PMI News - November 2005
23 Mar 2006
The Case for Trust Laws
Who should be responsible for running pension schemes?
The case for Trust Laws
- Nature of a trust
- Focus on funded DB occupational schemes
- Exempt approved schemes need to be trust based
- No such need under Finance Bill for registered schemes...
- ... but needed under Pension Bill (European Directive)
Under Pensions Bill Government proposes to use trusts for legal seperation:
Each Member State shall ensure that there is a legal seperation between a sponsoring undertaking and an institution for occupational retirement provision in order that the assets of the institution are safeguarded in the interest of members and beneficiaries in the event of bankruptcy of the sponsoring undertaking.
- Article 8, 2003/41/EC
- Key concern: segregated, bankruptcy-remote fund
- But associated need for governance and reassurance, including safeguards against conflicts
- Maxwell, (where trust law through availability, of tracing remedies, helped in effecting recoveries)
- Goode Report
- Pensions Act 1995
Shortcomings of Pensions law:
- Compexity
- Uncertainty
- Lack of structure
- Limited solvency
- Lack of regualtion
(Paras 4.1.1 to 4.1.7, Goode Report)
Result ... the Pensions Act 1995
- OPRA and regualtion of trustees
- Whistle blowing
- MNT's, MFR, IDR, s67
- Trustees' investment powers and duties
- Statutory winding up priorities
- Compensation scheme
- Much else
The weaknesses to which we have drawn attention have led to suggestions that trust law should be abandoned for occupational pensions and that pensions right should be defined by contract and/or legislation. Following on the Maxwell affair some commentators have derided tust law as medieval and archaic and as having failed its purpose in the pensions field...
- Para 4.1.8, Goode Report
... but
We ... endorse the view expressed in the great weight of evidence submitted to us that trust law in itself is broadly satisfactory and should continue to provide the foundation of interests, rights and duties arising in relation to pension schemes.
- Paras 4.1.14, Goode Report
Paras 4.1.9 - 4.1.12, Goode Report:
- Trust law, although old, is very adaptable to modern uses.
- Compare pensions trusts with modern commercial trusts (eg unit trusts and bond or debenture trusts) rather than family trusts.
- Apart from segregation of assets, trusts enable collective representation and protection of members of a group.
- Trusts law embodies highly developed concepts of fiduciary responsibility, important to preserve.
- Contract not itself adequate to take over the functions performed by the trust in occupational pensions.
- Trust law cannot prevent breaches of trust anymore than criminal law can prevent crimes.
What will have changed since the Goode?
- Buy-out-debt-on-the-employer on wind-up
- New statutory funding objective (based on Directive rules as to technical provisions)
- PPF and anti-avoidance measures
- New wind-up priorities
Results of Change
- Greater burdens and risks for employers and trustees
- Less flexibility for employers
- Greater roles for trustees in funding policy
- Greater roles for regulator and PPF
- Members more secure (but still vulnerable to loss of benefits above PPF level and possible dilution of PPF benefits)
- No opt-out for MNTs/MNDs
While trustees remain responsible for investment strategy (subject to consultation with employer.)
...trustees have outlived their usefulness.
- Alan Pickering, 2004 (but was referring to DC plans.)
Donald Duval, 2004:
- Current governance system
- Fails to protect members on current insolvency
- Exposes companies to large risks which they are legally prohibited from controlling
- Government should legislate for more appropriate structure
But stil a role for trustees:
- Responsibility for governance of scheme in interest of members (subject to balance of power unde TDR and legislation) and so providing reassurance
- Acting in partnership with employer (creative tension, not confrontation)
- Agreeing funding strategy, recovering plan etc with employer
- Discretionary trusts for death benefits (avoiding IHT)
- Decisions/discretions over ill health benefits and enhancements
- Agreeing to change of rules, transfers in and out etc
Contrast with board of subsidiary /SPV in purely contractual relations with members
- Much less flexibility
- Greater need for external regulatory supervision
- Less reassurance for members
- Questionable scope for MNDs
- Need for special corporate legislative regime, eg:
-Prioirty order instead of pari passu insolvency rules
-Replicating relevant trust law rules on responsibility
- Limited scope for entirely new DB schemes
- Accrued rights, costs and other difficulties for old schemes
- Dangers of law of unintended consequences
Conclusions:
- Pensions Bill, FRS17 etc seek to address opposing and perhaps irreconcilable objectives
- They are challenging for employers, trustees and advisers. Appropriate rsourcing and management are needed
- The trust law structure is not to blmae for these difficulties (and it ain't so broke that it needs to be replaced)
- The use of other arrangements on Continental Europe is largely due to the lack of trust concepts there rather than their superior corporate technology
Pension Trusteeship
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