Pension schemes at a glance

With changes in retirement ages and retaining older staff firmly on the
agenda, pension benefits must be handled carefully. Peter Dickinson highlights
the key issues for the successful management of occupational pension schemes

While pension legislation has always been highly complex, managing a pension
fund is increasingly onerous. Recent developments in IT coupled with a growing
interest by pension scheme members – and their lawyers – means 100 per cent
accuracy is demanded at all times. The pressures on HR managers and trustees
can be further intensified if the firm’s management controls are inadequate or
the employer is not interested in staff pension management.

The catalysts for change

Internet/intranet technology Communication through this medium, stimulated
by stakeholder pensions, is becoming widespread. For example, members can now
access their personal accounts for transaction purposes or to find out about
benefits.

The Turnbull Report Published September 1999, it was aimed initially
at quoted companies, but has implications for occupational pensions schemes. It
emphasises:

– The value of a risk-based approach to create and review internal control
systems

– Financial controls alone are insufficient

– The need to set business targets to be achieved within specified time
frames

– Identification of associated risks

– Risk management techniques to be improved

The Myners Report Published March 2001, it singles out the following
points:

– Perceived lack of investment awareness by trustees generally

– Need for effective decision-making structures within pension schemes

– Effective division of time by trustees between their various
responsibilities

– Trustees having the "right mix of skills and experience
collectively"

– Whether the scheme’s control environment is "fit for its intended
purpose" (echoing Turnbull)

Myners also highlights the need for trustee training and recommends that
sponsoring companies ensure trustees have sufficient "in-house"
support staff.

FRS 17 This financial reporting standard essentially requires
companies that sponsor defined benefit (final salary) schemes to include a
scheme’s actuarial surplus or deficit in their audited financial statements.
The surplus (or deficit) has to be updated annually on a market value basis.
The standard started being phased in over two years in June 2001 and will mean
corporate managers putting pressure on trustees to minimise any negative impact
on the company’s financial results.

Against the above developments, HR managers and trustees should focus on:

– Developing a coherent management structure

– Creation of a good governance culture (regarding regulatory compliance)

– Provision of clear objectives

– Investment portfolio structure, management and custody

– Administration controls and performance measures

– Communication between employer, trustees and third parties

– Financial controls

– Identification and assessment of management risks associated with the set
objectives and adaptation of management structures to control risks

Trustees’ key duties

Despite pressures arising from economic developments, trustees’ general
duties remain constant. They must therefore act:

– In accordance with the trust deed, rules of the scheme and statutory
requirements

– Prudently, honestly and with the utmost good faith

– In the interests of members as a whole, taking a fair balance between
parties

They must also:

– Take advice on technical matters

– Invest funds in accordance with status objectives

With today’s emphasis on "real-time" accuracy, penalties for
errors can be severe. Training for trustees and staff is vital.

Penalties and pitfalls

Even if trustees are very careful, they can be in breach of any one of the
hundreds of statutory regulations. This situation is not helped by the fact
that actuaries, auditors and certain other advisers can "whistleblow"
to the Occupational Pensions Regulatory Authority (Opra), with or without
trustees’ knowledge.

Breaking the rules can incur statutory penalties, ranging from fines for
trustees and employers, to disqualification and even imprisonment. Of more
concern is Opra’s recently stated policy of publicly naming and shaming
trustees and employers whom it has penalised for infringements.

HR departments must also be aware of the need to constantly update the admin
records and the growing impact of case law.

Against this background, trustees should undertake a "regulatory
compliance" audit, concentrating on:

– Calculation and timing of contribution payments by the employer

– Timely investment of contributions

– Application of performance standards for completion of benefit
calculations and payments

– Completion of annual audited accounts

– Appointment and subsequent supervision of statutory advisers

– Custody, security and management of investments

– Dispute resolution procedures

Outsourcing administration

Smaller pension schemes frequently outsource all their activities, whereas
the medium/large schemes usually outsource on a specific basis.

For any scheme, it is critical that the employer’s management control
systems deliver accurate data to tight timescales. In particular, trustees
should ensure that:

– Services provided by the employer and associated timescales are defined
(even if at "no cost" to the scheme)

– Employer systems are secure and that "ownership" of membership
and financial records is clearly defined

– Disaster recovery and contingency plans operated by the scheme’s
membership and financial records

– They have recourse against the employer for actions taken by staff which
may be detrimental to the scheme eg fraud, negligence

– They have access to employer’s internal control reports covering payroll,
personnel and cash management

In respect of relationships with independent third parties, trustees should
ensure:

– A management agreement exists

– Clear objectives and operating performance standards are agreed

– A stable and documented control environment exists (ie operating manuals)

– The third party is technically competent and can provide both detailed and
strategic advice if required

– The third party’s software systems are "industry compatible"

External consultants

Getting the best from an external consultant relies on communication and
teamwork, involving a three-way relationship between trustees, employer’s
management and the consultant.

Too often trustees delegate, then relax, creating a vacuum in which nothing
develops. This can be avoided by having:

– A clear management structure and defined roles for individuals

– Trustees with specific responsibility for day-to-day liaison/progress
chasing

– Structured trustee meetings with a pre-set annual timetable

– An educational programme allowing trustees to gain necessary understanding
of strategic and practical issues

Conclusion

Teamwork is the key to successful pension scheme management. A balanced
trustee board should include responsible members with specific experience in:

– Internal controls, risk management and general co-ordination

– Investment structures, management and administration

– Human resources management

– Financial reporting

Peter Dickinson is a partner specialising in pensions administration at
Smith & Williamson
Tel: 01483 407100
e-mail: peter.dickinson@smith.williamson.co.uk
www.smith.williamson.co.uk

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