers envrionmentally sensitive investments and whether ‘going green’ is really a viable funding option.  

I was reading a recent article highlighting a report by “Forum for the Future” pushing for major investors such as Pension Schemes to use their collective “financial muscle” to push greener investing.  The argument being that as the environmental conditions worsen financial returns will be greatly diminished!

Am I the only one thinking if our planet is on the verge of imploding, financial returns would not be my number one concern?  The resultant change in mortality assumption to age would ensure all defined benefit pension schemes ending with a massive surplus!  Although I am sure the last surviving government Actuary would argue this point, even with solar rays firing down in the background in a Spielbergesque (yes that’s a word) vision.

The suggestion was made that as pension contributions receive tax relief the Government have a duty to encourage pension schemes to “go green”.  Whilst I fully support the notion, in the reality pension schemes are hard enough to fund without limiting the investment powers of a Trustee Board.  It is like asking Mr Muscle (famous for loving the jobs you hate) to do a charity run up Everest with a back pack filled with the full weight of Actuarial funding requirements (estimated to be about 700 metric tonnes).

Perhaps the government could provide incentives for the environmentally friendly scheme Trustee.  What about a 10% reduction on PPF levy for every 1000 trees planted?  Or a reduction on Actuarial funding requirement for any employer with solar panels strapped to the roof?

Not the most serious of suggestions but in my opinion any restriction on Trustee investment options must be mitigated by some form of easement on the schemes financial burden.

I sympathise with agencies such as Forum for the Future but whilst pension professionals will (probably) never fully understand the difficulties faced by the environment, environmental companies will never fully understand the difficulties faced by a Pension Scheme Trustee.

The Pensions Regulator (tPR) has issued a statement reminding trustees of the importance of identifying the statutory employer(s) of their scheme.

A statutory employer is obligated to meet the scheme specific funding requirements, to pay Section 75 in an insolvency situation or trigger entry into a PPF assessment period.

Statutory employers have been defined by the Pensions Acts 1995 and 2004 as extended by the Employer Debt, Scheme Funding and PPF Entry Rules Regulations. Recent case law (Pilots case) has extended the definition further to deem employers who employ eligible members of defined benefit (DB) pension schemes to have statutory obligations to a Scheme. 

For schemes open to accrual, identifying your statutory employer(s) is likely to be straightforward but for schemes closed to accrual this can be a complex and time consuming task, particularly in cases where there are multiple employers with statutory obligations.

You will be required to declare who your statutory employer(s) are on tPR’s scheme return form from November 2011. TPR has urged trustees to act immediately to clarify the position of their scheme.

Reviewing the following information should provide you with a clearer understanding of which company or companies have statutory obligations to your scheme:

• Scheme documentation including deeds of participation and cessation should be the first reference point. From experience we have found it useful to refer to companies house numbers (CRNs) in addition to company names. 
• Employment records with payroll information, National Insurance records, contract details and secondment information can also be a useful source. 
• The Elections Team at HMRC Pension Scheme Services  can  provide Trustees with a list of employers who have been allocated ECON numbers in relation to schemes.
• Useful information on historic employers can be found on the Companies House website.
• Past scheme accounts may provide information on the scheme funding position at the date an employer ceased to participate and whether section 75 debts were paid to the scheme.
• You should note that your statutory employer(s) may be different from your principal or participating employers.

If the position remains unclear it would be prudent to seek legal advice. For assessment of employer covenant it is important that you have identified the employer(s) with statutory obligations to your scheme.

Once identified, you should keep the situation under review and look out for any situations which would cause your scheme to lose any statutory employers, for example:

• Employer substitution where a new employer does not meet the statutory employer definition or is a defined contribution (DC) only employer.
• Bulk transfer of DB liabilities to a scheme in which no DB liabilities will accrue.
• Where employers cease to participate leaving an employer not deemed to be a statutory employer or is a DC only employer.
• Where a ‘phoenix event’ occurs, i.e. an employer’s business is sold to a new entity following an insolvency event and the new entity has never employed any active members.

The consequences for members of schemes which have lost their statutory employer(s) are serious and could result in schemes being ineligible for Pension Protection Fund (PPF) compensation or assistance from the Financial Assistance Scheme (FAS).

If your investigations conclude that your scheme no longer has a statutory employer or the employer supporting your scheme is a DC employer which has never employed an active or eligible member of the DB scheme, you should inform tPR via Exchange and investigate the circumstances that led to the loss of your statutory employer. TPR may consider use of its anti avoidance powers in some cases.  A principal or participating employer can become a statutory employer in certain circumstances by employing an active member accruing DB benefits in the scheme.

The Government has been alerted to the fact that some schemes have lost their statutory employer(s) and their current consultation proposes an extension to FAS to cover schemes which lost their employer before 10 June 2011, for which the last remaining employer had an insolvency event before 6 April 2005 and for schemes which begin to wind up the day before the new FAS regulations come into force. 

Through Dalriada’s involvement in scheme terminations, carrying out investigations to identify statutory employers is one of our areas of expertise. If you would like to discuss how Dalriada could assist your scheme you can call me directly on 02890 412013 or send me an email paula_cunningham@dalriadatrustees.co.uk.

Click here to view tPR’s statement.

With the Pensions Regulator guiding schemes towards seeking external covenant monitoring, Dalriada Trustees’ Claire McGruer argues it does not have to be an expensive exercise.

It is the trustees’ ongoing responsibility to actively and regularly monitor the employer covenant to ensure they can perform their role effectively on behalf of the scheme’s membership.

Within all pension schemes, trustees should have a framework for assessment and monitoring of the covenant.

Recent regulatory guidance produced by the Pensions Regulator is welcome, but the advice comes with a price tag: “Trustees should ask probing questions to understand the covenant the employer provides for the scheme, and where they have any doubts about their ability to do this, they should engage the right professional help.”

This is all sound advice as many trustees do not have the relevant expertise and therefore require help from a specialist covenant assessor. While this independence and expertise is welcome, it can be an expensive process, ultimately paid for by the employer.

The shift in demand that has occurred since the regulator’s guidance has led specialist assessors and accountancy firms to strengthen their teams to handle the numerous calls from nervous trustees who need to be led through this minefield.

However, before they commit to significant fees on specialist advice, we believe there are many cases where trustees can better utilise these external experts and scale down the costs that go with them. By taking a proactive approach to assessment and monitoring of employer support there are ways to manage costs without compromising on quality.

Based on our own experience, a typical covenant assessment can be broken down into the following key areas:

• Cover pages, content pages, disclaimers
• List of information used, glossary, re-statement of sponsor accounts and notes from accounts, clarification of company structure, latest company news, industry comments, reference to Dun & Bradstreet  Assessment
• View on ongoing monitoring and additional questions to be put to the employer
• Executive summary

What is significant is that the first two parts of these reports, which require limited expertise, tend to make up at least 70% of the content.
While it varies for each report, these two opening sections can also account for around 70% of the resource that goes into preparing the report.

If trustees are looking to closely manage the assessment process and any related costs they should begin the process early and ensure they fully understand it. They must then be proactive by engaging with the employer over any issues needing clarity.

We would always suggest they start by making a list of the information required; gather this information, chasing up any missing information in the process; collate it and present it in a cohesive manner with any resulting queries being raised with the employer.

The cycle of gathering, collating and presenting is then repeated as necessary.

In adapting this process trustees can, in many cases, cover the core workload of the covenant assessment – around 70% – themselves.

If these steps are taken thoroughly they will be left with well presented information and, as a result, have a good understanding of the situation, putting themselves in a strong position to decide whether or not to attempt the other elements of the assessment or call in expert advice.

If opting for the latter at this stage, the trustees will often find that the expert advice is focused, they are better able to respond in a shorter timeframe than otherwise and, importantly, there should be a significant reduction in the costs.

To sum up, we would always advocate using expert assessors as they can be invaluable in helping trustees understand the current position of the employer covenant for their scheme. However, when the trustees adopt a proactive approach of understanding what is required, the expert advice will be focused on the essential aspects of this work.

This approach should lead to an equally good result but keep a firm lid on costs. The starting point for determining what is the best approach is for the trustees to make an honest appraisal of their own skill-sets and draft in expertise where they identify the need.

Claire McGruer is an independent trustee at Dalriada Trustees.

This article was featured on SchemeXpert.com, published 27th April 2011.

Independent Trustee, Dalriada Trustees Limited, has today successfully completed the transfer of one of two schemes to the Financial Assistance Scheme (FAS). Together, these two schemes represent the first contracted-out pension schemes to transfer to FAS.

The transferring scheme is the NA Motors (1984) Pension Scheme whose sponsoring company, a Ford car dealership formerly based in Newton Abbot, Devon, began winding up in 1998 when it lost its franchise. Most of the scheme’s members still live around the Newton Abbot area.

Dalriada, which specialises in scheme terminations, was appointed as Trustee of the scheme in 2009 in order to manage the transition to FAS. They have now secured members’ benefits that, prior to the creation of FAS, could otherwise have been substantially reduced or even lost altogether.

Managed by the Board of the Pension Protection Fund, FAS makes payments to top up scheme benefits for eligible members of schemes that are in wind up. They do this by paying assistance to members so their overall benefit is topped up to a maximum of 90 per cent.

Dalriada director, Connie Johnstone, who led the project said: “We are delighted with this result and what it means to the members. Throughout the process, we have had superb help from our FAS caseworker, and from Xafinity, who provided admin and actuarial backup. In particular, I would like to mention Xafinity’s admin service in Stirling which was right up there with the best I have ever come across.”

“Unfortunately the reality today is that many schemes winding up are often seriously underfunded. Many do not have a solvent sponsoring employer which makes FAS invaluable to members and their families.”

“Dalriada currently has a significant number of schemes at different stages in the FAS process, all with their different issues, which has enabled us to build up detailed expertise in this area. We are proud of this ‘first’ especially as we were trustee of one of the first three schemes to transfer to the Pension Protection Fund (PPF) in December 2006. In what has been a busy past year, we have also transferred four more schemes to the PPF with another three due to transfer before the end of March.”

For further information please contact Bill Shaw on 07974 720669 or bill@billshaw.uk.com

When a member leaves a trust based pension scheme within 3 months of joining, the Scheme may require the member to receive a refund of their own contributions (net of tax and contracting out deductions). Should the member leave between 3 months and 2 years of joining the Scheme, the Trustee(s) must give them a reasonable period of time to transfer their accrued benefits to another pension provider before enforcing a refund.

In the case of defined benefit schemes, the employer contributions are not earmarked for any particular member and therefore remain in the Scheme if a member’s refund of contributions is paid. Many Defined Contribution (DC) schemes, however, allow for the employer contributions in respect of a member who is taking a refund of contributions to either be refunded to the employer, or retained within the scheme to off set against future costs.

There have been noises from the DWP and the Pensions Minister that the option of a refund of contributions will be removed and therefore schemes will be left with the cost of providing benefits that far outweigh the benefits themselves. DC schemes will be left with deferred pension pots that are too small to purchase annuities with and may prove difficult, under current regulations, to pay as a cash sum.

The justification being given for this move is to “even the playing field” with contract based schemes, under which refunds are not possible, on the assumption that employers will provide trust based “auto-enrolment” vehicles so that they can take advantage of such refunds. I wonder if such aspersions originated from insurance companies looking to drum up business.

Trust based schemes cost the employer time and money to run but, in return, they offer a level of control and ownership over employee benefits that cannot be achieved through contract based arrangements.
The contribution refunds from the vast majority of schemes would struggle to cover the cost of ongoing governance of trust based schemes, and therefore, the difference in treatment of refunds of contribution cannot possibly be the main reason to set a scheme up under trust.

Far from creating an “even playing field”, simply removing the refund option would askew the game greatly in favour of contract based arrangements. Employers looking to set up new, or with existing trust based schemes, will not want the cost or hassle associated with administering very small pension funds. However, a joined up solution involving the ability to transfer accrued benefits to NEST could be a logical compromise.

Providing defined contribution benefits under trust is never the easy option but, with the assistance of a professional trustee, it can be the best way to ensure that a scheme provides the benefits, options, flexibility and service that fulfill both the employees’ and employer’s needs.

Greig McGuinness is a trustee representative with leading independent trustee Dalriada Trustees Limited.

If we were to compare the developments in UK pensions in 2010 to a football match, it might be described as a classic game of two halves – with the half time whistle being blown a little early in May for the General Election.

Unlike most football games, there was a new coalition referee for the second-half who decided that some of the goals in the first half were under review. If fans were feeling a little cheated at this point, they soon got over it as the second half began with a flurry of events, announcements, consultations, surveys, opinions, discussions, guidance, strikes and so on – I even recall someone saying at a meeting in June that they were unable to offer an opinion on the market because they had been on holiday for a week.

With so much having happened in 2010, and as we begin the countdown to Christmas and the New Year, we thought it might be useful to look back, sort the fact from the fiction and offer a post match summary of what actually happened.

Please let us know if we have missed anything out, what’s affected you most or what is likely to go down as the big story of 2010 in years to come – there’s plenty to choose from.

A new Government
In the first four months of the year, under Gordon Brown’s leadership, the DWP published regulations for Automatic Enrolment and National Employment Savings Trust (NEST) and confirmed that the option to contract out of the additional State Pension into a Defined Contribution pension scheme would be abolished from 6 April 2012.

But did it all matter when, after 6 days of uncomfortable behind-the-scenes negotiations, the Labour Government was replaced by the newly formed Conservative and Lib Deb Coalition on 12th May.

With the new government came a new lineup under David Cameron: George Osborne as the Chancellor of the Exchequer, Iain Duncan Smith as Secretary of State for Work & Pensions and Steve Webb as Minister for Pensions.

Some strong statements and intentions followed soon afterwards. IDS was first up with his vision for improving the quality of life by phasing out the default retirement age, ending compulsory annuitisation at age 75 and, from April 2011, the Basic State Pension was to rise by the minimum of prices, earnings or 2.5%, whichever is higher. He also committed to making automatic enrolment and increased pension saving a reality.

Next it was George Osborne with the first Budget of the Coalition Government on 22nd June, which included a number of announcements on pensions:

• Pensions Indexation. From April 2011, the Consumer Prices Index (CPI) will be used for the indexation of all benefits, tax credits and public service pensions.
• State Pensions and Benefits. From April 2011, the basic State Pension will be uprated by the higher of earnings, prices or 2.5 per cent. CPI will be used as the measure of prices but the basic State Pension will be uprated by the equivalent of RPI in April 2011.
• State Pension Age. The Government will review the date at which the State Pension Age rises to 66.
• Pensions Tax Relief. The Government will restrict pensions tax relief through an approach involving reform of existing allowances, principally of a significantly reduced annual allowance in the range of £30,000 to £45,000.
• Public Service Pensions. An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011.
• Default Retirement Age. The Government will consult shortly on how it will quickly phase out the Default Retirement Age from April 2011.

Two days later, reviews were announced into the timing of the State Pension Age rise to 66 and how best to implement auto-enrolment.

We all caught our breath for a few months and then, in October, the Government announced that, from April 2011, the annual allowance for tax privileged pension saving will be £50,000 and from April 2012 the lifetime allowance will be £1.5million.

Soon after, the outcome of the independent review into auto-enrolment was published and, separately, the Government announced that the State Pension age would rise from 65 to 66 between December 2018 and April 2020 for both men and women.

The Pensions Regulator flexes its muscles
Bill Galvin became the new chief executive of tPR from 17 May, replacing Tony Hobman, after five years in charge.

Soon after, guidance was issued on record keeping, monitoring employer support, multi-employer schemes and winding-up. Consultations were launched on transfer incentives and single equality schemes.

From June to September tPR used its powers of enforcement, handing out the first Contribution Notice to the Bonas Group Pension Scheme and a Financial Support Direction to companies connected with the Nortel Group and Lehman Brothers Group.

After four years of operating the Trustee Register, tPR changed the way it assesses the conditions for registration. From 51 firms at the start of the year, it is expected that this number will be considerably less by the year-end.

and the PPF was busy too
January and November saw the PPF unveil not one but two Purple books as a revamp took place and those schemes currently in the assessment period were removed.

June was the month the PPF issued new guidance to actuaries completing section 143 valuations and in October a new formula was proposed for calculating the pension protection levy from 2012/13 onwards.

Finally, as the year approached its end, the first scheme (the Paterson Printing Pension Scheme) successfully transferred through the new Assess & Pay Programme, just under 18 months after the company went insolvent.

How 2010 is shaping up – end of year financials
As we write, the pound is up 4.5% in the year against the Euro and down 3.5% against the dollar, the FTSE 100 sits around the 5750 mark, up 6% on the year, and the benchmark government bond yield has hardly moved compared to a year ago. Wouldn’t it be great if these relatively moderate movements were the result of a number of small predictable steps in one direction throughout the year and we knew what was going to happen next year? If only it was that easy when we agreed our recovery plans.

No doubt many of us will end the year by looking to the future. Will 2011 be the year that EU regulation imposes further funding requirements on defined benefit schemes? How will the rpi/cpi debate play out? Will new rules allow early access to 25% of our pensions savings if we fall ill? How about an ETV mis-selling scandal? Like 2010, a lot could happen. Please let us know what your predictions and concerns might be.

But before you become too paralysed with fear about potential hyper-inflation, the break-up of the European Union, winning the Ashes or never hosting the World Cup, you may wish to consider the words of Mark Twain: “I’ve been through some terrible things in my life, some of which actually happened”.

With Seasonal Best Wishes,
Brian Spence and the team at Dalriada Trustees