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The opdu Report - Issue 18, May 2005 Bulletin Board Ministers Speech: I’d like to speak to you about the radical steps we have taken to ensure that today’s and tomorrow’s pensioners have a secure and confident future. As you know, the Pensions Act is a significant element of our programme of reform which will build confidence in saving for retirement; make it easier for employers to run schemes; and help people to plan and save for their retirement. Building Confidence In terms of building confidence in pensions, our flagship policy – the Pension Protection Fund – represents a historic step forward in providing the protection workers deserve. Over ten million members of schemes will benefit from the security and peace of mind afforded by the Pension Protection Fund and people will have greater confidence in saving for their retirement safe in the knowledge that they are protected if their employer becomes insolvent and their defined benefit pension scheme winds up under funded. The introduction of the Financial Assistance Scheme will help some of those who have suffered significant losses when their pension schemes have wound up under funded in advance of the Pension Protection Fund becoming operational. We are also introducing a new proactive Pensions Regulator, focused on tackling the greatest risks to members’ benefits. There are other important measures which better protect scheme members’ interests. These include the statutory obligation that we will place on employers to consult with scheme members when making significant changes to a scheme. Employees and their representatives will be able to feed in their views about proposed changes to their employer for consideration before a decision is made about future pension arrangements. We are also taking forward measures to ensure that pensions receive TUPE like protection. On business transfers, employers will have to offer transferred employees a minimum level of pension provision if they previously had access to an occupational pension with employer contributions. Transferee employers must offer the transferred employee membership of a defined benefit, defined contribution or stakeholder pension scheme. Where the scheme offered is a defined contribution or stakeholder arrangement, the transferee employer must match the employee’s contributions up to a prescribed level which will be set at six percent. The Act also offers a better deal for short-term workers – if an employee leaves a scheme after 3 months, but before their rights have fully vested, they get a full refund, including employer’s contribution, to pay into a portable pension. Making it easier to run schemes Of course, these measures that offer greater protection must be balanced with measures which cut red tape and make it easier for employers to provide and run pensions. The Finance Act 2004 takes forward a radical simplification of the pension’s tax regime, making it easier for fifteen million people to save for their retirement. This is supplemented by measures being taken forward in the Pensions Act such as the replacement of the standardised Minimum Funding Requirement with more scheme specific funding requirements. In addition, reductions in the limited price indexation cap from 5 percent to 2.5 percent for defined benefit schemes, and its removal entirely for defined contribution schemes will also help to reduce the costs of occupational pension provision. Trusteeship Many of these measures have attracted a lot of media interest but we are also taking action that will make essential changes to the role of pension scheme trustees which will help to build confidence amongst scheme members. These address the key challenges of ensuring that trustee boards always benefit from the skills of member-nominated trustees and improving trustee knowledge and understanding across the piece. The trust structure of occupational pension schemes places trustees at the very heart of the UK’s private pension provision. The role of trustees is instrumental in taking forward our essential reforms as you play a vital role in ensuring that hundreds of billions of pounds in occupational pension savings are invested appropriately. The “best schemes” have had member trustees for many, many years. But it was the Pensions Act 1995 that brought the role of the pension scheme trustee into sharp focus and introduced us to member-nominated trustees. But it soon became apparent that too many employers were choosing to opt out of the member nominated trustee requirements resulting in many boards being made up solely of company elected trustees. There was clearly more for Government to do, if it wanted to ensure that the trustee board would always benefit from the specific skills, perspectives and experience that member-nominated trustees can bring. But this wasn’t the only area where action was required. Looking at trustees as a whole, we found evidence that trustees sometimes have a lack of information, resources and expertise. Of course many have an excellent grasp of their duties – but there is no uniformity of standards. The Myners report highlighted the important role which Trustees face in the decision making process. The review identified a number of challenges in ensuring effective decision making by trustees, such as lack of resources and expertise, lack of support and over-reliance on investment consulting firms for advice. Additional research found that many trustees had few expectations about their role prior to appointment and that often little information was given to individuals concerning their role. This was clearly an unsatisfactory situation – for trustees, for scheme members and for employers. That is why the Pensions Act will benefit all parties involved in the pension partnership. Member-nominated trustees On member-nominated trustees, we are changing the law so that at least one third of scheme trustees are member-nominated, moving to one half at some stage in the future. We want to see ordinary scheme members getting involved in the running of every scheme. That is why we have removed the right of the employer to opt out of having Member Nominated Trustees. A lot of schemes have one third member-nominated trustees already; more and more are waking up to the benefits that member nominated trustees bring; and an increasing number are, I’m told, actually moving to half, which is good news indeed. We are committed to increasing the requirement to fifty percent but recognise that this will involve a certain upheaval for some schemes. So we want to give time for other Pensions Act measures to bed in before we will consult about the best time for the fifty percent requirement. I am sure that everyone here today welcomes this important change, but perhaps the measures that have the most significant impact on you all, are the provisions relating to trustees knowledge and understanding. Trustee knowledge and understanding Trustees sometimes receive little beyond basic induction training, and work in an environment where it is traditional to rely simply on precedent, and where investment and funding issues are not fully considered because trustees do not have the knowledge and confidence to question the professional advice they are given. It is crucial to your reputation that ALL trustees are competent and confident in carrying out their duties, in particular in looking after and investing other people’s money in a prudent manner. The new measures will require all trustees to have appropriate knowledge of things such as the trust deed and scheme rules, relevant pensions and trust law, scheme investments and scheme funding issues. I am sure that some trustees may be worried about what they consider to be an additional burden. However, we do not expect every trustee to be an expert in every aspect of pension’s law and administration – that would be unrealistic. But we do expect trustees to be able to demonstrate at the very least a good, solid understanding of their own scheme's rules and policies, knowledge of the legal framework, and of the principles underpinning funding and investment strategies and decisions. Having this ‘knowledge and under-standing’ will not be a pre-condition of being a pension’s trustee. Instead, regulations will ensure that new trustees are given a suitable period of grace to acquire the appropriate knowledge and understanding. The Pensions Regulator will draw up a Code of Practice – in consultation with practitioners, that sets out the level and type of knowledge that will be necessary. It is too early to say exactly what the code of practice will contain. But it will provide ‘good practice’ guidance on the relevant knowledge and understanding that trustees need and suggestions as to how to get it. Conclusion The role of Trustee requires people like many of you here today who take on this role to demonstrate prudence, honesty and impartiality at all times when exercising powers as a trustee. You enable members to have confidence in their scheme and a sense of ownership. The changes we are making through this Act are designed to strengthen this confidence and sense of ownership. They should place no significant additional burden on the best trustees, but provide an important mechanism in setting a benchmark to ensure that ALL trustees are up to speed with their responsibilities. We also want you to think about how you can all move forward the pensions partnership. In that respect I'd really like to hear your views on one particular area. Because we value the role of trustees so much, the Government is currently considering whether it would be useful to establish a Trustees Forum, which could:
I would be interested to hear your views today on whether you think such a forum would be valuable, and any ideas you might have about how it should work. I welcome your suggestions – either now, or by letter if you would prefer to write to me. Your role is recognised by Government as instrumental in taking forward pension reform. We are grateful for your support to date, and look forward to it continuing in the future. Malcolm Wicks MP |
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