08/12/08 Trustee Knowledge and Understanding – Review
08 December 2008
Overview
The Pensions Act 2004 creates a statutory duty on trustees of occupational pension schemes to have knowledge and understanding of trusts and pensions law and of the principles of funding and investment, and to be conversant with their own scheme documents. The degree of knowledge and understanding required is that “appropriate” for the purposes of enabling trustees to exercise their functions properly.
The Act was supplemented by a Code of Practice issued by the Pensions Regulator in May 2006. The Regulator undertook to review the Code after two years and has recently issued a revised draft Code and three revised draft scope guidance documents for consultation. The Reguator emphasises that the original scope guidance covered the matters that trustees need to know and understand, and these requirements have not essentially changed. Alterations to the scope guidance and the Code have been kept to a minimum.
The consultation period closes on 31 December 2008.
Scope Guidance
The draft Code proposes three versions of the scope guidance: one for defined benefit (“DB”) schemes with defined contribution (“DC”) arrangements on the basis that all DB schemes have DC arrangements ( eg AVCs), one for DC schemes, and a third one for fully insured DC schemes with 12-99 members which represents a much reduced scope.
In addition to re-ordering the scope documents, the Regulator has made changes to reflect the following in particular:
– the importance of good administration; – a reference to the forthcoming Personal Accounts regime; – developments in investments; – the importance of the employer covenant and trustees’ understanding of their powers; – buyout issues ( including abandonment and inducement); – a new emphasis on the importance of recognising the possibility of wind-up where appropriate and being aware of sensible preparatory steps.The draft Code emphasises that the three versions of the scope guidance represent three frameworks of requirements, and that trustees will need to determine what is appropriate in their particular circumstances using the relevant framework.
The Level of Knowledge and Understanding
The level of knowledge and understanding will vary according to the role and current expertise of any individual trustee and the type of scheme in question. The draft code re-emphasises that asset allocation and investment matters are the units of the scope guidance which require particular care.
Acquiring Knowledge and Understanding
The draft Code notes that research confirms that there are many existing trustees who have not had the opportunity for learning at all, and many who have had induction training only. These trustees may not be able to make the necessary decisions, and need to carry out a training needs analysis using the relevant scope guidance to enable them to undertake suitable training.
The Regulator is of the view that its free e-learning programme is required study for new trustees and also for existing trustees who have not completed it, unless both can find an alternative learning programme which delivers the equivalent.
Updating Knowledge and Understanding
The draft Code reconfirms the Regulator’s view that trustees should review their knowledge and understanding at least annually against the scope guidance and should undertake learning to fill any gaps.
Demonstrating Knowledge and Understanding
The draft Code re-emphasises that the Regulator expects trustees to keep their own records of their learning activities. Trustee boards should keep both individual records and records of activities carried out by the board as a whole.
If the Regulator makes enquiries about a trustee’s level of knowledge and understanding, it will be the level set out in the scope guidance and in the code which will be expected, subject to the notion of “appropriateness” relevant to the trustee in question.
A qualification to demonstrate knowledge and understanding is now offered by the Pensions Management Institute, and this is accredited as a vocational qualification. The syllabus is based on the scope guidance and was developed by the Regulator.
Requirement to be Conversant with Scheme Documents
The draft code reconfirms that being conversant with scheme documents means having a “working knowledge” of those documents to enable trustees to use them effectively when required to do so. A scheme’s documents include both particular documents required by the Pensions Act 2004 ( trust deed and rules, statement of investment principles and, where applicable, statement of investment principles), and unspecified documents “recording policy for the time being adopted by the trustees relating to the administration of the scheme generally” – ie other documents relating to scheme governance and general administration.
Action by Trustees
Trustees should review their levels of knowledge and re-assess their training needs to see if the revised code and scope guidance documents leave any gaps.
Pitmans can assist trustees in attaining the required level of knowledge and understanding by organising bespoke training courses or sessions on particular topics. A session would typically last 30-40 minutes and could cover any or all of the following topics:
– scheme governance – eg internal controls, monitoring the employer’s covenant, handling conflicts of interest; – member-nominated trustees; – current cases or decisions of the Pensions Ombudsman; – scheme specific funding; – assistance with understanding the scheme’s trust deed and rules.For more information please contact any of our Pensions team or;