Pensions Supplement - Introduction

As everyone knows, the 1995 Pensions Act comes into force in April this year and already it seems as if one of the main consequences of the Act will be to make significant numbers of FDs rethink the whole idea of providing the traditional style of defined benefit occupational pension scheme.

This is not what was intended. The politicians did not sit down and say, “Let us change the fashion in the pensions industry – it’s time money purchase and defined contribution schemes were given their turn at the table again.” No, what they did say was: “How can we make pension schemes safer, so that there is a better chance of schemes having the assets to meet their liabilities?” This is an entirely laudable approach. The only problem is that when you start thinking in this way, you inevitably generate a more expensive compliance regime, making those responsible for providing the product or service in question stop and think about whether or not it is still sensible for them to continue down their accustomed path.

Small wonder then that there are many in the industry – usually to be found among those not intimately connected with providing services on the defined contributions or money purchase side of things – who do not view the Act as a resounding success.

According to Andrew Waddingham, a partner in pensions consultants Barnett Waddingham: “The 1995 Pensions Act will ensure the better employer has to bear more costs while smaller companies will be more likely to steer clear of offering pensions altogether.”

This, of course, is not a universally held view. There are those who see the Act as a much needed attempt to put the whole issue of pensions on a sounder legislative footing. Duncan Buchanan, a lawyer specialising in pensions with Garratt and Co., argues that the likely impact of the Act will be to make everyone involved with pension schemes, including employers, trustees and advisors, a great deal more aware of what their duties are and to whom they owe those duties.

As an instance of the kind of additional clarity the Act might generate, he cites the case of advisors who are appointed to provide advice both to the employer and to the scheme’s trustees. Under the Act, such advisors will now have to draw the attention of trustees to the potential conflict of interest in this arrangement.

Buchanan also notes that when one starts to think about the concept of duty, it soon takes on dimensions that might not have been obvious to begin with. The duties of trustees – now spelt out in fine detail, with plenty of penalties for non-compliance – are usually understood to be primarily to the active and deferred members of a pension scheme. As Buchanan explains, however, the trustees will also in certain circumstances owe a duty to the employer. When a scheme is wound up, the employer might, for example, be due a refund of the fund’s surplus, which would make the employer a beneficiary in the trust, hence the duty arises.

Legislation, by itself, does not constitute a solution. However, it makes it harder for bad pension schemes run by bad employers to find compliant trustees – particularly with fines of up to #5000 lurking on every hand. The “whistle blowing” provisions of the Act also lay down clear responsibilities for professionals, including auditors and actuaries, and that too will doubtless make fraud that much more difficult. The Occupational Pensions Regulatory Authority (OPRA) has already indicated that it is not in the business of pursuing the letter of the law with “good schemes”, but bad schemes and negligent trustees will quickly feel its weight.

The final test of the success of the Act, however, may lie in a comparative census three or four years from now. It will be interesting to see how many final salary schemes – not counting the excellent arrangements currently in place for MPs – the Act has fostered.