Back in October, when we launched pensionstalk, we said that we would let you know what was happening at the coal face (without, of course, breaching client confidentiality). Having checked with my colleagues, I’m going to give you the top ten issues over the next few weeks starting with the ones you can probably predict….
1. Benefit changes
The number of our clients who are changing their defined benefit arrangements continues apace. We are working on full closures to future benefit accrual (some with very short timetables), caps on pensionable pay, reductions in accrual rates and increases in member contributions and combinations of these cost-cutting measures. Interestingly, a number of clients are doing their best to retain their DB schemes in some shape or form for existing employees – for example, conversion to career revalued average earnings (CARE). But most are closing final salary scheme entry for new employees – if they haven’t done so already.
2. Mergers
We are handling a number of scheme mergers. That makes sense if the relative funding positions are not too far apart. It helps reduce the future cost of administering a number of group arrangements. In some cases, it has been to release surplus.. what’s that I hear you ask!
3. EFRBS
A number of employers are looking at employer-financed retirement benefit schemes (EFRBS) both onshore and offshore. In our view, the potential benefit lies in an offshore arrangement for international mobile executives. EFRBS clearly have their place in the post-A day tax framework. However, the potential advantages should take into account a level of political risk of change to the tax regime. Clients are understandably nervous of HMRC’s reaction. Everybody is asking what everybody else is doing. The answer is that they are just looking at whether or not to set them up! We have advised on a few that have been set up.
4. DC investments
Very many schemes are reviewing their DC (including AVC) investment options and providers, particularly the default and lifestyle options. We have been asked how to go about changing current investments – whether members need to be consulted or their agreement sought. Generally, the answer is no – but it does depend on the scheme’s documentation. This is definitely an area of trustee responsibility legal risk and there have been recent press reports of member claims. The Pensions Regulator and FSA are trying to encourage greater employer and trustee involvement in this area, as well as around the retirement process to make sure that members are making the right decisions. External versus internal annuitisation is also a hot topic. There are some difficult messages to handle for money purchase funds if a member is retiring before normal pension age as a result of recent case law and the PPF’s view of priorities.
5. Trustee company articles
The Companies Act 2006 has taken a while to come into force. Pension schemes can now take advantage of more flexible arrangements for running their trustee companies. This includes replacing existing articles of association. We have found that many of our clients have not updated their articles since the 1985 – or even 1948 Companies Act! Another reason for reviewing articles is the need to bring them up to date with the pension scheme’s trust deed and rules, member-nominated director arrangements and protocols on confidential information and conflicts of interest. We have come across significant discrepancies between these documents. We will post more on this very soon.
I’ll cover the next five in a week’s time…can you predict what they will be?
Maria Stimpson is a partner at Allen & Overy LLP
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