TPR has issued its latest guidance on the very tricky subject of Employer Related Investments. Readers may know that for many years now there have been fairly strict limits on the amounts that a pension scheme can invest in the business of its sponsoring employers. In very simple terms, no more than 5% of the fund can be invested and there are complete bans on things like providing bank guarantees to the company.

There is a very good reason for these limitations – essentially to prevent ‘putting all your eggs in one basket’ as it were. Way back in the mists of time, the pensions of whole swathes of workers were wiped out when the trustees unwisely made excessive loans to keep the sponsoring employer afloat, (for the seemingly logical reason that it’s better to have a job which provides a pension scheme than no job at all) only to see the whole thing come crashing down when the employer inevitably went belly up meaning not only was there no job, but there was no money in the pension scheme left either. Today of course we have the PPF but that’s another blog entirely.

But that was then and this is now and we have seen an explosion in rather more complex and imaginative investment vehicles coming on stream  including pooled type investments such as unit trusts and other collective investment schemes. In addition, the industry is having to come up with some exotic ways of meeting funding shortfalls as the regulator uses its muscles to require stricter funding mechanisms which again has led to complex debt for equity swap deals (where the trustees effectively take over the business and give up any further claims on the company in return) such as in the Uniq case.

This has led tPR to think a bit more deeply about ERI and remind schemes and employers that they might need detailed legal and other advice when considering such investments and expects ‘an alternative funding structure’ to be provided as a fallback position.  Even cash of equivalent value would do…presumably it didn’t occur to TPR that if cash was that readily available it might have been offered already but we’ll let that pass for now. While acknowledging that it may be ‘difficult’ for trustees to track investments underlying pooled investment vehicles such as collective investment schemes, nevertheless it expects trustees to monitor these indirect investments ‘in a reasonable and proportionate way’ So that’s all right then.

If ever there was a proof that no one at TPR has ever actually run a pension scheme, this is it.

Now that the dust has settled a bit on the excitement of the Auto Enrolment announcements of last week, I thought I might just sit down and try to understand a little bit more about what the proposals might actually mean in practice, particularly for small to medium sized businesses. I’m not addressing the really small employers here – those with just a few employees and who previously provided no pension provision. Yes, it’s true that they will for the first time have to look at this, but generally, they will probably just auto enrol into NEST and be done with it.

No, I wanted to think about the employer who might in fact already have a pension scheme for its workers and what AE might mean for them. And while doing so, my euphoria at the good intention behind the policy of forcing people to save for a pension slowly turned to despair as I began to realise that once again, we have probably managed to make it the most complicated, expensive process that we could possibly have come up with. ‘ Why?’  I hear you ask. Well, here’s just a sample.

Let’s assume you are an employer with an existing DC scheme and you have perhaps 250 employees, 100 of whom are actually in the scheme because the other 150 either didn’t wish to join or opted out of joining. Along comes your AE staging date. You now have to:

1) work out if your scheme falls within the definition of Qualifying arrangement which will require you deciding which of the 3 definitions based on contributions and pensionable pay your scheme falls into.

2) work out whom of your workers fall within the jobholder definition who require to be auto enrolled ie, are they between 22 and state pension age – itself a movable feast – are they earning at least £7425 per annum etc

3) write to all those eligible (including those already in your eligible scheme even though you don’t have to do anything about them but especially also to those who aren’t in the scheme based on a strict regulatory process as to the information to be provided and woe betide if you get it wrong

4 )auto enrol any eligbile jobholder who isn’t currently a member and make sure that they ’suffer’ the pain of seeing a pension deduction before they can opt out.

Ah, opting out, now there’s a topic. Let’s just look at this shall we? Individuals can of course opt out – but first they must be ‘opted in’! An employer must ensure that jobholders are told all about auto enrolment including the right to opt out (see 3 above)  but they cannot do anything that would encourage jobholder to actually opt out nor can they provide a form to make life easier for them should they wish to do so. The Scheme can provide a form but then the jobholder must return this confusingly not to the scheme but to the employer who must also make the necessary returns to the Pension Regulator. Still with me? And the employer must do NOTHING that requires any action on the part of the jobholder. So, he can’t ask them to fill in a form with their basic information in order to facilitate membership administration (though a third party administrator can and perhaps if the scheme admin is done in house but that’s not really clear) and the jobholders must not be asked to select any options – although of course they can be given options but only as long as its after they’ve been put into the default position first. I think it was at this point that I started to lose the will to live.

But I shouldn’t complain I suppose – there is no way that even sophisticated employers of this size will work their way though the mire without professional help. No one said it would be easy but did it have to be this bloomin’ difficult?  Hello, can I be of any assistance…?

Bad news story of the week is the proposal leaked by the Daily Telegraph today (24 September) that the Pensions and PPF Ombudsman Service is to be merged with the Pension Regulator. As a consequence, the Pensions Advisory Service is to be abolished. This is a seriously bad idea for a number of reasons. Here are just a few.

1. tPR is very nearly unfit for purpose. It makes orders such as Financial Support Directions on Lehman Bros subsidiaries that cannot be enforced in all likelihood. It is seemingly unable to attract and recruit a new Chief Executive or Chairman. It is well past it’s ‘use by’ date and needs a radical rethink.

2. Why on earth would the PO be a good fit with tPR? Just because they both have ‘pensions’ in their titles does not mean that they are a match made in heaven.

3. There is already a very good Financial Ombudsman Service. Surely the PO would sit far more comfortably there as was previously suggested a few years ago. An Ombudsman is not and should never act as a Regulator as Tony King the current Pensions Ombudsman so rightly has said. Merging it with the regulator of pension schemes would be a severely retrograde step. Merging with the FOS however may well achieve some cost saving (which is of course what this is all about), although I doubt frankly that it would be much overall.

4. The disbanding of TPAS would remove a vital free advisory resource for the general public. Pensions are a complicated thing. TPAS through it’s volunteers provides excellent FREE guidance to individuals. Where is the Big Society in this proposal then?

I sincerely hope the Government thinks again about this particular idea. There are a lot of quangos that need sorting out. But pensions have had quite enough trauma…overmeddling with these two respected industry bodies would simply add salt to the wound.

I have recently been instructed by a trustee client to assist them in the merger of two pension schemes of the same employer. Great news of course especially for my bank balance, but it immediately started me thinking about possible conflicts of interest. Stay with me here and I’ll explain why.

A little unusually, the two schemes had the majority of the trustees in common. Now most Conflicts guidance, including that of the Pension Regulator tend to concentrate on the possible conflicts that can arise when a senior executive of the Employer also sits as a trustee and that’s fine and dandy but this was a bit different. So what were the trustees to do? Could they effectively and fairly negotiate with themselves when dealing with relative funding positions, future benefits in the merged scheme and the like?

Now the answer may indeed be an obvious one (and I’ll give my advice below) but it got me thinking about basic principles since managing possible conflict is key to good scheme governance and we know how keen the tPR is on this – and indeed, rightly so. But I am often asked how can we identify whether we have a conflict at all?

Here’s the tPR’s definition “A conflict of interest may arise when a fiduciary (which includes a trustee) is required to take a decision where (1) the fiduciary is obliged to act in the best interests of his beneficiary and (2) at the same time he has or may have either a separate personal interest or another fiduciary duty owed to a different beneficiary in relation to that decision giving rise to possible conflict with his first fiduciary duty which needs to be possibly addressed.”

My guidance to clients generally goes like this: If it smells like 5 day old unrefrigerated haddock and/or you feel uncomfortable about it, then it’s probably a conflict situation and you need to manage it.You can either step back from the decision, you can appoint an independent professional trustee or you can resign completely.

In the case of my clients mentioned above, I advised a distinct unpleasant odour may arise. They are very sensible trustees – I am sure they will agree!!

So, Readers Digest (or rather the pension scheme of course) has now entered the PPF Assessment process as was almost inevitable following the calling in of the Administrators in February. Readers of my blog will know that RD had been in discussion with the PPF prior to this in relation to its multi million pound deficit and came a cropper when TPR refused to accept a negotiated deal that would have seen an innovative resolution including a significant cash injection and a large equity stake in the US parent company being taken by the scheme trustees.

This was not TPR’s most glorious hour (frankly they’ve not had a glorious hour for a long while now). The publishing interests of Readers Digest itself has now been bought by a private equity company but they will not take on any liability for the pension fund.
Instead, this will be left in the shell of the old RD with TPR now in the unenviable position of considering how the £125m liability can be satisfied. Let’s not forget that TPR has a statutory duty to protect the PPF which will now be picking up the tab. For those of my readers familiar with Twitter speak, we would call this #fail!!

Even if TPR can use it’s powers to call in a Financial Support direction, this will fall on the US parent. And we all know how successful TPR has been when trying to get Overseas companies to pay up under an FD. Again for the Twitteratis amongst you – Nortel#Fail!!

I have decided that this blog will be an election free zone – at least for the time being. I suspect that none of the three main parties actually have much of a clue about pensions other than how they can get the over 55’s to vote for them with a bribe or two so let’s not go there and instead talk about a couple of other pensiony issues

First, a cautionary tale for Trustees, with tPR having reported two trustees from the firm GP Noble to the Serious Fraud Office. Charges have been laid and the matter is next due before Southwark Crown Court on 16 April.

Criminal sanctions against trustees have been available since the good old days of OPRA and the Pensions Act 1995 but have (rightly I think) been used sparingly and only in the most serious of cases. We await the outcome of this one with interest but it behooves no one,  not even MPs – and certainly not pension trustees – to think they are above the law

Next, an interesting development in the Cadbury take over saga by Kraft. It seems that the original drafters of the Scheme inserted provisions which will make it all but impossible for Kraft to close the final salary arrangement. As a result, the members are being told that they must either opt out of the Scheme (thereby encouraging a ‘death by a thousand cuts approach’) or face a three year pay freeze. Not a great choice either way and doesn’t say a lot for the due diligence process when the deal was put together does it? Oops!

Finally to public sector pensions and the recent report by the CBI that suggests that the final salary model is unsustainable and needs reform. While not wishing to accuse the CBI of stating the bloomin’ obvious, it nevertheless highlights the issues and proposes some solutions which may be a challenge to the next Government. An estimate that public sector pensions could cost each working person over £330pa in taxes to pay for these pensions is not likely to be much of a vote winner for any party that ignores the subject. Rats – I said I wasn’t going to mention the election – as I’m clearly not able to keep my promises, perhaps I should offer myself to the electorate!!.

Sometimes, its not just what you know…it’s who. The Pension Regulator has just found this out having been sent off with a flea in its ear by both the US and Canadian Courts in its attempts to enter the ‘world domination’ market by thinking – completely wrongly as it turns out – that it had jurisdiction in those countries.

The background is it’s attempt to make the overseas parent companies of the Nortel UK Pension Schemes to pay an additional contribution to cover the significant deficit. The US and Canadian courts have given permission for the overseas parent to ‘ignore’ the demand for £2.1 billion. Nortel is bankrupt by the way.

So what possible sense would it make to pursue a ‘man of straw’ and what advice did tPR have to suggest that pursuing a dead duck was a great idea? Presumably the same adviser who said that going up against Readers Digest was going to result in a saving to the PPF too. Time for better advice I think – actually better  yet, time for a different regulator.