2011: the road ahead

Contents

10 pension priorities for this year 2

The Pensions Regulator in 2011 5

Change on the horizon 6

Countdown to auto-enrolment 7

Perspective on the year ahead 8

What’s hot (and what’s not) for 2011 9

Fully protected in pensions 10

The road ahead2011

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2 Engaged Investor / Pensions Insight

Trustees need to prepare the groundwork for many changes to their schemes in 2011, both legal and structural, says Luke Clancy

The road ahead: 10 things you need to know for 2011

Introduction

The whole of 2011 is set to be a big year for pension scheme trustees who will need to start preparing for a raft of legislative

and regulatory changes. In this supplement, Engaged Investor provides a round-up of the issues trustees need to consider in the year ahead.

1. New pensions tax relief annual allowanceThe biggest change facing trustees next year will be preparing for the new pensions tax relief annual allowance, requiring schemes to identify and help those high-earning members affected.

For both final salary and defined contribution (DC) schemes, the annual allowance will be set at £50,000 (compared with the current £255,000) and fixed until 2015/16; beyond that date the government will consider options for indexing the level of the annual allowance. Where individuals are tipped over the £50,000 level, for example by a one-off promotional salary increase, they will be able to carry forward their unused annual allowance from the previous three years to reduce any tax charge. However, savings which breach the maximum will be taxed at an individual’s marginal rate. Expected with effect from April 2012, the lifetime allowance will be reduced to £1.5m (as it was in 2006/7).

A single flat factor of 16, instead of the current 10, will be used to value the annual increase in defined benefit provision (i.e. a £1 increase in annual pension is valued at £16). Where individuals do incur a tax charge that they cannot afford to pay immediately, the government will consider measures to enable the charge to be paid through the scheme,

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3Engaged Investor / Pensions Insight

Introduction

including the possibility of the tax charge being rolled up and deducted from benefits paid at retirement. Where individuals take early retirement, there will be no adjustment to the flat factor of 16 to take account of the fact that the pension is being paid from an earlier age. There will be no test against the annual allowance on death or serious ill-health, although there will still be a test on redundancy.

Existing protections of benefits in excess of the lifetime allowance under primary and enhanced protection will not be affected. Additional protections will be considered for those with benefits already in excess of £1.5m and those who opt for a fixed lifetime allowance of £1.8m in return for agreeing to cease contributions or accrual.

There will be a new information requirement that pension schemes must provide members with details of their pension input amount (i.e. the amount of contributions or increase in pension earned over the year) within six months of the end of the tax year where that amount is in excess of the annual allowance. They must also provide information on the annual allowance for the three previous years to ensure these members can take advantage of any ‘carry-forward’ headroom. In addition, schemes will have to provide this information to any member who requests it.

Employers will have to provide information to pension schemes on pensionable pay and service within three months of the end of the tax year. Both schemes and employers will be given a year’s grace to comply with these new information requirements. If the information is not available, members will have to estimate a value with an adjustment later being made to their tax position.

It has also been confirmed that the rules on Employer Financed Retirement Benefit Schemes (EFRBS) will be changed to make them less attractive than other forms of remuneration. The general thrust of the legislation, which will apply from April 2011, is to apply a new employment income tax charge to those third party arrangements which allow an employee to enjoy the benefit of money paid or assets provided through structures which are in substance a reward or recognition or loan in connection with the individual’s employment. This legislation includes EFRBS.

2. Section 251 clarification expectedLegislation is expected early in 2011 which will

clarify application of section 251 of the Pensions Act 2004, dealing with surplus payments. This section, which was not clear in its intention, appeared to prevent any payment being made to an employer out of scheme assets unless an appropriate trustee resolution was passed before 6 April 2011.

The way the provision was drafted appeared as though it might apply to general reimbursements from scheme assets where an employer had been paying an administration cost, or to the return of surplus to an employer on a scheme winding up. The new legislation will clear up these anomalies. Schemes will be given a welcome breathing space, as the section will be confirmed as only applying to payments of surplus from ongoing schemes and the deadline for action to be taken by trustees will be extended by five years to 6 April 2016.

3. Increases linked to CPI rather than RPIThe government has announced that pension benefits in the public sector and state provision are to be linked to Consumer Prices Index (CPI) from next year, rather than the traditionally higher rate of Retail Prices Index (RPI) increase. For many schemes this is likely to lead to a

reduction in liabilities to some extent. The Government issues an annual revaluation order to deal with annual pension increases from a statutory perspective.

However, company pension schemes will not be forced to use CPI rather than RPI to uprate pensions. The Government will not issue a modification power to make it easier to use CPI where schemes do not already have the power to amend scheme rules.

The government is, however, consulting on a proposal to make the use of CPI the minimum requirement for uprating for private schemes, but it will not be compulsory for private sector schemes to adopt it. The government also intends to make it compulsory for employers to consult their staff if they want to change their method of inflation uprating.

Only around a third of private sector schemes will be able to make the switch to CPI for pension benefits that have already been promised, according to the NAPF. The remaining two thirds of schemes have RPI ‘hard-wired’ into their rules.

4. Abolition of requirement to annuitise by 75From April 2011 pensioners will be able to draw down unlimited amounts from DC pension pots provided they satisfy a new Minimum Income Requirement (MIR). To satisfy the MIR, they must have secured a lifetime annual income of at least £20,000. This is intended to make it unlikely that people will fall back on the State after exhausting their savings. Income from state pensions, defined benefit pensions and annuities will count towards the MIR, but only once they have started being paid out. ‘Level’ annuities, which provide the same cash

[ ] Only around a third of private sector schemes will be able to make the switch to CPI

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Introduction


amount every year and do not rise with inflation, will count towards the MIR. Annuities which do not provide an income for a surviving partner after the saver’s death can count towards the MIR.

5. Default retirement age scrappedThe default retirement age (DRA), currently set at 65, is due to be abolished from 1 October 2011 (with transitional arrangements from 1 April 2011 – meaning no new notifications of retirement under the current statutory procedure although existing notifications can proceed). Final legislation is expected in early 2011. From April next year employers will have two options: to stop using retirement ages or to continue to use them in the knowledge that they may have to prove in the courts that their actions are “proportionate” and “contribute to a legitimate aim”.

Certainty around the DRA is crucial for DC schemes because it influences the structure of default funds.

6. Pension Protection Fund levyThe Pension Protection Fund (PPF) is looking to increase the levy burden on schemes with strong employer covenants by raising the levy for those in the new insolvency risk Band 1 (those with the lowest risk of going bust). Previously a scheme had to be more than 140% funded not to pay a risk-based levy, but now a scheme has to be more than 155% funded. The reduction in total levy from £720m to £600m allows for the shift from PPF benefits receiving RPI-based increases (before and after retirement) to receiving CPI-linked increases, and thus reflects the reduced benefits that the PPF will pay out in future.

7. Disclosure requirements changePension schemes will be allowed to use electronic communication to communicate with their members as of 30 December 2010.

If a scheme has not used electronic communication in this regard before they will have to send a notice to members telling them a switch will occur and giving them an opportunity to opt out. The regulations also recognise that where schemes already use electronic communication they do not have to re-notify members.

Schemes will also be able to provide information to members via websites, so long as the trustees can be sure that all relevant members will have access to the website and

the information can be viewed and documents printed. Schemes are required to take into account the needs of members with disabilities. For websites to be used for these purposes, schemes will need to write to members, via their electronic or postal addresses, advising that the information will be placed on a website. If new information is subsequently placed on websites, then schemes must notify members of the updates using the electronic or postal method selected.

These regulations also allow defined contribution schemes to provide more concise information to members in their annual benefit statements than is currently permitted, with additional detailed information being available on request.

8. Bribery, corruption and pensionsA wide-ranging new criminal law on bribery coming into force in April 2011 applies to pension scheme trustees. The comforting news is that trustees are low risk for bribery. Normally their main concern will be hospitality and other promotional activity by advisers and service providers. In practice, this is unlikely to breach the Bribery Act as long as it only involves reasonable and proportionate expenditure in pursuit of good relations.

On the other hand, there is no exhaustive list of what can constitute bribery and no minimum value. Parliament has deliberately set a very low threshold for potential prosecution. Like other organisations, trustees need to do a risk assessment and adopt procedures to address the risks they identify. The assessment should be documented but need not be particularly complicated. As well as a policy on hospitality, trustees will need a general statement on ethics that declares zero tolerance of corruption.

Trustees might be able to adopt versions of their employer’s bribery policy, modified to reflect their different circumstances. One measure they might consider is to require that all hospitality be declared to the full trustee body and that any estimated to be worth more than a certain figure be approved in advance.

EVEN FURTHER AHEAD: THE THINGS TRUSTEES NEED TO KNOW ABOUT 2012 …

9. Auto-enrolment on the horizonAuto-enrolment will be phased in for all businesses between 2012 and 2016, requiring them to either enrol workers aged between 22 and retirement age into an existing ‘qualifying’ pension scheme – the company’s main scheme or a separate one established for the purpose of auto-enrolment – or the National Employment Savings Trust.

Workers will be enrolled after three months with an employer – but savers who want to save from day one and take advantage of employer contributions will not be stopped from doing so. Allowing employers an optional three-month waiting period before auto-enrolling their staff will reduce the administrative burden and cost of opt-outs.

Workers will need to have earnings above the income tax threshold, which is roughly £7,500, but will pay contributions on earnings in excess of the National Insurance earnings threshold, which is just above £5,700. Any worker who opts out of a scheme will have to be re-enrolled every three years.

Qualifying pension schemes will have to offer contributions of 8% by October 2017 when auto-enrolment is fully phased-in. This will be split as 4% employee, 3% employer and 1% via tax relief by the government. Sponsors can also offer membership of a DB or hybrid scheme.

10. Abolition of DC contracting-out approachesDraft consequential legislation is designed to implement the planned abolition of contracting-out of the State Second Pension into a DC pension from 6 April 2012. DB schemes which are currently contracted-out on a DC basis will need to review their funding strategy to account for the fact that they will no longer receive National Insurance rebates from the abolition date. The DWP has said it will allow contracted-out DB rights to be transferred to contracted-in schemes when contracted-out DC schemes disappear in April 2012.

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The Pensions Regulator

This year is set to be another busy 12 months for trustees. Defined benefit (DB) and defined contribution (DC)

are both going through intense change and auto-enrolment is looming large.

Protecting DB members in the long termThe impact of the economic downturn continues to be felt keenly by trustees and sponsors. But it is heartening to see that trustees are using the flexibility in the funding regime to ensure that schemes continue to have a viable funding plan, and that levels of funding are improving. The use of PPF approved contingent assets has increased by 16% and despite employers having experienced three of the toughest years in living memory, recovery plans submitted during 2010 remain on average just 9.4 years long. Total employer deficit reduction contributions during 2009-10 were up £2.6bn to £29.1bn.

There is however no room for complacency and trustees must continue to be prudent in setting technical provisions and reasonable in agreeing funding plans in 2011 and beyond. As conditions improve we expect schemes to once again narrow the gap between assets and liabilities as they did in 2006 and 2007.

De-risking will likely be another key issue for many DB trustees in the coming year.

Following a year of lively industry debate, at the end of 2010 final guidance on Enhanced Transfer Values was published.

The guidance recognises that there will be a minority of members whose personal circumstances mean they are more likely to benefit from accepting a transfer offer, but we maintain that trustees should start from the presumption that transfers are not in most members’ interests and should therefore approach any exercise cautiously and actively.

The Regulator considers this to be a sensible

approach to ensuring that members are properly protected. In any de-risking exercise trustees have a duty to ensure that members’ interests are being represented and considered.

Building a member-focused DC marketEarly in 2011 the Regulator will publish a discussion paper on the regulation of the DC market.

The current framework was set out in 2007. Since that time there have been significant shifts in the landscape. Membership of DC provision has grown and with more members bearing greater personal responsibility for their retirement savings, it is crucial that the framework and the DC market provide the necessary protection for members. The review will focus on ensuring that the framework is fit for purpose in light of the landscape shift and the introduction of auto enrolment, which will likely see a further increase in DC scheme membership, and will encourage the industry to work together to develop a market which holds good member outcomes as its primary aim.

The Regulator encourages all parties with an interest in DC provision to engage with the

discussion, which will continue throughout 2011.

Preparing for auto-enrolmentLinked closely with the rise in DC membership is the introduction of auto-enrolment, as we expect the majority of those auto-enrolled to be so into a DC scheme.

Although the staging process means that medium and smaller employers will not reach their duties dates until at least 2014, employers and trustees should not underestimate the value of planning ahead.

We encourage all employers to look up their duty date now and plan to meet their duties. Trustees can be an important source of support for employers so it is also important that trustees know when their employer’s duty date is so that they are ready to provide that support.

Trustees will need to consider whether their existing scheme qualifies for auto-enrolment; whether there are any barriers to auto-enrolment, such as forms for the member to fill in; whether scheme systems and processes will be able to cope with the increase in membership; and also when to engage with the employer to discuss any changes that need to be made.

The Regulator will communicate directly with all employers at least 12 months before their duty date; for many large employers who will likely have complex systems and a large number of members, the first direct communication will be 18 months before the duty date.

In the spring, the Regulator will launch a number of online tools for employers, trustees and advisers. These will include fact sheets and interactive tools. More in depth technical guidance will be published later in the year.

The Pensions Regulator looks at some of the key issues

facing trustees 2011The Regulator in

For more information and resources for trustees, employers and advisers, visit www.thepensionsregulator.gov.uk/

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Change on the horizon

Expert View


Auto-enrolment will have a significant impact on UK employers, but many have yet to consider how they will address this or the cost implications it will have on their organisation. Now that the details are known, it is time to plan!

Identify when to comply Auto-enrolment requirements will be phased in from ‘Staging Dates’ between 2012 and 2016, dependent on the size of an employer’s PAYE payroll. All organisations with 500 employees or more will need to comply by the end of 2013.

For many organisations, it may be appropriate to consider bringing auto-enrolment forward to ensure that it does not conflict with key company milestones (e.g. Christmas trading for retailers) or human resource aspects (flexible benefit renewal dates).

Plan to do it again every three yearsAny employees that opt out will have to be auto enrolled on the third anniversary of the Staging Date (or three months either side of this date).

Think about new employeesEmployers will be able to wait up to three months before automatically enrolling a new employee into a pension scheme. However, if they prefer, workers can elect to opt-in and demand an employer contribution as soon as they start.

Decide who will be auto enrolledThis is where it gets complicated!

All employees aged between 22 and State Pension Age (SPA) will have to be auto-enrolled if they have earnings above the ‘auto-enrolment threshold’ (£7,475 for the tax year 2011/12). Contributions will then be payable on all Qualifying Earnings.

Qualifying Earnings are defined as taxable-earnings between £5,715 and £38,185 in 2010/11 terms. The threshold at which pension contributions become payable is to be aligned with the NIC primary threshold (£5,715 for the tax year 2010/11).

Workers aged between 16 and 22, and those

who have attained SPA, but are under age 75, who have earnings above the auto-enrolment threshold may opt to become members and demand employer contributions. Similarly any employee earning between the Qualifying Earnings threshold and the auto-enrolment threshold will have the right to opt-in and receive an employer contribution.

Those aged between 16 and 75, but earning below the Qualifying Earnings threshold, will also be able to demand membership of a pension scheme. However there will be no requirement for their employer to contribute.

Of course, these are the minimum requirements and employers will have to consider how they approach their own workforce. The legal minima are complex and should be carefully considered.

Consider scheme designWhen the Pensions Commission set the contribution levels for auto-enrolment, they were designed to target half the level of voluntary saving needed to achieve a level of income in retirement of 60% (taking into account State pension benefits) of current income assuming an individual started contributing at age 22.

It is clear therefore that, in isolation, the minimum contributions will be insufficient to meet the level of retirement income desired by `average workers’, with those earning more than average having considerably less.

Those who want to differentiate their scheme will need to work hard so that employees understand why their employer’s offering is better than those of their competitors. Those that don’t will need to be prepared to justify the low levels of emerging benefits that will be provided.

Identify an appropriate pension arrangementThere are a number of types of DC vehicle available for employers to use to comply with the auto-enrolment requirements. It will be important that employers carefully consider their relative merits in order to ensure that their pension plan is appropriate for both the

sponsor and its employees.The National Employment Savings Trust

(NEST) may be appropriate for certain organisations, but many are expressing reservations about its design, particularly the upfront charge of 1.8% on all contributions.

This together with the expected defensive nature of investment options, restrictions on the amount of contributions that can be paid to the arrangement (maximum of circa £4,300 p.a. in today’s terms), inability to offer full upfront tax-relief for non-basic rate tax-payers and a prohibition on transfers into or out of NEST, may make it inappropriate for many employers and their employees. Added to this, the fact that death-benefits will, unlike other pension arrangements, be subject to inheritance tax and the attraction of NEST diminishes.

A recent innovation that addresses these limitations and, importantly, helps to mitigate the financial impact of auto-enrolment on employers are master trust arrangements.

Many members will likely opt-out of pension scheme membership within two years of being auto-enrolled. Master trusts offer the flexibility of refunds for such members, enabling employers to ‘re use’ their contributions, generating significant savings for sponsors. This is not possible if NEST or a contract-based arrangement such as a GPP or Stakeholder is used.

BudgetAuto-enrolment may still seem a few years off, but planning should start now!

We would suggest that employers review their total expected pension costs against what they can afford and, ultimately, need to pay to recruit and retain employees. Scheme design and ways of reducing costs and risks should be considered.

Ken Anderson gives some practical steps that employers should follow to prepare for auto-enrolment in 2012 and beyond

Ken Anderson, Head of DC solutions,

Xafinity Consulting

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Expert View

As 2012 looms, employers should now be in the final stages of preparing for the changes to come with auto-enrolment. But how many really are? Research that we have recently carried out suggests that whilst the vast majority of professionals within the industry believe that auto-enrolment and soft compulsion will improve pension provision in the UK, they have yet to start preparing for this from a practical point of view. What must be done to ensure readiness for the huge changes to come?

Education and engagementEducating and engaging with a range of audiences will be key to ensuring that schemes successfully integrate auto-enrolment into their pension scheme. Unlike other recent changes, and those that are planned in the near future, the impact of auto-enrolment is not just on pension schemes. Responsibility lies firmly with the employer who should now be focussed on amending, or creating where necessary, robust and engaging HR strategies that ensure newly eligible members of staff are fully aware of all their options regarding pension provision. Failure to implement strategies reflective of the legislative changes will lead to many more problems in the long-term but even so, research suggests preparation is yet to begin on a large scale.

With employers choosing different ways of dealing with auto-enrolment, they must make it clear to all stakeholders what the changes mean and how they should be implemented; this must be done in several stages, from engaging in the first instance with administrators and then other key parties affected.

Administrators must be informed by the employers and the trustee so they have all the necessary information they need to make changes to systems, processes and workflows along with making sure potential members are communicated with regarding their options.

Depending on the size of the scheme, the administrators could be faced with major changes to the management of the scheme on behalf of their client as a result of the choices made by the employer. For example, using NEST, creating a new section specifically as a

result of auto-enrolment within their existing arrangement or taking advantage of the benefits offered by establishing a section within a DC master trust all impact differently on the amount of work required from administrators and the changes they may need to make to their systems. Whereas limited change may be required if an existing section is used and can therefore be done quickly and easily, the setting up of a new scheme for auto-enrolment will require much more work from an administration perspective. Consequently, they will need much

more notice to ensure they have enough time to fully plan and implement changes ready for 2012.

After making all the necessary arrangements with their administration team, including ensuring they have the knowledge to deal with any enquiries from potential members, scheme managers must then create partnerships with administrators and payroll teams to make the changes needed within the actual organisation.

Still a long way to goWorryingly, results of our survey show that two thirds of payroll teams have yet to start preparing for auto-enrolment, a scary thought with it becoming imminent. Again, depending on the route chosen to meet the obligations of auto-enrolment, payroll teams may have a lot or limited work to do. With issues regarding the capability of systems, the development of appropriate strategies, processes and interfaces and the overall cost for organisations, this

need for engagement and joint working is even more important. As pensions professionals, our main aim is to embrace what needs to be done with regards to auto-enrolment and work with employers to support payroll teams.

One reason for the lack of progress from payroll teams to date may be as a result of the other challenges they are currently facing with regard to the impending changes to tax and the implications this will have on established PAYE systems. These professionals may see pensions and in particular, auto-enrolment as secondary to their ‘day job’ and consequently, it may be that a laissez faire attitude has been adopted, hoping that a solution will present itself when the time comes; a nice thought in theory, but highly unlikely in practice.

Then come the ever important members, in the case of auto-enrolment, mostly newly eligible and recent starters. Communication directly from employers and the trustee is of vital importance to make sure that employees have the information about their choices and the knowledge to make informed choices about whether to opt-out or stay enrolled in the scheme offered to them by their employer.

Although this all means more work for those involved in the short-term, in the long-term, supporting all stakeholders now will ensure smoother management in the future – a benefit for employers, administrators, managers and members. By providing all parties with the information, expertise and resources they need we will ensure they can all cope and deliver in what is surely to be a challenging but rewarding year.

Lesley Carline says trustees must start to make plans for pensions reform now

Countdown to auto-enrolment

Lesley CarlineHead of sales

and marketing rpmi

[ ] Communication directly from employers and the trustee is of vital importance to make sure that employees have the information they need to make informed choices

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Perspective on the year ahead

Expert View


Whether as a professional, employer nominated or member nominated trustee the agenda for 2011 will be largely dictated by the Pensions Regulator. With statements and guidance covering a number of key areas it is a major task to maintain the right level of focus.

GovernanceThe issues that trustees face for 2011 fall into a number of distinct categories, these include improving scheme governance, chiefly by raising the standards of administration and the collection and retention of data.

InvestmentSetting appropriate investment strategies and monitoring investment performance is business as usual, but in the difficult financial circumstances likely to prevail during the year, being prepared to take tactical decisions, within tight timeframes, or delegate the responsibility for doing so to professionals will need trustee boards and their advisers to take a proactive approach.

There is growing evidence that a key factor in a successful investment strategy is the selection of asset classes. This is also significant as both the Regulator and the PPF have expressed concern at the level of risk taken by pension schemes in relation to their investment strategies, in particular that pension schemes are overweight in equities.

Employer covenantThe Regulator places great emphasis on trustees’ willingness and ability to monitor and understand the employer covenant. This interest is driven by the dual need to protect both the beneficiaries’ interest and to fulfil the statutory duty to protect the PPF. These drivers place responsibilities on trustees that have hitherto been outside their remit.

The growing emphasis on independent covenant advice increasingly removes the link between company management and the trustee body, and this can lead to unhelpful adversarial positions being taken. Underlying the covenant issue, and no doubt driven by the need to protect the PPF, the Regulator’s emphasis on

deficit reduction makes sense from both the Regulator and beneficiary perspective. In the current financial climate it throws into sharp relief the problem faced by trustees in how far they should go in balancing funding issues of the scheme against a backdrop of threatening its future viability and the possible loss of their members’ jobs if the company goes under.

Enhanced transfer value exercisesWith increasing numbers of sponsors seeking methods of reducing scheme liabilities the recently published revised Regulator guidance places a significant burden of responsibility on trustees. Balancing the regulatory requirement contained in the 2008 transfer regulations and the Regulator’s far reaching guidance will involve difficult decisions particularly if the sponsor covenant is weakening.

Scheme advisersMaking best use of advisers is another key issue. As the Regulator issues more statements and guidance, and flexes regulatory muscle by seeking to impose payment directives through the courts, so advisers have generally become more cautious in the scope and scale of advice they are prepared to offer. Trustees need to ensure that not only do they get good value for money from their advisers but that they are equipped to constructively challenge them, which brings us to perhaps the most important thing for trustees, improving their knowledge and understanding.

Trustee Knowledge and Understanding (TKU)Improving, or even just maintaining, TKU requires considerable commitment by

individuals and recognition by sponsors that good governance comes at a price.

All schemes have their advisers, and the challenges they face in working effectively with them, but are trustees content to listen to one point of view? Finding opportunities to get a wider, more varied view must be desirable. Sponsors need to recognise this and allow trustees, ENT and MNT alike, the time to attend seminars, conferences and special interest events. Subscriptions to industry publications and websites should be taken out to enable trustees to keep abreast of what is happening in the wider pensions arena.

ConclusionsAs trustees, we face an agenda of growing Regulator interest and increased expectations of how we will govern schemes. Clearly the agenda will vary from scheme to scheme, the most obvious difference being the issues associated with governing an ongoing scheme and one that is closed to future accrual. For instance, if the Regulator has concerns that all schemes are over exposed to equity risk that must be compounded in a closed scheme that is firmly on the glide path to wind up. In such schemes the need to match assets and liabilities becomes much more significant. As with all de-risking strategies this comes at a cost so trustees will be expected to get the best value possible from their scheme’s investments, and have the knowledge and skills to take tactical decisions rather than simply reviewing their Statement of Investment Principles every three years or so.

Well informed trustees who are confident in their abilities and better able to constructively challenge advisers, and indeed the sponsor, can only improve governance for the benefit all concerned.

Peter Askins examines the challenges for trustees that will appear during 2011

Peter Askins Director

Independent Trustee Services

[ ] The Regulator places great emphasis on trustees’ willingness and ability to monitor and understand the employer covenant

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Expert View

For those in the pensions industry keen to know what they will be wearing in 2011, this article will offer little in the way of fashion advice. But if it is pensions law trends you are after (in particular, those iconic collections which trustees and scheme sponsors will need to be aware of) please read on.

THE WINTER 2011 SEASON The switch from RPI to CPIIt seems appropriate to start this piece with a look at the effect on pension schemes of the switch from RPI (the retail price index) to CPI (the consumer price index) for statutory increases to pensions in payment and in deferment from 1 January 2011.

Scheme rules which specify that statutory increases apply (or are silent on the point) are likely automatically to follow the legislation. If scheme rules specifically refer to RPI as the basis for providing increases (which many do) then a scheme amendment will most probably be needed to make the switch to CPI. Although widely rumoured, a statutory easement to help schemes make this change did not materialise. That said, at least schemes which continue to use RPI will not have to provide a CPI underpin.

The legislation uses the September CPI figure, which was 3.1% compared to 4.6% for RPI. However, as a result of legislative changes made back in 2005 and 2009 respectively, some schemes may well already cap increases on pensions in payment and for early leavers at 2.5% in respect of certain members’ service.

The Pensions & Savings BillWidely tipped to emerge some time in January, the Bill will hopefully deliver promised clarity as to the scope of section 251 of the Pensions Act 2004 (preserving powers to refund surplus), and also extend the deadline for trustees to pass a resolution to preserve such powers by five years (to 6 April 2016).

With employers already gearing up for 2012, the introduction of the national employment savings trust (NEST) and auto-enrolment will

also come under the Bill’s spotlight. As a recent independent review recommended a number of refinements, the certification process for qualifying defined contribution (DC) schemes will be made easier, and employers will ultimately be able to take advantage of a three-month waiting period.

THE SPRING / SUMMER SEASON Tax restrictionsWith Labour’s plans to restrict pensions tax relief for high earners now shelved for being unduly complicated, the coalition government’s proposals will take to the catwalk from 6 April 2011. Although ‘high end’ pension savers were Labour’s original target market, by making a drastic cut in the Annual Allowance (‘AA’) (from £255,000 down to £50,000), the coalition’s changes look set to have a more far-reaching effect.

Key issues which may need to be ironed out in the run up to 6 April include:

• Whether (and to what extent) individuals and scheme sponsors will want to adapt pension savings behaviour to ensure that pension contributions (or ‘deemed contributions’ in defined benefit (DB) schemes) remain below the new AA;

• Although the concept of a ‘pension input period’ or ‘PIP’ (the period over which pension savings are assessed for the purposes of testing against the AA) has been with us since A-Day (6 April 2006), the prospect of a significantly reduced AA has made the possibility of changing the PIP (for example, to align it to the tax year) one of the hot topics for trustees.

STILL WEARING IN AUTUMN Default retirement age (DRA)The DRA of 65 under age discrimination legislation will be phased out from 6 April 2011, with a short transitional period until 2 October 2011 covering retirements already in train. From April 2011, employers will therefore

have to objectively justify having a compulsory retirement age for their workforce.

While the Government’s recent consultation on how to phase out the DRA did not deal with the potential impact on pensions, schemes are bound to feel the change because for generations benefits have been paid at ‘normal’ retirement date.

ALSO ON THE 2011 RUNWAY Regulatory actionHaving published a determination to issue its first ever Contribution Notice and its second Financial Support Direction, if 2010 is anything to go by we can expect to see the Pensions Regulator (TPR) very much ‘en vogue’ in 2011. However, with an expected appeal in one case and multi-jurisdictional difficulties adding an extra dimension in the other, TPR is going to have its work cut out.

Guidance for all seasons In addition to stepping up enforcement action in the DB arena, regulatory guidance is one to watch again in 2011. But it is not just DB schemes that are likely to experience an upsurge in TPR attention. DC schemes will also require 100% accuracy for new ‘common data’ and 95% accuracy for legacy data (basically, any data created before June 2010). Those schemes whose merchandise is not up to scratch can expect TPR to investigate and possibly take enforcement measures.

What’s hot (and what’s not) for 2011As pensions fashions change, Claire Carey explains how to stay on the right side of the law

Claire Carey,Partner,

Sacker & Partners LLP

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Fully protected in pensions

Expert View


Trustees have an increasingly difficult job to do. The Pensions Act 2004 increased the legislative burden on trustees giving the Regulator wide ranging powers if schemes are not being managed appropriately and various new codes of practice have also been issued recently.

The issue of protecting trustees from liabilities has also become particularly topical following the various headlines reporting the liability of trustees including the cases involving the incorrect authorisation of unsecured loans to sponsoring employers. The Pensions Ombudsman’s Office provides members with an easily accessible forum to pursue any disputes. Last year, in the ES Group Pension Scheme determination, the Pensions Ombudsman found several breaches and the trustees were personally liable to pay in excess of £500,000.

As can be seen, therefore, the responsibilities of a trustee are onerous which is also borne out by claims experience which demonstrates that errors can occur even in the best managed schemes particularly in the increasingly dominant environment of defined contribution schemes. Liability for breach of trust is a personal liability and a trustee is liable to both the scheme beneficiaries and to scheme creditors. Professional advice should be sought when appropriate and failure to do so may in itself be held to be a breach of trust. If trustees are uncertain as to how to exercise their powers, they can also apply to the court for directions. The risk is potentially greater after a winding up where there may be missing beneficiaries or other contingent liabilities and no assets. A trustee or trustee director is also potentially at risk of having to pay a civil fine for breach of pensions’ legislation. Fines for individuals range up to £5,000 and for corporate trustees £50,000.

Limited protection: exoneration & indemnity clausesMany trustees will have the benefit of clauses within the trust deed and rules exonerating them from liability and in many instances, an indemnity may be given by the scheme or the sponsoring employer company. However, it

is not always appreciated that such clauses are subject to statutory limits. For example, an exoneration or indemnity from the fund cannot operate for any breach of trust relating to investments and it is also prohibited for the scheme to indemnify trustees for civil fines and penalties. It should also be appreciated that an indemnity from the employer would be of no value upon an insolvency when the trustees are still having to manage the scheme.

Exoneration clauses are also subject to several other limitations including not affording protection from claims involving third parties and they will always be construed restrictively by the courts. In addition, the problem with relying purely on exoneration and indemnity provisions is that they merely transfer any liability between the trustees, the beneficiaries and the employer. More importantly why should a pension member, who has a valid claim, be defeated by a legal technicality i.e. an exoneration clause. In today’s environment, trustees do not usually wish to “hide” behind exoneration clauses when facing such claims.

Wider protection: insuranceIn these circumstances, insurance is playing an increasingly important role in protecting trustees and pension scheme assets. It provides an external resource of protection and should stand in front of such indemnity and exoneration clauses. The purchase of a properly drafted and comprehensive insurance policy can be a cost-effective means of protecting members benefits, individual trustees, the sponsoring employer, pension managers and internal administrators from losses resulting from claims, be they well-founded or not.

If the decision is taken to adopt insurance, however, it is important to have a policy specifically designed to respond to the needs of trustees and other individuals involved in the management of pensions. This is highlighted by the potential conflicts of interest which commonly exist when a trustee is also a director of the sponsoring employer company with duties to the company and its shareholders. As a trustee, however, there is an overriding

duty owed to the scheme beneficiaries which is paramount. Accordingly, it is not recommended that reliance be placed upon a Directors & Officers (D&O) policy of insurance as the cover will not be tailored to meet the specialised circumstances relating to pensions and potentially there will be competing calls on the policy. Furthermore, D&O policies will often contain an exclusion for any acts or omissions while acting as a trustee or administrator of the pension scheme.

ClaimsThe value of insurance cover is, nevertheless, best demonstrated when it comes to claims which can affect even the best managed schemes. There is a continuing increase in the notification of claims. OPDU’s own claims experience has seen issues which have involved individual claims sums of up to £20m to date.

Insurance is available as an external resource of protection and thus the trustees can give a higher level of comfort to members that their interests are being looked after properly in preserving the fund assets which is particularly important today when deficits are common.

Protecting trustees, the scheme, members & the sponsoring employer is as important as ever, says Jonathan Bull

Jonathan BullExecutive director

OPDU Limited

[ ] It is important to have a policy specifically designed to respond to the needs of trustees and other individuals involved in the management of pensions

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Documents

2011: the road ahead