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UPDATES TO CONTENT

This Update revises content at this site www.gpt-online.com and updated pages are automatically sent to subscribers to the hardcopy Guide for Pension Trustees. To help you locate the most recent changes, see the table: Summary of Main Revisions from this Update at the bottom of this page.

Statement to trustees about current financial pressures

In a Statement issued in October 2008, the Pensions Regulator acknowledged that developments in financial markets will be of great concern to trustees, employers and members. In setting out its policy, the Regulator has confirmed that:
● the impact of both falling asset values and weakening covenants falls within the framework of the Regulator's scheme-specific funding regime
● it has no plans to change its Codes of Practice or make specific announcements in relation to market events: the principles set out in the Code of Practice: Funding defined benefits were intended to work across a range of economic conditions and the Regulator considered they continue to remain valid
● trustees should consider reviewing their existing recovery plans and if necessary revise them where there is a significant improvement or decline in the employer's covenant
● recovery plans arriving in 2009 may show larger deficits and weaker covenants, and 
● its operational processes will continue to reflect the conditions in which recovery plans were produced.
Trustees are encouraged to contact the Regulator with any concerns they may have. 

A copy of the Regulator's statement can be accessed via: 
http://www.thepensionregulator.gov.uk/mediaCentre/pressReleases.

Current markets and Defined Contribution members

In the same statement, the Regulator confirms it is important that DC members are reminded to review their pension accounts in the light of any changes in their financial circumstances and changes affecting funding to retirement date. The Regulator suggests employers with contract-based arrangements (group personal pensions/stakeholder schemes, etc.) may wish to encourage employees to contact the provider to address issues.

Guidance on the benefits of good record keeping

In the recently issued Record-Keeping: A consultation document, the Regulator says it is firmly of the opinion that good record keeping can lead to less expensive administration, less complaints from disgruntled members, lower costs on winding-up, increased confidence in the data used for actuarial valuations and potentially lower indemnity insurance premiums. No one would disagree with that! 

Sadly, the Regulator has also confirmed that there is general evidence of problems with record keeping. Most problems are apparently caused by legacy data (historical records held on file or inherited). Yet current data should not be overlooked, including data in respect of special benefits awarded (following scheme mergers and rule changes, etc.), which also might not be accurate or complete. 

Naturally the Regulator has stated that it intends to work with trustees, providers, administrators and advisers to raise awareness of, measure, and where necessary improve standards of record keeping. Put another way, all work-based schemes may eventually be required to meet minimum standards relating to the maintenance of core information and, possibly, also relating to other additional information needed to administer benefits and without doubt this is clearly the right approach. [Section 10.0 and 10.1.1, 10.1.5 and 10.1.6, 10.6.1, and 10.10.5(d) (Note) carry the new detail.]

Measuring and improving record keeping – trustees work

The Regulator's aim is to ensure that the records of every work-based scheme are such that the benefits due to each member at any point in time and in any circumstances can be calculated accurately. In support of its intention to improve standards of record keeping, the Regulator expects trustees to undertake regular data checks and produce regular reports, testing data quality using programs designed for the job. [Section 10.6.1 (Note) confirms the detail ]

Data Cleansing

To support this, the Regulator suggests data held should be checked for completeness and accuracy. The following would assist in any data-cleansing exercise:
(i) using data validation software to check for missing data and the consistency of data held, and
(ii) reminding members to notify any changes in personal details and/or to notify any disagreement with data conveyed in annual communications. 
[Section 10.10.5(4)(d) (Note) refers.]

Effective member communications – Guidance

In conjunction with the Pensions Regulator, the Financial Services Authority has issued guidance: Effective member communications, which can be accessed via:
http://www.thepensionregulator.gov.uk/pdf/EffectiveMemberComms.pdf. This guidance makes good reading and provides a number of examples (anonymous extracts from schemes' communications) to help explain the operational tips and suggestions given. [Section 11.4.10 contains the detail.]

Defined Contribution Guidance

The Regulator has started to issue its ‘good practice guidance’ for trustees and employers of Defined Contribution schemes (see June 2008 Update). Three documents have been issued and two more are to follow (Scheme Returns Analysis and Investment Practices). The documents issued are:

(i) Q & As: DC Schemes
This document brings together some of the issues mentioned in the Regulator’s DC guidance document: (i) regulation (ii) governance (iii) administration (iv) investment (v) charges (vi) retirement and (vii) member understanding. [Section 1.11.14 (i) (Note) confirms.]

(ii) Making Pension Fund Choices – ‘Think before you choose’
This is designed to help members understand the fund choices available to them. In the form of a user-friendly, short leaflet, it is well worth considering issuing to members. Items included are the points to think about (a) when considering different types of fund or (b) when choosing funds and/or (c) when reviewing and changing fund choices and possibly taking advantage of any default and lifestyle opportunities. This guidance will also prove to be helpful in communicating AVC money purchase options. [Section 1.11.14 (ii) (Note) confirms.]

(iii) Effective Communication
To quote from these guidelines: ‘in defined contribution schemes, many of the important decisions which affect members’ benefits are made by the members themselves. If members have a lack of understanding of their pension arrangements they may well make poor decisions or take no action at all.’ Included are principles of good practice and examples to help trustees, managers and employers (a) to consider what they are trying to achieve and (b) to determine whether their written communications are successful. [See Section 11.4.10 for guidance on ‘effective communication’.]

Group Personal Pension Schemes (GPPs) – Financial Services Authority guidance

The FSA has issued a brief guide – Promoting pensions to employees, a guide for employers – clarifying what employers can do to promote their GPPs. [Section 1.16.10 confirms.]

Voluntary employer engagement in workplace contract-based pension schemes – guidance

Although the regulation of personal pension and stakeholder schemes falls mainly on the FSA the Pensions Regulator has responsibilities in respect of work-based personal pension schemes and stakeholder schemes where some or all of the contributions are paid by the employer.

This guidance is designed to help those employers who choose to involve themselves more closely in monitoring the running of their contract-based personal pension and stakeholder schemes. [Section 1.27.5 (ii) (Note) refers.] To quote the guidance: ‘Employer engagement can: (a) lead to a better quality arrangement (b) save time and money by preventing problems that could be costly to put right (c) improve member understanding of, and confidence in, the pension offered (and hence improve take-up and appreciation by members) (d) provide members experiencing problems with a collective voice.’

With this in mind, the Regulator ‘believes it is in members’ interests if all employers with contract-based schemes, particularly larger schemes, put in place arrangements for schemes to be periodically reviewed’. Towards this end it recommends the formation of a group personal pension management committee. [Section 1.27.5(ii) (Note) confirms the detail.]

Health warning for employers

Unlike stakeholder pensions, where there are special rules granting employers protection from any legal claim by employees regarding the choice of provider (insurer) and monitoring performance [see 1.13.6], any employer putting in place a GPP should consider obtaining advice (legal, or otherwise) about its specific circumstances and needs. [Section 1.27.5 (ii) (Note) advises.]

Informing members about the existence of dispute procedures

A new Note [12.3.11 (Note)] now confirms that, when informing members that a procedure is in place for the resolution of disputes, the information given should mention that (i) an independent organisation, The Pensions Advisory Service (with address details given), is available to assist members [see 25.3] and also that (ii) the Pensions Ombudsman (with address details given) has power to investigate and decide upon complaints in connection with occupational pension schemes [see 25.4]. In addition, members now also need to be told that the Pensions Regulator (with address given) has powers to ‘intervene in the management of schemes where, trustees, employer or professional advisers have failed in their duties’ [see 25.1]. ‘Member’ now includes ‘persons having an interest in the scheme’ and these include past members, pensioners, dependants, prospective members, beneficiaries and pension credit members. Trustees may need to consider pointing out in their procedures that the definition of ‘member’ includes such parties. [See 25.7.1 (Note).]

Guidance on Winding up

The Pensions Regulator has issued guidance: Winding up: avoiding delays. This includes suggestions for ‘good practice’ to enable the key areas of scheme management in winding up to be completed ‘as soon as reasonably possible and certainly within two years’. [See 16.1.3 (Note) for the key areas.]

There is no doubt that the Pensions Regulator expects trustees and managers to keep to the two-year deadline for winding up. However, the Regulator acknowledges that these issues will (and do) cause unavoidable delays in winding up: (i) scheme-specific legal issues, which involve court actions (ii) industry-wide legal issues, which involve court actions under way (iii) where early wind up is not in members’ best interests, for example, because of early redemption charges on a particular investment policy (iv) when further distribution of funds on employer insolvency are expected, and (v) where there is an outstanding member complaint with the Pensions Ombudsman.

Item (iii) above is timely. Disinvestments or transfers out of with-profits policies could easily invoke a market value reduction/adjustment (MVR/MVA) at the present time. [Section 16.1.10 confirms. See also Section 20.1.6 (Note).]

Buy-out and buy-in policies

A new Section 16.3.5 explains what happens on winding up when trustees purchase an insurance policy to secure liabilities outside the trust in the names of individual members. A similar procedure is involved when trustees of an ongoing scheme purchase a ‘buy-in’ policy for pensioners and/or deferred pensioners (i.e. the insurance contract is held by the trustees as an investment of the scheme). The potential gain of buy-in is that the security of members’ benefits is (arguably) improved whilst, at the same time, advantage is taken of competitive terms in the annuity market.

Further HMRC easement to unauthorised payment charges

An easement is being introduced. In future, pension payments made within three months of a pensioner’s death may likely not be classed as unauthorised payments, where the administrator (normally the trustees) did not, or could not, reasonably be expected to have known that the member had died when the payments were made. Most practitioners and trustees will agree this is a useful and pragmatic decision.

STOP PRESS

At the time of writing, the Pensions Regulator has issued a consultation document: Review of Trustee Knowledge and Understanding (TKU) Code of Practice (No.7) and its scope guidance with a closing date for comments of 31 December 2008.

When the original Code of Practice and its scope guidance was introduced (effective April 2006) an undertaking was made that it would be reviewed after two years. Little or no change is expected to be made to most of the existing scope guidance (see Appendix III) though some of its content will likely be ‘tidied up’ and/or ‘refreshed’ and re-ordered. New items added are expected to include:
(i) the importance of good administration
(ii) a reference to the forthcoming Personal Accounts regime (registration and auto-enrolment arrangements)
(iii) developments in investments over recent years
(iv) the importance of the employer covenant and trustees’ understanding of their powers
(v) buy-out issues (including abandonment and inducements), and
(vi) recognising the possibility of winding up and being aware of sensible preparatory steps.

However, in future the scope guidance may well be available in three formats: (a) DB with DC arrangements (b) DC schemes and (c) small, fully insured, DC schemes (12 to 99 members). More to follow on TKU guidance in future Updates.

SUMMARY OF MAIN REVISIONS FROM THIS UPDATE

The Guide's regular Updates help keep it up to date with important and topical new items, but changes to pages can also include new technical terms, changes to organisations' names, new cross-references and a variety of minor revisions, as well as description of legislative, technical and other material, and useful tips or simply interesting additions. Here is a summary of the main changes made by this Update.

This update loaded 18 December 2008

Previous 'What's New' Items.