The opdu Report - Issue 22, May 2007
The Changing World of Pensions
This article is based on a talk which David Laverick, the Pensions Ombudsman gave to the meeting celebrating the 10th anniversary of the foundation of opdu
"As a youth you desperately want to change the world.
As you grow older you discover that the world is changing faster than you can endure."
I am not sure whether when opdu was founded it desperately wanted to change the World. Undoubtedly though, the Pensions World around it has been changing. opdu has been able to endure those changes which cannot necessarily be said of all the participants in the Pensions World.
Some, like Malcolm Mclean and Alan Herbert, seem always to have been with us and destined to be so. Pensions Ombudsmen, perhaps to the relief of those on the receiving end of our determinations pass across the scene rather than being embedded into it.
Indeed there may be an argument, in light of the course upon which DWP appears to be set for taking the view that I will be the last of Pensions Ombudsman who has the necessary degree of independence from the Executive to be able to provide the determination of disputes in the way which complies with Article 6 of the European Convention on Human Rights.
I make that observation partly because the advertised terms on which my successor was being sought and partly because of proposals canvassed by the person appointed to review what the DWP termed the Institutional Landscape. The advertised terms for my successor included limiting the appointment to three years, if not determined earlier, and also involve part of his remuneration being determined by the Department of Work on Pensions in accordance with its assessment of his performance. Bearing in mind that the Department is itself a Respondent to some complaints and that part of the work of the Ombudsman for the Pensions Protection Fund involves reviewing decisions made by those staff in the Department who administer the Financial Assistance Scheme it is difficult to see how a person appointed on such terms can be seen as having the necessary independence to adjudicate upon such matters,
A suggestion being canvassed by Paul Thornton alongside his review of the Pensions Institutional Landscape is to merge the office of Pensions Ombudsman into the Financial Ombudsman service. Implementation of that proposal will mean that unless the Financial Ombudsman Service changes its practices, determinations made by the Ombudsman dealing with pension disputes will no longer be compliant with the provisions of Article 6 of the European Convention on Human Rights.
My passage across the Pensions Scheme will end this summer when my sixth year in office. In my time there have, so far, been five Secretaries of State. Looking back over the last 90 years it has been rare for the Minister with overall charge of pensions (there have been various changes of title) to have stayed in post for more than two years: to rephrase my opening quotation the world around undoubtedly changes faster than Ministers and Secretaries of State can endure. Such short terms of office tend to thwart the possibility of those who come with the intention of changing the Pensions World from realising that ambition.
Those of us whose education has included exposure to Yes Minister may infer from the procession of Ministers that the real influence to shape Pension Policies may lie elsewhere in the corridors of power. But there seems, at least in my time to have been almost as rapid a degree of churn in the ranks of those charged with giving advice to Ministers as there has been in the ministerial offices themselves.
Are the revolving doors at Richmond House themselves a factor in what seems to be slow progress toward averting or addressing a pensions crisis, the effects of which will perhaps be felt more by our children than the current generation.
It is now rare for the new entrant to an occupational pension scheme to be joining a final salary arrangement. There is little evidence that the change to money purchase arrangements represents the realisation of any strategic political view. Not only can the current new entrant be expected himself to shoulder the longevity risk (a burden which previously fell on the funding Employer) but he can expect to do so having received a lesser financial contribution from that Employer than has been made available in the past.
It remains to be seen whether the Personal Accounts Scheme will allow the Government to deliver a previously stated aim of having 60% of incomes in retirement provided by private rather than State funding.
It also remains to be seen what role Trustees will continue to play: it would not be surprising if the move to DC schemes were not mirrored by a move to contract-based rather than trust-based arrangements. The TPR consultation paper on Regulating DC schemes indicated that only about a third of occupational DC arrangements were trust-based although that third accounted for more than half of all members.
Is the conventional Trustee model, with is origins in family trusts established when women did not own property and children were viewed as profligate, appropriate for modern day pension schemes? Even if trust-based Schemes are retained I suspect a case could be made out for an alternative arrangement of governance. One possibility would be for lay Trustees to operate as a supervisory board overseeing the work of a professional Executive Board. Another may be for all Pensions Trusts to have a Trustee appointed by the Pensions Regulator and for that Trustee to have a power to veto, or at least to require deferment and reference to TPR of, any particular matter.
There are certainly aspects of the current model which trouble me. The first arises because the Pensions Scheme model has been set into the broader context of Trust Law. Coming as I did from a Public Law background it seemed to me that Trust Law is heavily protective of Trustees as against the beneficiaries rather than with being zealous in protecting the interests of those beneficiaries.
My impression from those early Trust cases is that the Courts were taking the view that it ill-behoved beneficiaries who had done nothing (other than being born holding the required silver spoon) to have any claim to Trust Property, to complain about those who were giving of their time and expertise to look after and distribute the trust funds. Thus, I was told, it was well established law that Trustees need provide no reasons for their decisions.
I am pleased to have made some inroads into that specific doctrine during my time in office but am still left with a wider question as to whether the basic model really holds good in the context of a work based Pension Scheme. There the member will usually have himself put in a share of the trust funds and might indeed see the Employer’s contribution as a form of deferred salary. In those circumstances members might expect the Trustees to be accountable both to themselves and the funding Employer to a greater degree than has been expected of those acting as Trustees to private trusts.
I am a great deal happier with the public sector’s concept of overall responsibility than with the protected status provided for the Trustees of Pension Schemes. In the public sector the Parliamentary and Local Government Ombudsmen can investigate ”action taken by or on behalf of the body under jurisdiction.” Thus despite the widespread practice of privatizing the delivery of public services through the agency of third parties a complaint can still be made to the public authority with responsibility for commissioning the service provider. No doubt in its contractual arrangements with that provider, the public authority ensures that it will be indemnified against claims which arise from that delivery. But those are not claims which the citizens needs directly to pursue with the provider: his route to redress is through the public authority.
Contrast that with the arrangements for Pensions Scheme where the Respondent Trustees, the body with overall responsibility can absolve themselves from liability by establishing that they engaged the services of a reputable professional firm and monitored the delivery of those services, leaving the individual to being his complaint directly against the managers or administrators, despite their being no contractual or even trustee/beneficiary relationship. My preference would be for a system whereby pension schemes took responsibility for actions taken on their behalf and took responsibility for providing redress if there were failings in the way that action was taken. It would of course be open to the Schemes themselves to seek redress from their contractors and suppliers.
I am also concerned by reliance on what are known as exoneration or exclusion clauses which preclude redress being sought from Trustees. I regret the failure of the Law Commission to recognise the need to overcome the injustice to some members of Pension Schemes which arise from the use of those clauses. I particularly regret the actions of some Professional Trustees who seek to shelter behind such a clause to avoid providing redress for their maladministration. Indeed such an attitude may be a bar to establishing a true professional status for such an occupation.
It cannot be right, for example, that someone whose name has been missed from a Schedule associated with a bulk purchase annuity can be left entirely without redress when faced by the annuity provider denying ever having accepted liability, the Trust itself having being wound up and the Independent Trustee who arranged the wind-up relying on an exoneration clause as a reason for not providing redress for any maladministration on its part.
By far the better course is for the Trustees to accept the responsibility but ensure that appropriate arrangements are in place to indemnify the Trustees against personal liabilities and to ensure that, even if Trustees do default, redress can be provided for the individual member.
My preferred approach is reflected in the practice of opdu and its membership. I began with a quotation (the source of which is unknown to me) about the pace of change and its effects. I was born in the week which saw the first atomic bomb dropped on Hiroshima. I have lived through happier achievements such as seeing men going to and from the moon, through exciting developments in medicine and surgery, and through the growth of the digital age.
Alongside those easily recognizable changes there have also been more subtle changes in social attitudes. Thus in relation to health care (my previous area of work), the populace is no longer respectfully grateful for what assistance our local doctors and hospitals can provide. Instead we regularly hear of people complaining that they have been denied their “right” to particular kinds of treatment and if, mistakes are made we expect to be compensated for them. Shortly after taking up my present office, I was in an Accident and Emergency Department where television screens flash advertisements from solicitors who claimed that they, at no cost to the viewer, would be able to obtain compensation for the injury which had occurred – or which might be about to occur at the hands of the medical team.
The Better Regulation Task Force concluded that “Compensation Culture” was a “myth,” but one with which was associated a very real cost. Part of that cost is felt by my own office.
Many complaints are made in the belief that, because a mistake has been mad, some compensation must follow. But my practice is to award compensation only if the mistake has caused injustice and much time and effort sometimes needs to be spent in establishing for example whether any different action would have been taken had there not been a mistake in a quotation of retirement benefits. The compensation culture myth is sufficiently well established for complainants to need much convincing that they do not have an automatic entitlement to compensation simply because some inaccurate information was at one stage given.
In this context it is interesting to note the response to the recent High Court judgment following the Government’s decision not to give effect to the Parliamentary Ombudsman’s recommendations following her investigation of the complaint from the Pensions Action Group. In that case Mr Justice Bean indicated that there needed to be a much stronger link than had been out between the maladministration (the misleading leaflets produced by the Government) and the loss of pensions when scheme employers went into liquidation, to justify a finding that injustice had been caused by that maladministration. That aspect of the judgment seems largely to have been lost in the subsequent media coverage about the Government being wrong in rejecting the Ombudsman’s finding that there had been maladministration,.
In the kind of social context I have described, I am surprised that the concept of discretionary decision making by trustees should be seen as the way to provide the security in retirement which has been earned in employment over one’s lifetime. A change to a rights-based system seems more attuned to the Britain of the 21st century than does the Trust-based systems of 200 years ago.
Nowhere is this more apparent to me than when considering cases abut the distribution of death benefits. Pension Scheme Trustees are to my mind placed in an almost impossible situation by the terms of the Trusts they are there to administer. It is also too easy for benefits to be distributed without Trustees being aware of potential beneficiaries. A lack of knowledge of some long-lost nephew or niece is understandable; the failure to recognize that the deceased left a dependent child less so. Yet it is by no means unknown for me to be faced with a complaint from just such a child and for Respondents to argue that they had no responsibility for establishing the existence of that child. Such Respondents are rather too ready to quote a sentence from a decision of the House of Lords that their obligation to ask the ’correct question’ does not impose on the decision-maker a duty to identify all potential beneficiaries without having regard to that part of the decision which stated:
“Correspondingly, a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field, by class and category; might indeed make diligent and careful enquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide on certain priorities or proportions, and then select individuals according to their needs or qualifications.”
That seems to me to impose a very burdensome duty upon those whose task it is to decide whether, and how, death benefits should be distributed. Often of course the issue will be straightforward with the money finding its way for example to a widowed spouse. But, to an increasing extent in view of the breakdown of marriages and the establishment of less formal (and sometimes less long-lasting) relationships, trustees and managers are frequently being faced with more difficult choices and with the possibility of being unaware of significant potential beneficiaries. Into that mix needs also to be stirred complications which may arise from Trustees’ personal dealings with the deceased and beneficiaries and the need to deal with feelings of grief and guilt which may be associated with some deaths.
I am told that the reason why such matters are left to the discretion of the trustees is to avoid inheritance tax being charged on the value of such benefits. It is to my mind a pity when the pension scheme’s vehicle is hi-jacked for taxation reasons. I am also aware of some advice from Linklaters that it is possible to devise rules whereby such benefits can be distributed according to the wishes of the deceased member without incurring such a liability. It may of course be the case that some scheme members would fail to keep their wishes up to date so that a long deserted partner may find themselves in receipt of a windfall to the detriment of more recent dependents. That however would be the responsibility of the member concerned.
Those involved with the design and management of pension schemes should have sufficient confidence in the worth of the product without the need to have to rely on add-ons in the form of tax avoidance. That part of our population which has just retired or which is just about to retire with the benefits of an occupational pension will be doing so on more affluent terms than enjoyed by previous generations. And yet, through recent years there has been a growing undermining of the confidence felt in occupational pension schemes, despite the establishment of the safety net provided by the Pension Protection Fund and the powers of the Pension Regulator which are designed to avoid schemes needing to use that safety net.
For the benefit of the generations to come we need to present the positive aspects of making secure provision for retirement.
020 7834 9144