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The opdu Report - Issue 22, May 2007 Advisory Service Forum Trustees of schemes whose principal employer opted out of requirements in relation to member nominated trustees ("MNTs") under the Pensions Act 1995 ("1995 Act") must now conform to new requirements (under the Pensions Act 2004 ("2004 Act")) by the 31 October 2007 at the latest. There is no longer an opt out provision for employers under the new legislation. Under the 2004 Act trustees are required to ensure arrangements are in place and are implemented for at least one third of the scheme’s trustees (or trustee directors of a trustee company) to be member nominated. Set out below are the principles which must govern trustee arrangements with regard to a one third MNT composition and key decisions and issues that trustees will be required to consider with respect to the Code, the 2004 Act and the existing provisions of their current scheme arrangements. Deadline For schemes that did not have an opt out in place on 6 April 2006, the new requirements under the 2004 Act applied from that date and arrangements needed to be in place within a reasonable period of that date. A reasonable period is considered by the Regulator to be six months and, as such, arrangements should now be in place for these schemes. Schemes with opt outs in place on 6 April 2006 must put in place the arrangements under the new requirements by either the date on which the opt out expires or the 31 October 2007 (this is the longstop date by which all schemes should have put in place arrangements for the new requirements). Implementation of the arrangements must occur within a reasonable period (six months) of the need arising. Failure to comply with the legislation may result in civil penalties being imposed of up to £5,000 on individuals and £50,000 on trustee companies. The new legislation applies equally to the appointment of individual member nominated trustees as it does to the appointment of member nominated directors ("MNDs") of trustee companies although this article will just refer to the MNT requirements. Proportionality, Fairness and Transparency The new MNT legislation has moved towards a principles-based system with The Pensions Regulator providing a Code of Practice (the "Code") to act as guidance and to assist trustees to ensure arrangements are in place and implemented to meet the one third MNT requirement. The Code sets out three key principles (the "Principles") to which trustees should adhere when implementing arrangements for their schemes: proportionality, fairness and transparency.
Eligibility criteria The trustees may wish to impose eligibility criteria for prospective nominees and these should be considered in relation to the Principles. Consultation with the employer and a review of the scheme rules is recommended prior to setting any criteria although, should the trustees wish non members to be eligible for a role as an MNT, this should also be discussed. Trustees should bear in mind the general criteria as to who can act as a trustee. Anyone below the age of eighteen, anyone disqualified from being a director or convicted of an offence involving dishonesty or deception and un-discharged bankrupts will not be valid candidates for nomination and selection to the position of MNT on a trustee board. Nominations Trustees should consider the composition of the existing trustee board. Trustees who were member nominated in accordance with the provisions of the 1995 Act will constitute MNTs under the new legislation. Trustees who were nominated by members under the terms of an opt out will not, however, constitute MNTs for the purposes of the legislation going forward. They will, however, be able to remain in office until such time as their term of office expires or cessation of their trusteeship occurs. Existing MNTs may wish to put themselves up for re-election. Due to their existing knowledge of the scheme and of trusteeship this may be beneficial. If the scheme rules specify that the one third MNT level prescribed by the legislation is to be exceeded then this must be followed. In the absence of such a provision, the legislation prescribes that an increase in the number of MNTs beyond the one third level is only possible with employer consent. As a minimum, all the active and pensioner members (or organisations that adequately represent them) must be invited to nominate. The Code specifies that trustees should consider and decide whether to invite others to nominate, e.g. deferred members. Any involvement of organisations representing the members in the nomination procedure should comply with the criteria set out in the Code. When considering whether an organisation represents members, trustees should take into account, for example, the relationship of the organisation with the employer, whether the organisation has representation as one of its purposes and whom the organisation represents. Examples of representative organisations include recognised trade unions, staff committees, member representative committees, pension management committees and pensioner organisations. Trustees may also consider using constituencies in the nomination process (e.g. by category of member or section of the scheme), provided the process conforms to the Principles. The arrangements put in place by trustees must provide for a selection process. If there are more nominations than vacancies or if the trustees decide to select MNTs irrespective of whether there are fewer nominations than vacancies, a selection process will be required. New MNTs should be formally appointed, e.g. by a Deed of Appointment, if an individual or by resolution if being appointed as a director of a corporate trustee. Selection Selection should involve some or all of the members and may include representative organisations. The Code makes specific reference to the fact that the method of selection may vary dependant upon the circumstances of the scheme. The potential selection methods outlined in the Code are:
Once appointed, MNTs can normally only be removed from office if all the trustees agree with the removal. It is also worth noting that any arrangements made must not exclude MNTs from the exercise of functions exercisable by other trustees purely by reason of the fact that they are MNTs. The term of office should be determined in consultation with the employer. In the event of insufficient nominations, trustees will be required to decide if the nominees are deemed to be automatically selected (without going through the formal selection process) or whether they will still run the selection process despite there being insufficient nominations. The Principles should be considered as to any decision taken. Should there be insufficient nominations, legislation requires that the arrangements allow for the nomination and selection process to be repeated at regular intervals until such time as the vacancies are filled. A regular interval for these purposes is considered to be no more than three years. Trustees should be aware of the potential need to re-run the selection process earlier. Trustees could consider including deferred members in any re-run of the process. At the nomination and selection stages, communication to the members should follow the guidelines set out in the Code to include information as to the outcomes of both processes. The form of communication with members may vary depending upon the scheme’s individual characteristics. The Code recommends a review of the arrangements every three to five years or earlier if there is a substantial change to scheme membership or circumstances. Recording compliance The Code states that trustees should keep a record of the steps taken to achieve compliance with the new requirements. Exemptions from the MNT requirements The requirement for MNTs applies to occupational pension schemes set up under trust. However, some schemes may be exempt from the MNT requirement if one of the following applies:
The list of exemptions above is not exhaustive and trustees should investigate further to see if there is an exemption that applies to their scheme. If an exemption appears to apply it is prudent for trustees to investigate whether the exemption is still applicable and has not been rescinded. Summary of the key decisions:
Conclusion The new requirements will be an agenda item for many trustee meetings over the coming months as the deadline to implement the new requirements approaches. Scheme trustees must liaise with their advisers as soon as possible to ensure that they meet the new legislative demands. Matthew Swynnerton
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