Increased Prudence for Scheme Trustees in Volatile Times
June 2009
HR & Recruitment Ireland
By Fionan O'Sullivan - IFG Corporate Pensions
While Trustees of Corporate Schemes have always had to demonstrate a high degree of responsibility and duty of care towards scheme members, the economic events of the last 12 months has dramatically increased the level of scrutiny on the decisions they take on behalf of their members.
The concept of a "passive" Trustee is no longer an option for individuals lacking the skills and expertise to approach the role with a high degree of confidence and credibility. There are other alternative options to consider, including the use of Professional Trustee Services. This route has the added benefit of ensuring that the conflict of being both a scheme member and a Trustee can be avoided, should that be an issue.
The rising cost of purchasing pension annuities, a high degree of volatility in the investment markets and more stringent compliance standards are just some of the external market forces placing pressure on Scheme Trustees to raise their standard of Governance.
The majority of pension scheme members expect to maintain a relatively high standard of living in their retirement years and up to recently there was no reason not to believe this would be the case. From those lofty ambitions of retiring in comfort, free from any financial stress ; fast forward 12-18 months and the situation is much bleaker for many entering the retirement phase of their lives. This new harsher reality does not just result in a moral obligation for Trustees to ensure they are equipped with the relevant skills and training to protect schemes members. We have also witnessed harsher financial penalties from the Irish Pension Board for non-compliance with the relevant legislation.
As of April 2008, The Pensions Board introduced an initiative whereby Employers and Trustees are now liable to ‘on-the-spot fines’ should they or their scheme, contravene the specified provisions of the Pensions Act (1990), as amended. The fine is €2,000 per Trustee per offence however in additional to the financial impact, there is also the unwelcome threat of negative publicity for both employers and individuals as the media spotlight continues to shine a light on the nations Pension’s woes.
The government acknowledged concerns over funding pressures for DB (Defined Benefit) schemes in December 2008 following increased market volatility, and asked the Pensions Board to introduce more flexibility in the supervision of the funding of DB schemes.
The Board has published those new guidelines for pension schemes wanting to apply for an extended funding period, and has also revealed it has "taken steps to streamline the process by publishing an application form to be completed by trustees and their advisers when making applications under Section 49(3) of the Pensions Act".
The Pensions Board acknowledges there is no single "best" investment strategy, and stresses that the setting of a pension fund's investment strategy is the responsibility of trustees, while the Board only ensures compliance with regulations. They have however warned that an investment strategy is a "relevant consideration in deciding whether or not to grant an application", and confirmed it would look for evidence that trustees have fully considered the investment strategy, and the effect of potential losses on the security of member benefits.
The guidelines also state that trustees must demonstrate the proposed investment strategy is "grounded in sound risk management and investment principles", and the Board will have regard to "issues including the matching of liabilities with appropriate assets."
While these matters can be often be more grey than black and white, what is apparent is that Trustees must ensure the security, quality, liquidity and profitability of the portfolio and have regard to the nature and duration of the expected liabilities of the scheme and the consequences for not doing so are increasingly punitive.
As companies across all sectors find themselves in unchartered waters, the Senior Executives within these organisations have to demonstrate strong leadership and clearly establish their business goals to ensure survival as management are being forced to work harder than ever before. It is prudent at this juncture for Trustees of occupation schemes to reconsider their time commitment to their company and their duty of care to scheme members and establish where their efforts are best focused. As the role of a Trustee is more onerous than ever before, whatever the choice, Trustees need to ensure they have the appropriate skills, expertise and time to handle both their company and Trustee roles with the same level of precision, skill and dedication.
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