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Pension law
is complex. But understanding the basics of the law is extremely
important if pension scheme members are to ensure that their rights
are protected.
Pension fund trustees in particular have a duty to ensure that they
understand their duties and how a pension scheme is operated.
This leaflet sets out the basics of pensions law, the duties of
employers and of trustees and the rights members have under the
law.
Introduction
All private
sector pension schemes are founded upon the law of trusts. Parliament
has added to, or modified the common law (that is the judge made
law) by Statute. The main Acts of Parliament affecting pension schemes
are the Pension Schemes Act 1993 and the Pensions Act 1995 which
was passed to reform pensions law following the Maxwell scandal.
There are an enormous number of statutory instruments but the common
law is still the current which flows under this raft of legislation.
There is surprisingly
little case law specific to pension schemes. The Courts still rely
on 18th and 19th century cases concerning traditional trusts (which
predominantly concerned family wealth). But the Courts recognise
that pension schemes are different because:
Benefits under
pension schemes are earned by the service of members under their
contracts of employment and, where the scheme is contributory, by
their contributions.
The State has
an interest in encouraging people (and their employers) to save
for their retirement and there are tax benefits available should
a scheme choose to become "exempt approved" for tax purposes.
Occupational
pension schemes may also interrelate with the State pension scheme.
If a scheme is "contracted out" of the State Second Pension
then there is another detailed body of social security law which
governs the relationship between the occupational scheme and the
State social security system.
There is a common
professional practice relating to occupational pension schemes,
arising from the work of actuaries, fund administrators and investment
managers as well as lawyers. This is used as a guide to the legal
regulation of pension schemes but it is not binding law.
Nine times out
of ten, the answer to any question will be found in the deeds and
rules.
There is a three-way
relationship which lies at the heart of a pension scheme. It is
a triangle, with the trustees, the employer, and the beneficiaries
at each corner. The trustees have rights and obligations in their
relationship with the employer, and in their relationship with the
beneficiaries, which must be considered separately.
Does my employer have to provide me with a pension?
No. An employer
is required to identify a stakeholder pension scheme (that is, a
low cost money purchase scheme similar to a personal pension) for
its employees. It must arrange for contributions to be collected
by payroll deduction if any employee wishes to contribute, but it
does not need to contribute itself.
Employers who
take charge of a business following a business transfer under the
TUPE regulations will have to think about providing a pension scheme
for the transferring staff. It is a condition of any transfer from
the public sector that the incoming contractor provides a pension
scheme broadly comparable to the former public sector employer.
It is commonly a requirement imposed on the incoming employer in
the case of a private sector transfer as well, as a result of the
commercial deal which the two companies make. The legal basis of
this requirement is uncertain however. The government has indicated
that it will clarify this when the TUPE Regulations are amended.
How is a pension scheme set up?
Public sector
pension schemes are made by Parliament and are governed by statutes
and statutory instruments. That is the exception rather than the
rule. However, private sector pension schemes are usually set up
as trusts, creating a trust fund to which the employer is obliged
to contribute. The scheme may require employees to contribute as
well, but many schemes do not.
Trusts are a
very old legal concept, developed as a means of passing on inherited
wealth. One party gives the trust property to another (the trustee
or trustees) but on condition that the property is used only in
the best interests of a third party: the beneficiary or beneficiaries.
In a pension trust, the first party is the employer and the beneficiaries
are the employees, former employees, and the family members who
might obtain some form of benefit under the Rules of the scheme.
What is the
role of the trustees?
The trustees
own all of the assets of the scheme (including any surplus assets).
They must invest them, and spend them looking to the best interests
of the scheme's members, taking care to balance the interests of
all of the classes of beneficiary. They have to look after the interests
of pensioners and deferred pensioners (that is, early leavers) as
well as current employees.
Best interests,
for these purposes, mean the financial best interests of the beneficiaries.
The Courts perceive the interests of scheme members to be limited
to obtaining the maximum pension. The trustees therefore have to
invest the assets with a view to obtaining the maximum return without
taking excessive risks. That is usually interpreted as balancing
the investments between shares and Government bonds but recent stock
market experience is causing many fund managers to re-examine the
wisdom of holding shares, which are expected to earn greater returns
but are more risky.
The Pensions
Act 1995 has reinforced the obligations placed upon the trustees,
so far as investment decisions are concerned. Whilst, as a general
rule, the deed and rules can limit the liability of trustees (by
exonerating them for any losses caused by negligence) it is not
possible to exclude the trustee's liability for negligence in investment
decisions. But if they appoint a qualified fund manager they will
not be liable for the act or default of the fund manager provided
that they have taken all reasonable steps to satisfy themselves
that the fund manager has the appropriate knowledge and experience
and is carrying out his or her work competently. In other words,
they must take care in ensuring that a proper person is appointed
and in supervising the manner in which that person carries out the
task of investment.
The trustees
must draw up a statement of investment principles setting out their
policy regarding the kind of investments that they will make, and
the balance between different kinds of investments. They must also
specify how they will approach socially responsible investment,
and how they will exercise their voting rights as shareholders (never
forgetting, however, that they must maximise the return).
Trustee discretions
The trustees
have other decisions to make. Typical instances are:
- item whether to pay a member an ill-health pension
- item who to pay a death-in-service lump sum to
- whether to initiate or agree a rule change
- what transfer values to pay if a member leaves and wants to move
their benefits to another scheme
red bullet indicating list item what employer contributions should
be paid.
The way most
of these decisions must be taken will be specified in the Rules
of the scheme, and they must be observed scrupulously. Setting the
employer's contribution rate is more heavily regulated: when the
scheme is valued by the actuary every three years, the trustees
must agree a schedule of contributions with the employer which will
keep the funding at a minimum level, known as the MFR, within time
frames specified by the law. If they can't agree the schedule with
the employer then they must impose it.
A decision once
made is not easily set aside. The Courts take the view that if the
trust deed and rules give the decision making power to the trustees,
then the Court should not exercise it for them. There are some important
exceptions:
-The right person
must make the decision. If the rules say that a decision is for
the employer to make then the views of the trustees are irrelevant
and a decision made by them is irrelevant.
-The trustees
must observe the limits on any discretion given to them. If, for
example, the trustees have a power to pay benefits to a "dependant"
they may not give benefits to someone who is not dependent upon
the deceased member in question.
-If trustees
take some action without realising that there is a decision to be
made then the action may be set aside. If trustees sign documents
without reading or understanding them they risk this happening.
-Trustees may
only use a power for the purpose for which it was given. For example
a power of amendment is given to the trustees for the purposes of
the scheme and that means the provision of pensions and other benefits
to scheme members. It is not given to the trustees with a view to
protecting the employer and they cannot act to protect the employer
from a hostile takeover bid.
-More obviously,
decisions can be set aside if, for example, they are taken in bad
faith.
What are the employer's obligations under the scheme?
The relationship
which exists between the trustees and the employer is defined first
and foremost by the trust deed and rules. When lawyers talk about
the balance of power they are talking about the powers of the trustees
and of the employer, and the manner in which each keeps the other
in check.
The most important
powers, for these purposes, are:
-the power to wind up the scheme
-the power to amend the scheme
-the power to set the employer's contribution and the power to dispose
of any surplus
-the power to make discretionary payments (such as ill health benefits)
-the power to fix the amount of any transfer values which are paid
over and above the statutory minimum
The employer
usually reserves the power to decide whether or not to allow an
employee to join the scheme in the first place.
It used to be
the case that the employer could also reserve the right to appoint
the professional advisers to the scheme. This is no longer possible.
The trustees must appoint the scheme auditor and actuary. The same
firm or individual can be appointed to advise the employer as well,
and the trustees have to rely on these professionals to withdraw
if they think there is a conflict of interest. The trustees should
also appoint their own solicitors, either by using the same firm
as the employer and relying upon the solicitors to inform them if
there is a conflict of interest, or by appointing another firm altogether.
The law has
shifted this balance of power in favour of the trustees. The trustees
can always amend the scheme to ensure that it does not discriminate
against women or men. The priority order, if the scheme is wound
up, is now fixed by law. Limited benefit improvements must be made
before an employer can receive a repayment out of any surplus.
More importantly,
the power to amend the scheme is now limited. If any modification
is proposed which will affect accrued rights or entitlements then
the trustees' consent must be obtained. If they will be adversely
affected then the consent of each member concerned will have to
be obtained as well.
The employer
also appoints some of the trustees. The employer's power to appoint
the trustees is now significantly constrained by the obligations
based upon the trustees (not the employer), to ensure that member
nominated trustees (or member nominated directors in the case of
the trustee company) are appointed.
The provisions
are extremely complex and will be changed soon. At present, at least
one third of the trustees must be elected by the members of the
scheme, with a minimum of two (one in a scheme with less than 100
members). The employer can opt out by making 'alternative arrangements'.
These will apply unless 10% or more of the members object, (and
if they do the proposal will go to a ballot). It is this right to
opt out which is likely to be abolished.
Ultimately,
control of the scheme almost inevitably rests with the employer
at least to the extent that it is only in the rarest of cases that
the employer's right to terminate the scheme is constrained by the
need to obtain trustee or member consent (or is constrained by any
provision in the contracts of employment of the members).
Members' rights under the contract of employment?
These are usually
quite limited. The contract usually refers to the members' explanatory
booklet, and the employer reserves the right, in the booklet, to
amend or terminate the scheme.
The employer
is obliged, however, to treat its employees and former employees
in good faith. That means that it must look at each individualÕs
circumstances when, for instance, deciding whether to agree an ill
health pension application. And it means that the employer may not
exercise its powers under the rules of the scheme in a way which
undermines its very purpose.
Remember too
that promises made outside the formal contract of employment can
have contractual effect. If for instance an employer promises to
provide a pension scheme of a particular nature as a condition of
a business transfer then employees who rely on that promise may
be able to enforce it.
What if I need to complain?
If the complaint
is about something the employer has done, then use the ordinary
employment grievance procedures. If the complaint is about something
the trustees or administrators have done, there is a special internal
dispute resolution procedure in every scheme which should be used.
This must specify
a two-stage process as a minimum. If the first stage complaint does
not provide a solution, then there will be a right of appeal, usually
to the trustees. The law requires decisions to be made, at each
stage, within two months (unless there is a convincing explanation
why more time is needed).
If you are still
dissatisfied, you may be able to reach a solution by calling on
the services of OPAS, the Pensions Advisory Service. If it can't
help, then you could make an application to the Pensions Ombudsman.
He can deal with complaints against the employer, the trustees or
the administrators.
Note the time
limits however. A complaint to the Pensions Ombudsman must be filed
within three years of the action or omission which is at the heart
of the complaint. An extension can be granted if the member concerned
didn't know that there was a problem until some later stage, or
if the Ombudsman is satisfied that justice requires an extension.
Thompsons
Solicitors
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