Pension Scheme Trustees' Duties and Responsibilities
A brief summary of the main duties and responsibilities for trustees of pension schemes, based on the various Pensions Acts and guidance from The Pensions Regulator.
The law requires that trustees have knowledge and understanding of the law relating to pension schemes as well as the principles relating to the funding of pension schemes and the investment of scheme assets.
Pension scheme trustees are also requires you to be familiar with certain scheme documents including the trust deed and rules, the statement of investment principles and the statement of funding principles.
The trustees are responsible for the proper running of the scheme – from the collection of contributions, to the investment of assets and payment of benefits.
There are three main types of pension scheme:
1. Defined benefit schemes (sometimes known as final-salary schemes)
2. Defined contribution schemes (sometimes known as money purchase schemes)
3. Hybrid schemes (mixture of defined benefit and defined contribution benefits)
Other ways in which employers can provide retirement benefits for their employees include:
(a) Setting up a group personal pension scheme; and
(b) Offering a stakeholder pension scheme.
Two of the most important pieces of pensions legislation in relation to the role and duties of a trustee are the Pensions Act 1995 and the Pensions Act 2004, and the regulations made under them.
The Pensions Act 1995 reinforces trust law affecting how schemes should be run and increases the security of members’ benefits.
The Pensions Act 2004 builds on this with the aims of further improving the security of members’ benefits and standards of scheme administration, and strengthening the scheme funding requirements.
The Pensions Regulator has issued codes of practice about certain requirements of the Pensions Act 2004, and may issue other codes if it wishes. The codes contain practical guidance on how to comply with the requirements in question, and set out the standards the Pension Regulator expects. If a court or tribunal is deciding whether a particular requirement has been met, they will take the code of practice into account.
Pension scheme trustees have the following duties:
1. To act in line with the trust deed and rules
2. To act in the best interests of the scheme beneficiaries
3. To act impartially
4. To act prudently, responsibly and honestly.
Trust deed and rules
The trust deed is a legal document that sets up and governs the scheme. The scheme rules set out more details on various issues including the benefits that will be provided, trustees’ powers and procedures trustees must follow. Trustees must act in line with the terms of the trust deed and rules.
Who are the beneficiaries?
A 'beneficiary' is anyone who is entitled to, or who might receive, a benefit from the scheme, now or in the future. Scheme beneficiaries can include:
1. Active members (employees who are building up benefits in the scheme)
2. Pensioner members (people who are receiving a pension from the scheme)
3. Deferred members (people who have stopped contributing to the scheme, but who still have benefits in it (for example ex-employees who have not transferred all their benefits to another pension arrangement)
4. Prospective members (people who, if they go on to meet the eligibility conditions, may be entitled to join the scheme at a future date)
5. Widows and widowers of members
6. Dependants of members (e.g. children or other relatives of members who financially depend on them)
7. Former husbands and wives of members who, as a result of a court order on divorce have been granted pension credits within the scheme
8. In some circumstances the employer who, for example, may be able to receive payments from the scheme if there is a funding surplus or when the scheme is wound up.
Trustees will need to strike a balance so that they give appropriate weight to the interests of each class. Members in the same class should be treated the same. When dealing with individual beneficiaries, trustees will have to weigh the interests of that individual against the needs of all the other beneficiaries. Conflicts of interest may affect not only trustees but also directors of the employer, agents, professional advisers and others. Many trustees have a stake in the scheme or its sponsoring employer. If not managed effectively, decisions may be taken that put the interests of the beneficiaries at risk, or subsequently prove to be invalid. The failure to deal properly with a conflict of interest could result in a trustee’s actions being set aside and/or personal liability for the trustees. Trustees who are directors of the employer will also need to consider requirements of the Companies Act 2006 (in particular CA 2006 section 175 relates to “duty to avoid conflicts of interest). Conflicts should be appropriately identified, monitored and managed.
Acting prudently, responsibly and honestly
The duty to act prudently means trustees must act in a way that a prudent person would act in their own affairs. In doing so, trustees must use any skills and expertise they have. This duty is particularly relevant when selecting and dealing with the scheme’s investments. When reaching a decision trustees must consider the circumstances impartially, taking account of all the relevant facts and ignoring irrelevant facts. It is usually good practice to record the factors that influenced the decision.
Trustees should take professional advice on any matters which they do not understand and on technical issues which may affect the scheme. Trustees should not make any personal profit at the expense of the fund. However scheme members can become trustees. The Pensions Act 1995 makes it clear that scheme members can be trustees and they can benefit personally from decisions made by the board of trustees as long as this will benefit members generally or a specific class of members.
Trustees may be personally liable for any loss caused to the scheme as a result of a breach of trust. A breach of trust can happen when:
1. Trustees carry out an act which they are not authorised to do under the trust deed and rules (unless agreed by the court or directed by the Pensions Regulator);
2. A trustee fails to do something which he should have done under the trust deed and rules; or
3. A trustee does not perform one or more of the duties that they have under trust law or pension law or do not perform them with sufficient care.
Trustees can be personally liable for any loss which is caused to the scheme as a result of the trustees’ breach of trust. Even after ceasing to act, trustees are still liable for the decisions they took when they were a trustee. Trustees have 'joint and several liability'. This means that any trustees can be held responsible for a breach of trust committed by another trustee.
Trustees who become aware of a breach of trust committed before they become a trustee of the scheme may be held liable for it if they take no action to correct the breach, even though it happened before their appointment.
If the Pensions Regulator or a court fines a trustee as a result of a breach, that trustee can neither pay the fine out of the scheme’s assets nor use the scheme’s assets to pay the premiums for a policy insuring the trustee against the fines.
It may be possible to obtain indemnity from the employer or insurance to cover the trustee in case of a breach of trust.
Working with the employer
Trustees should put procedures in place to ensure that the employer keeps them informed about its financial position and of any plans that will change or impact upon the pension scheme. It is against the law for a trustee to be dismissed or detrimentally treated for carrying out their duties or using their powers properly. If a trustee is dismissed they have the right to complain to an employment tribunal. The Employment Rights Act 1996 provides this protection for trustees who work for the employer.
Providing information to the Pensions Regulator
Trustees need to provide information to the Pensions Regulator in three circumstances as follows:
• Providing information for the register and the scheme returns on a regular basis.
• Providing information when particular scheme or employer-related events occur.
• Providing information if certain breaches of the law occur.
1. The Pensions Regulator keeps a register of pension schemes, holding information about the scheme and the employer. Trustees must provide this information and notify the regulator of changes. Where the scheme is being registered for the first time the trustees must provide all the information within three months of the scheme being established.
The Pensions Regulator issues a scheme return to all schemes on the register on a regular basis. Large defined contribution schemes will receive a return annually while smaller defined contribution schemes may wait up to three years between returns.
2. Notifiable events are explained in a code of practice issued by the Pensions Regulator.
3. The Pensions Regulator has produced guidance on reporting breaches of the law.
Providing information to members
The trustees of most pension schemes have to make information available about the scheme to members, prospective members, husbands and wives of members and prospective members, other people entitled to benefits under the scheme and independent recognised trade unions. Some information needs to be produced annually such as the annual report which should be available within seven months of the end of each scheme year. Other information should be provided automatically or if it is requested.
By law trustees are required to appoint various professional advisers to assist in running the scheme. The Pensions Act 1995 requires the trustees to appoint certain professional advisers to carry out specific tasks in relation to the scheme. Trustees can only rely on advice from professional advisers who have been properly appointed. The principal types of professional advisers are as follows:
1. Auditors will need to be appointed if the scheme requires an audit.
2. Schemes with a defined benefit element must have a scheme actuary to provide advice on all aspects of the funding of the scheme.
The scheme may also have the following advisers:
3. An investment adviser (to give advice about the type of investments to hold)
4. A fund manager and (to deal with the investment of the scheme’s assets)
5. A custodian (to safely hold the scheme investments)
6. A legal adviser.
The current statutory funding framework, which replaced the minimum funding requirement, came into force on 30 December 2005. Under the requirements each scheme must meet the “statutory funding objective” to have sufficient and appropriate assets to cover its technical provisions. Technical provisions are an estimate, based on actuarial principles, of the assets needed to cover the schemes liabilities which will be payable in the future. Technical provisions are calculated using an accrued benefits funding method and assumptions chosen by the trustees, after taking the actuary’s advice and usually obtaining the employer’s agreement. The scheme funding provisions require the trustees to:
1. Prepare a statement of funding principles
2. Obtain regular actuarial valuations and reports
3. Put in place a recovery plan addressing any funding shortfall
4. Keep scheme members informed about their scheme’s funding position by issuing regular summary funding statements.
The Pensions Regulator has produced a code of practice Funding defined benefits which explains this in more detail.
The trustees (except trustees of wholly fully insured schemes) are responsible for deciding the investment strategy to be adopted by the scheme. Having established the investment strategy the trustees should prepare the scheme’s statement of investment principles (SIP). The trustees need to review the SIP regularly (at least every three years) and whenever there has been a significant change in investment policy. When the SIP is drawn up and revised the trustees must obtain and consider the written advice from a person who they reasonably believe to have the appropriate knowledge and experience of financial matters and investment management and to consult with the employer. 'Consultation' means considering the employer’s views carefully however the trustees do not need to agree with the employer or carry out their wishes.
Pensions law allows trustees to delegate day-to-day investment decisions to an investment manager (fund manager) who is authorised under the Financial Services and Markets Act 2000 and who has been properly appointed. The trustees should set up appropriate procedures to review their performance and charges.
Certain employer-related investments are restricted (to no more than 5% of the scheme assets) and other certain employment related investments are not allowed at all.
Trustees must establish, operate and maintain adequate internal control mechanisms for the purpose of monitoring that the scheme is being effectively administered and managed in the interests of the members and beneficiaries under the scheme rules. This includes:
1. Taking decisions about the scheme (following the trust deed and scheme rules)
2. Keeping records and holding original documents
3. Updating the trust deed and rules when necessary
4. Resolving disputes with scheme members.
Auditor’s statement and audited accounts
The trustees of most pension schemes need to get a statement every year from the scheme auditor confirming whether or not, in the auditor’s opinion, contributions have been paid in line with the scheme’s payment schedule or schedule of contributions. If the statement is negative or qualified, the scheme auditor must give reasons why.
For many schemes, the scheme auditor will also need to audit the scheme accounts. The accounts usually form part of the annual report about the scheme. The trustees are responsible for preparing the accounts (although an adviser may help in this process) and the scheme auditor will audit those accounts.
The accounts must be prepared in accordance with the Statement of Recommended Practice (SORP) for pension schemes, and must show a true and fair view of:
1. The financial transactions of the scheme during the scheme year
2. The amount and disposition of the assets at the end of the scheme year
3. The liabilities of the scheme, other than the liabilities to pay pensions and benefits after the end of the scheme year.
The accounts should be prepared and audited, if appropriate, within seven months of the end of the scheme year.
The Pensions Regulator has produced a Trustee Guide which contains more details on trustees duties and responsibilities.
In relation to Conflicts of interest The Pensions Regulator has issued detailed guidance.