Finance directors have been warned by the chairman of the UK’s leading pensions group to take seriously their duties to pension schemes or be personally liable for the consequences.
Richard Butcher, chairman of the Pension and Lifetime Savings Association (PLSA) whose members are responsible for over £1 trillion of UK pension assets, says the failure of FDs and other corporate directors to undertake pension scheme responsibilities have been addressed in a recent government consultation paper.
“Finance directors must now take pension schemes seriously. They need to recognise the risks that are inherent in pension schemes and the personal liability they and their co-directors now have,” he warns.
Butcher says that in light of a number of recent corporate scandals that have engulfed pension schemes at British Steel, BHS and Carillion, greater powers are being installed in the Pension Regulator to ensure directors of sponsoring companies are being addressed, outlined in the white paper by the Department of Work and Pensions titled Protecting Defined Benefit Pension Schemes. “The Regulator will have new powers to demand information, backed by civil sanctions,” he says.
At the heart of the issue is the requirement for company directors to be open and transparent about the state of the corporate’s health, with the FD taking the lead. “It is likely to be the FD who is seeing this going across their desk on a daily basis, so they need to point things out to the owner or CEO. They need to be saying we’ve all got out our necks on the line, we’ve all got to do the right thing here,” he says.
Butcher, who is also the Managing Director of independent pension trustee firm PTL, says the vast majority of FDs will get that message and will go into a negotiation with the trustees of a pension scheme with a constructive mind set. “It should be a robust and challenging process between sponsoring company and pension trustees,” he adds.
A rebalancing act
At the core of the issue is a perceived imbalance between corporate sponsors and pension trustees, reflected in the recent decision of Barclays to tie pension schemes to its unprotected investment bank, rather than the protected retail bank.
“The vast majority of schemes that I see have an open and transparent exchange of ideas and information with the corporate, but there are inevitably some boards of trustees who do not have a full set of information,” says Butcher.
He says that may be because trustees don’t know to ask the questions or because they’ve got a corporation who is keeping information back. “There is no legislation that can address that,” he advises.
“What you’ve got to do in those cases is ramp up the standards of governance, so that the trustees know when to ask for information, when to challenge for information, and when they fail to get that information, to escalate with the regulator,” says Butcher.
In the same way it can be no guarantee a management team fully understands the financial health of a company, trustees of a pension funds are unlikely to fully understand the sponsors’ financial health. “You just have to drive the standards of governance up- then there’s a better chance the company’s board will understand what’s going on,” he says.
Butcher says the position for UK pension schemes is in a much better place than it has been in previous years. “We have a system that mitigates corporate failure, we have the Pension Protection Fund as a safety net, which provides a pretty generous level of compensation, an insurance policy to protect people when these failures occur.
“Is the system work at its best? The answer is no it didn’t and that’s why the white paper has made a whole bunch of proposals we are pleased with. The system is not working as well as it could have done and we hope it will be better in the future.
What was missing in the white paper? “One thing they have ducked which the PLSA was looking for is the ability to change the shape of pension increases in line with inflation. We think that was a missed opportunity,” he adds.
According to the white paper, there are now some 10.5 million members of Defined Benefit pension schemes in the UK, supported by roughly 14,000 employers. The schemes hold approximately £1.5 trillion in assets.