Just a short one this week in that I was interviewed by Lexis/Nexis the legal database, for commentary on St Vince of Cable’s plan to simplify legislation by ensuring a One In One Out approach. Here’s a link to the article. Call me an old cynic if you like but sometimes a glass half empty is exactly that. I’m off on my hols now for a couple of weeks. Lying on a beach in the Caribbean with a good friend, good food and a tall glass of something naughty. Now that glass will certainly be half full! See you in September.

http://lexisweb.co.uk/groups/employment/blog/archive/2010/8/16/21482.aspx

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!!

A few thoughts on tPR this week and it’s decision to reject the Recovery Plan put forward by Uniq and the scheme Trustees. The proposal in and of itself was not really that remarkable. But clearly tPR saw something in it that they didn’t like – probably the 3 year contibution holiday – and told them to go back to the drawing board. Uniq are now saying that they will have to raise more capital in order to pay off the £400m plus deficit. Not easy when you’re only making £4m pa profit. The difficulty in all this is that since the pension scheme is the firms’ largest creditor, any equity/debt swap deal, (which is almost the only thing left on the table) will mean the trustees potentially commiting a criminal offence in that this will breach the rules on self investment. The law limits trustees to no more that a 5% stake in the Principal Employer’s business. The prosecutor for those offences would be …yup, you guessed it…tPR!!

Now I don’t know for certain that tPR would have been aware of this little conundrum when they rejected the original deal. But if they weren’t then frankly they should have been or at least they should have reasonably forseen the possibility. Discussions between the company, the Trustees and tPR would have been pretty detailed and wide ranging. Were they blinkered by their statutory duty to protect the PPF and completely took their eye off the ball when it came to self investment? Perhaps but if so, they’ll never admit it and we’re never likely to know. Where’s Wikileaks when you really need it??

In other pension news, the Parliamentary Ombudsman has weighed in with her views on the latest development in the Equitable Life saga. It seems that the Chadwick Report has fallen somewhat short in the level of compensation that is being paid to policyholders who were affected by the Guaranteed Annuity Rate saga of the early ‘Noughties’. Despite £4.8 bn being lost, only £500m is being put up. Ann Abrahams had issued her own report in 2008 blaming significant regulatory failures in the debacle but now says that the Chadwick report is flawed due to it’s terms of reference being ‘irrelevant’. Well, I don’t know about that but I sincerely hope that this will now be brought to a swift conclusion. The Bloody Sunday enquiry took over 30 years…if this goes the same way, then most of the potential claimants will indeed be beyond caring.

And finally, it seems that Astra Zeneca is following the BBC Pension Scheme in trying to limit the amount of salary increases which will count towards Final Pensionable Salary. Entirely predictably, the Unions are threatening strike action. Word to the wise here folks – be grateful that you still have a Final Salary pension of any sort. Going on strike will hardly improve the financial position of your employer who might well be struggling to keep the businees (and your jobs) going in the light of statutory funding requirements. Just remember the potential alternative (Clue: birds lay eggs in them!!)

This week some interesting developments on the pension front and in particular the issue of a Consultation document by the Treasury on Compulsory Annuitisation by age 75. As many readers will know, the Government has already announced plans to scrap the Default Retirement Age requirements and so the need to review the requirement to purchase an annuity by age 75 when (in theory) you might still be actively working had to be on the cards.

The current tax rules were drafted on the premise that tax relief is given on the contributions going into a pension scheme on the assumption that tax will be paid on the income (or pension) derived from those contributions – that is on the benefits being paid.

Most members of Defined Contribution schemes which are of course becoming the norm with the demise of DB schemes, secure their retirement income by purchasing an annuity. If you don’t want an annuity, the options currently available to you are pretty limited. Before age 75 you can arrange for an ‘unsecured pension arrangement’ or USP from which you can take a tax free lump sum at retirement and drawdown an income from the remaining tax efficient savings pot as  needed subject to a prudent limit. After age 75 the choice is an ‘alternatively secured pension’ or ASP similar to a USP but with a lower maximum drawdown limit and a minimum drawdown limit so as to ensure that pension savings are used to provide a retirement income.

ASP’s were largely intended to be available only to those who had a moral or religious objection to annuitisation so most members of registered pension schemes are still required to purchase an annuity by age 75

The proposals aim to sweep away most of these restrictions.Annuities will still be available but won’t be compulsory at age 75. USP’s will be relaxed so that the amount of drawdown will be at the members choice subject only to a cap and members may choose not to drawdown anything at all.The Government will also create additional flexibility for individuals who wish to draw down more than the capped annual limit.

Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. This ‘Minimum Income Guarantee’ will be the most interesting (and potentially most controversial) thing to define and should make for quite a debate in the pension world.  So far, commentators are quietly impressed but this could change as we all begin to absorb the consequences and potential in this change. As ever, watch this space!

A slight departure today from the usual pension stuff to do a bit of unashamed advertising for an extremely funny book!!

Anyone who might have been avid followers of Baby Barista in the Times before it hid behind its paywall, may be interested to know that advance copies of “Law and Disorder: Confessions of Pupil Barrister” have just arrived.

This is a new edition of “BabyBarista and the Art of War” which was described by broadcaster Jeremy Vine as “a wonderful, racing read – well-drawn, smartly plotted and laugh out loud” and by The Times as “a cross between The Talented Mr Ripley, Rumpole and Bridget Jones’s Diary”. It follow’s BabyBarista’s fight for tenancy during his first year in chambers. It is officially released on 2 August and can be pre-ordered at www.amazon.co.uk. Tim Kevan is a great writer and I will be reviewing this on here once I get my paws on a copy!! I am madly in love with ‘Old Ruin’ despite his great age – he is a man of wisdom and cuddlyness!

I have added a link to the Baby Barista blog and if there are any Guardianistas amongst my readership, you may know that BB is now regularly appearing there. The cartoons are provided by the wonderful Alex Williams, and If you want to get a daily fix of amusement at the expense of the ‘Senior Branch’ of the legal profession (as they like to think but we solicitors know better!!) then I can thoroughly recommend you go out and spend a very tiny proportion of your pension or erstwhile contributions thereto!! See I got pensions in there somewhere!!

One of the most amusing stories that has arisen in the past week (although it has a serious purpose) is the proposal that Diageo, the drinks conglomerate has come up with to try and solve its Final Salary Scheme funding deficit. As readers may know, when an actuarial valuation reveals a deficit, the law requires that the Trustees and the Employer get together to try to agree a cunning scheme to repair that deficit over a period of time. This is called a Recovery Plan.

Now the usual way of doing this is by (for example) the employer putting in additional cash sums or contributions. Or it may put up some property as collateral or put in place a Guarantee. But Diageo has come up with a somewhat unique offer. It is handing over 2.5 million barrels of booze to the scheme Trustees. At the end of 15 years, the scheme must sell this back to Diageo for an amount expected to be “no greater than the deficit at that time”, which is estimated to be up to a maximum of £430m. The deal will generate an income to the UK Scheme of about £25m each year over the 15 years. While it’s true that this is no different from any other offering of property (as collateral) it should certainly help make the Trustees meetings go with a swing!!

All of which led me to wonder just what other assets companies might consider using in these circumstances. If you’ve got any ideas, just let me know!! No prizes for the funniest I’m afraid but it might cheer us all up over the Summer!!

Well, I really don’t know where to start this week. Retirement ages to go up to 66 from 2016 – an accelerated rate but perhaps not before time. Default retirement age is to go – this was well trailed and was a neccesity if State Pension Ages are rising. But there is a downside to this of course. And that is – just where are the jobs going to come a) for the over 50s who are already struggling to find jobs in the current market and b) for the younger generation who might find their job opportunties blocked by encumbent older workers who won’t (or can’t) retire?

There is no simple answer to this particular dilemma except perhaps to ensure that we all start saving earlier for our pensions which will allow us to take that ‘early retirement’ option. But it may not be possible for many. And then there’s the manual workforce who may well feel that working on beyond their bodily ‘use by’ date is problematical. Not easy is it?

Next a slightly sneaky announcement from the Government. Many of us are familiar with pensions in payment or in deferment rising each year by the Retail Price Index or RPI. Well, hidden in the small print is a change to State Pension increases  meaning that instead State pensions will rise by earnings or 2.5% or using the Consumer Price Index or CPI, whichever is the greater .  So what, you might think? Well simply this. CPI is usually a couple of percentage points lower than RPI. So by using this index the Government might save itself a bit. Employers and Trustees might wish to consider amending their schemes (which usually use the RPI measure) to take advantage of that soon.

Restoring the link to Earnings – another well trailed change – may sound good (and in times of wage inflation is very good) but two caveats here. First, earnings are not rising particularly fast at the moment and secondly, since the change is in no way going to be backdated, there will be a lot of catching up to do before we get back to where we should have been had the link not been broken in the first place!! Oh well, there’s always the World Cup to cheer us all up and at least we not striking over pensions like the French…yet!

Although it is really something of a statement of the bleedin’ obvious, PwC have recently issued a report which after extensive (and no doubt extremely expensive) research has concluded that Final Salary Pension Schemes will have ceased to exist within 10 years. This is not exactly ground breaking news to those of us within the Pension Industry who have been watching the death throes for several years now.

It does seem however that the pace of change is escalating and frankly this is no surprise either given current economic circumstances, the open ended cost and volatility of running such schemes and the legislative complexity of complying with the over burdensome regulatory regime.  (Oh and Obama’s ridiculous grandstanding over BP significantly reducing the value of our pension funds – when he clears up Bhopal he might just have the moral high ground!!) And that’s before one factors in increasing longevity of members (in other words, we’re all living too long for the actuaries to keep up) and the soon to be introduced reforms in 2012 (I say this with some caution since it is just remotely possible that NEST will be spiked as many of us in the Pension Industry hope…at least in its current form)

But the one area that the report flags up which should be of concern is the fact that employees are simply not saving enough for retirement. 60% of people won’t be able to retire at all due to lack of savings. Yet the previous Government (and this one too if they don’t do something about it) think that an 8% contribution into a monolithic money purchase scheme will be sufficient. Actually the figure that will be invested will be a mere 5.7% after the set up levy and management charges are taken off. Here’s a bit of advice that didn’t take a lot of research – IT ISN’T ENOUGH!!

It is no wonder that employers are incentivising their employees to transfer out of the DB arrangement into something less costly. Someone needs to get a grip of the Pension arena. Who will be brave enough to do it I wonder?

Best news story of the week has to be Mohammed Fayed’s rant at the Harrods Pension Scheme Trustees for not allowing him to ‘raid’ the scheme of his company dividend before paying up for the deficit as the law requires. The full report in the Evening Standard is simply hilarious. I was convinced at first that it had been written by Ian Hislop. The shareholdings in Harrods are opaque in the extreme as any reader of Private Eye will know, with various offshore ‘Fayed Family Trusts’ hiding most of the true picture.

So it was brave and absolutely correct for the trustees to spoil this man’s party by putting their members first.  Well done.

Next, the Coalition Government has announced the end of compulsory retirement at age 65 and instead, retirement will be linked with life expectancy. Those of my devoted Twitter followers will know that I have already commented with some concern on this.  I just don’t at the moment understand how this is going to work. It is a fact of life that a 65 year old will generally have a lower life expectancy than someone aged 30. Just who is going to decide what the appropriate life expectancy for a pension is going to be? Will it be some jobsworth in a dark room? Will those actuarial mortality tables suddenly get a whole new meaning?? Will we all be biochipped at birth and when it starts to flash red we report to Carousel? (you will have to watch Logans Run to get that allusion folks!!)

And what of the sick – what diseases will ‘qualify’ for reduced life expectancy assessment. I have diabetes – can I put in for my pension now please?

Obviously I am being a bit flippant here but it is an example of just how easy it is to make a great announcement. It will be far harder to translate that into a system that actually works. Mind you, we haven’t had a working adequate pension system for several years now, why should I expect anything to change?

This weeks’ items – another massive bailout (potentially) and a oopsie by a pension industry ‘good guy’

First, the Coalition Government has announced it’s intention to sell off part of the Royal Mail. So far so predictable. The kicker in this particular tale is that the Royal Mail is currently sitting on an £8BILLION (yes you read that correctly, £8 BILLION!!!) deficit and that’s just what’s been revealed in the company accounts. The Actuarial Valuation results due soon are expected to show an even bigger deficit. This will not ordinarily make it a particularly attractive proposition for any potential buyer.

But wait…everything is fine…the British taxpayer is going to pick up the tab…again. While the Government has said that it will seek the injection of private capital the chances are that this will fail as it did last year when an attempt was made to sell part of it off.  St Vince of Cable has indicated that the Government (that’s actually you and me to be honest) will take on the pension liabilites to make it more of a viable proposition for a buyer. We already have a gaping big hole in our national finances. What’s another £8 billion between friends? I would just love to see the PPF cope with this scheme!!

The second story this week concerns a claim by a former senior employee of the Pensions Advisory Service (TPAS) that the organisation discriminated against him on the grounds of age by sacking him before a restructuring exercise comes into effect, in an effort to avoid making him redundant just before he retired thus avoiding paying him compensation under a Civil Service compensation scheme. I don’t want to go into the rights and wrongs here. It’s not my place. But you would think wouldn’t you that an organisation like TPAS would have taken advice not from a lawyer (their decision may well have been LEGALLY watertight) but from a PR Guru who would almost certainly have told them that
bad press on something like age discrimination was bound to lead to adverse comment from bloggers and the industry alike!! Common Sense guys. Trumps economics every time!!