Chapter
UK regulation of occupational pension scheme governance
Supervision of occupational pensions governance in the United Kingdom
3 Pension funds and the capital markets
Pension funds and long-term investment
Emerging from the post-war environment
How pension schemes provided finance for growth
Pension schemes in the great equity bull market
Attention switches to liabilities and bonds
Entering a period of turmoil
New definitions of scheme solvency
A reassessment of equities
Pension funds as suppliers of risk capital
The search for alternative asset classes
Consequences of pension scheme closures
The danger of a gap in the capital markets
4 Social responsibility and fiduciary duties of trustees
Historical origins of fiduciary duties
The fiduciary duties of pension fund trustees
The duty to act for a proper purpose of the trust
Duty to act in the best interests of the beneficiaries
The organic nature of fiduciary duties
Recent developments: the pension fund industry in the twenty-first century
Principles of responsible investment
Fiduciary Responsibility Report: ‘Freshfields II’
Active ownership of pension fund assets
Moving towards better governance
Structure, composition and operation of trustee boards
Composition and operation
Duties and responsibilities of trustees
Trustee knowledge and understanding (TKU)
Looking after stakeholders’ interests
Key issues on the trustee agenda
Professional advisers and service providers
Independence and liability
The Pension Regulator’s Codes of Practice (as at April 2011)
Conflicts of interest at common law
Legal challenges and remedies
The statutory obligation to avoid conflicts of interest
The self-interest conflict
Where the trustee is a member of the scheme
Where the trustee is a director of the employer
Where the trustee is a senior employee of the employer
Where the trustee is a trustee of another scheme
Where the trustee represents a particular constituency
Managing conflicts of interest
Pensions Regulator guidance
Steps which can be taken to manage conflicts of interest
Excusing the conflicted trustee from the relevant discussion and decision-making
Resignation of the conflicted trustee
Appointment of an independent trustee
Background: the employer’s perspective
Where the trustee is a director of the employer
Fiduciary duties: their existence is not fatal to dual roles
The Companies Act 2006: conflicts must be authorised by the company
The trust deed and rules: authorisation clauses
Conducting negotiations: the general position
The position of the finance director
Confidentiality agreements
Duty under regulations for the employer to disclose information to trustees
Guidance from the Pensions Regulator
Acting for the employer and trustees: market practice
7 The pension scheme in the employment package
Route 1 – express variation clause
Route 2 – seek employee’s consent
Route 3 – gain implied consent
Route 4 – dismiss and re-hire
Pension consultation obligations
Employment consultation obligations
Overlap of consultation obligations
Other potential consultation obligations
Pensions issues on terminations of employment
Substantial loss approach
Pension claims in wrongful dismissal cases
8 Employer support and the development of the sponsor covenant concept
Pension scheme relationship with corporate sponsor and other parties
The sponsor and its owners and lenders
The pension scheme and its members
The pension scheme and its sponsor
The pension scheme as a creditor
Need for trustees to be engaged with the sponsor
Changing advisory dynamics
The analytical standpoint and the sponsor covenant
Fragmentation of stakeholder constituencies
Key factors in covenant assessment
Financial position in insolvency
Business environment and strategic challenges
Towards a new model for trustee engagement
Companies in restructuring or distress
Support for the trustees’ position in corporate events
Dynamic covenant monitoring
9 Establishing the funding requirements of pension schemes
What is an actuarial valuation?
Mortality – pre retirement
Mortality – post retirement
Retirement and leaving service rates
Mortality – pre retirement
Mortality – post retirement
Retirement and leaving service rates
Discount rates – funding valuations
Allowing for additional investment return
10 Effective oversight of pension administration
What is good administration?
Clarity of responsibilities
Insourcing versus outsourcing
Issues to consider when reviewing strategy
Selecting an outsourced provider
Step 1: appoint a working group or sub-committee to oversee the process
Step 3: examine the market and decide on a list of providers to be invited to tender
Step 4: issue a request for information (RFI) or invitation to tender (ITT)
Step 5: manage the tendering process and evaluate the tenders
Step 6: review the contract and conduct due diligence
Workflow and electronic document management (EDM)
Data management, security and data audits
Interfaces with HR, payroll and regulatory bodies
Corporate payroll and HR interface data
Web interfaces for members
Data sent to and received from external agencies such as HM Revenue & Customs (HMRC)
Straight through processing (STP)
Administration performance
Determining service levels
Operational risk management
Managing and mitigating operational risk
Effective administration teams and accountability
Team organisation and management
Interaction between trustees and administration team
Management of conflicts and transparency
Engaging stakeholders and clear accountability
11 Investment governance of defined benefit pension funds
Governance and the trustees’ responsibilities
Investment beliefs and long-term investment
Well-positioned governance
Focus on an appropriate time horizon
Alignment with a clear mission
Governance best practice and governance innovation
Effective focusing of time
Strong investment beliefs
Board selection and competence
12 Hedging investment risk
Asset and liability breakdown report
Deficit risk analysis (assets/liabilities)
13 Managing longevity risk
Death: an uncertain certainty
Managing longevity risk within the scheme
Improving the calibration of a scheme’s underlying risk
The future: measuring the immeasurable?
Managing longevity risk by transfer to emerging markets
Managing longevity risk: looking ahead
Bibliography and further reading
14 The role of insurance in the occupational pensions market
Background and development of the insurance market
Risk management – buy-ins and longevity insurance
Settlement of liabilities – insurance buy-out
Insurance regulation and pricing
Considerations when purchasing a buy-out or buy-in
Considerations on a buy-out
Considerations on a buy-in
Price and terms comparability
Certainty versus best price
15 Pensions – a corporate perspective
Liabilities – the operational side
Liability management checklist
Financial assets and financial liabilities – measurement and risk
Pension fund risk measurement and limitations
Actuarial valuations limitations
Working with trustees and their advisers
Asset-backed security, etc.
16 A note on the investment management of defined contribution schemes
Design of suitable investment choices for members
17 Effective investment governance in defined contribution schemes
DC pensions are guided consumer products
Understanding member needs and expectations
Level of financial understanding and familiarity with investment
Attitudinal/behavioural characteristics
Attitude towards planning
Socio-demographic characteristics
Setting an investment objective
Monitoring member behaviour and results
Monitoring investment performance
Investment architecture and governance
Investment governance in context
Contribution levels and persistency
Communication and engagement
Broader benefit design and objectives
Responsibilities and accountability
18 Inside pension scheme governance
Good Governance for Pension Schemes
( Law Practitioner Series )
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