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.

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!!

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?

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!!.

It wouldn’t be a ’start of the year’ without a few predictions so Mystic Jens has been gazing into her crystal ball and has seen the future…mind you, she was still a little the worse for wear at the time so please do not take any of these suggestions seriously…until they come true that is!!!

First, a bit of a no brainer – there will be even fewer Defined Benefit schemes by the end of 2010 than there are now.

The new Tory Government will announce a review of pension provision with particular focus on the Personal Accounts Regime due for introduction in 2011..er…2012…er whenever…!!

The Review will conclude that ” something must be done”  and orders a further review chaired by the wonderful Steve Bee which will in due course decide what that will be, In the meantime, Personal Accounts will be introduced in a modified form resulting in over 300 sets of regulation. This will be called ‘Interim Pension Simplification’

The Pension Regulator will be abolished to be replaced by ‘The Regulator of Pensions’. This will be based in Brighton with the same management as before and the rebranding will cost the taxpayer around £1.5 million However, performance and regulation will in no way improve though the new logo wins a design award.

Defined Contribution Schemes will become the norm but employer contributions will reduce to the minimum level required by the modified Personal Accounts Regime. Since in order to help the economy, employers will no longer need to contribute to Personal Accounts, this will be absolutely zero.  All DC schemes will therefore also be rebranded into something called a ‘Personal Account’

The British economy once again collapses having invested the national debt into an iffy Ponzi scheme run by a 4 year old in Stevenage. Several large DB schemes that had some sort of company attached to them will go to the wall. This will put the PPF into meltdown.

On a happier note, pension lawyers will continue to advise hard pressed Trustees and those employers who have survived the crash on the ever growing complexities of the law.

Some things never change…

It has long been a bit of a joke in the pension world that BA is a pension scheme that occasionally flew a few planes. Well, many a true word spoken in jest it seems.

Although the immediate threat of a strike over the Holiday period has been averted, it is almost certain that a fresh ballot will produce the same result. What’s that got to do with pensions you may ask? The answer is painfully simple.

BA has a combined £3.7 billion black hole in it’s pension scheme funding.The law requires that the Trustees and the Company reach some sort of agreement on how that deficit is going to be dealt with by June 2010.

It is a problem being faced by many if not most final salary schemes at the present time. And while the figures may be somewhat larger at BA, the princples remain the same. How can a company fulfull its obligations to fund a scheme while it is struggling simply to remain in business. It is in no one’s interest to force a company into the hands of the insolvency practitioners by making unreasonable demands for payment. The Pension Regulator (which needs to approve any agreements – called Recovery Plans in pension industry speak) has tacitly accepted this in its guidance to Trustees.

Yet tPR speak with forked tongue since while claiming to understand the problems schemes are facing, it is questioning perfectly sound deficit reduction plans for fairly minor deviations from what it considers appropriate. But that is bye the bye.

The problem for BA – and potentially any company in a similar position, is how can the company continue to pump money into the scheme while maintaining a viable business and preserving salary and benefit levels.

One of the obvious ways of beginning to manage a deficit is to limit ways of it getting any bigger. By controlling it’s growing liabilities. And the simplest way to do that is by closing the scheme to future accrual. It is not of course an instant fix. It can take several years for any direct effect of ceasing accrual to be seen.

But (and this is the conflict) no union likes to see it’s gold plated benefits being reduced. So they fight, and by fighting, risk the financial stability of the company and ultimately the jobs of those they purport to serve.

It ain’t rocket science. But it does seem a lesson that some unions and even poorly advised boards of trustees seem unable to understand. If you squeeze an orange too much, all you get left with are squeaking pips!!

I’m flying Virgin in future…Happy Holidays and see you next year!

First the good news is we are being told that the recession is over and the FTSE 100 has risen to over 5300 at at 17th of November. You would think then that pension scheme trustees would be expecting reducing deficits when their scheme actuary comes to look at the figures.

On the other hand, other observers are telling us that pension deficits could have been underestimated by nearly £270 billion, and far from things getting better, in reality the funding position of schemes is getting far worse. And it is beginning to effect not only defined benefit schemes but defined contribution schemes too are also showing severe underperformance.

The reasons for this are complex – isn’t everything in pensions? The Bank of England quantitative easing program has led to a sharp decline in corporate bond yields. Why is this important? Simply because the value of a schemes liabilities are assessed by reference to corporate bond yields. Quantitative easing has released far more corporate bonds on to the market making them cheaper. As the value of these decrease, the size of the liabilities increase. It has acted as a counterbalance to any value that the increase in equity prices may have produced.

There will be no quick fix to the funding problem. Many DB schemes are taking the opportunity to close to future accrual in an attempt to control pension costs. But in a typical scheme, this can take 5 to 10 years to show any significant effect. In the meantime, no government seems able or willing to grapple with the thorny issue of simplification of the pension regime here in the UK. Yet another layer of complexity in the form of Personal Accounts is just around the corner and even were there to be a change of government within the next six months, it is unlikely that any new administration will tear up entirely what is already on the statute book. More’s the pity.