Occupational Pension Scheme Trustee Duties

Occupational Pension Scheme Trustee Duties Defined Contribution Trustee Training 6 April, 2005 John Kettle Partner

Introduction Overview of legal obligations on trustees of an occupational pension scheme

Occupational Pension Schemes A pension scheme sponsored by an employer for the benefit of its employees Two types of occupational pension scheme: - Defined Benefit - Defined Contribution

Defined Benefit Schemes Sometimes referred to as final salary schemes A member s pension is directly related to salary at retirement The pension will normally be calculated by granting a fraction of the member s salary at retirement for each year of pensionable service

Defined Contribution Schemes Also known as money purchase schemes No guarantee of a particular level of pension related to final remuneration Member s benefit is determined solely by reference to the contributions paid into the scheme by the employer and (if contributory) by the member plus the investment return on those contributions

Defined Contribution Schemes Final outcome for each member depends on return on fund and investment conditions prevailing at the time of retirement Contributions of each member are individually tracked Individual Retirement Account Therefore, it is possible to see at any time what share of the fund relates to the member

Legal Structure of Schemes Occupational pension schemes normally established under a trust A trust is a legal device under which property is held and looked after by one or more persons (the trustees) for the benefit of other persons (the beneficiaries) Assets of the pension scheme held legally and physically separate from the assets of the employer

Trust Deed and Rules The terms and provisions of the scheme will be set out in a detailed (written) trust deed and rules The trust deed contains the formal administrative provisions of the scheme The rules contain details of eligibility, membership and benefits

Trust Deed and Rules Power of amendment e.g. to take account of changes to the law/change benefit structure Consistency of explanatory literature with the scheme documentation

Trustees Initial trustees usually appointed by employer at scheme s commencement Trustees can be individuals or a body corporate or a combination of the two Individuals acting as trustees could include directors of the employer company, employees, pensioners or professional trustees

Appointment and Removal of Trustees Under the terms of the trust deed Under the Trustee Act, 1893 Under the Pensions Acts A deed removing a trustee should contain a specific discharge releasing the retiring trustee from any future liability in relation to the scheme

Member Participation in Trustee Selection Since 1994, Regulations made pursuant to Section 62 of the Pensions Act provide that members are entitled to participate in the selection of a number of the trustees This entitlement applies to schemes with not less than 50 qualified members or directly invested scheme with not less than 12 qualified members

Member Participation in Trustee Selection In summary, a qualified member is an active member or a pensioner but not a deferred member Not compulsory to have member trustees unless the member selection process is initiated by either the employer, the members or an authorised trade union If the member selection process is not initiated, the existing trustee arrangements will prevail. Members may initiate the selection process at any time

Member Participation in Trustee Selection If the selection process is initiated, there are two types of arrangement which may apply, namely the standard arrangement or the alternative arrangement The standard arrangement provides for selection by means of an election The alternative arrangement allows the members to approve the selection by the employer of the relevant members

Member Participation in Trustee Selection Summary of procedure: Trustees notify employer of valid request Employer directs trustees to hold preliminary poll or proceed to election under the standard arrangement Trustees appoint a Returning Officer If > 50% opt for standard arrangement, the Returning Officer notifies trustees and employers and arranges for the election process

Member Participation in Trustee Selection If > 50% opt for alternative arrangement or if < 25% take part in the preliminary poll, appointment of trustees is via alternative arrangement If elections are to be held the Returning Officer must have regard to Guidance Notes issued by the Pensions Board

Trustees General/Fiduciary Duties NB A trustee has fiduciary duties to a member of a scheme A fiduciary is a person in a special relationship of trust to another A trustee, as a fiduciary, must place the interests of that other person ahead of his own and must act in that other person s interest

Trustees General/Fiduciary Duties Trustees basis obligation is to carry out the terms of the trust in accordance with: - duties imposed by equity and trust law - the terms of the trust deed and rules - applicable legislation (Trustee Act, 1893, Part VI of the Pensions Act, 1990) Must exercise reasonable care and have regard to interests of beneficiaries as a whole

Principal Duties of Trustees To be familiar with the scheme documentation To act prudently, conscientiously, honestly and in good faith To avoid any conflict of interest (particularly relevant for employee/director trustees) To ensure that contributions are paid by the employer and members

Principal Duties of Trustees To ensure the proper investment of the scheme assets To notify beneficiaries about the details of the scheme To ensure that proper records and accounts are maintained To pay out benefits

Principal Duties of Trustees To prepare or cause to be prepared an annual report To comply with the requirements of preservation To keep up-to-date with relevant applicable laws To ensure that the provisions of the scheme comply with the principle of equal treatment

Principal Duties of Trustees To take advice on matters on which they are not experts or not competent to act without such advice or where it is prudent to do so To comply with Revenue requirements so that favourable tax treatment is safeguarded Not to make a personal profit, unless authorised by the trust

Principal Duties of Trustees To maintain confidentiality To act fairly as between the different classes of beneficiary To register the scheme with the Pensions Board, pay registration fees and furnish information re inspection

Trustees Duties - Investments Proper investment: - provide for the proper investment of the scheme s resources in accordance with the scheme - In so far as is reasonable, to invest contributions within 10 days of the latest date for payment (contributions must be remitted within 21 days from the end of each month to the trustees or their nominee)

Trustees Duties - Investments Absence of express investment power: - trustees are only permitted to make the investments set out in the Trustee Act, 1893 (Part I), as amended by the Trustee Authorised Investments Act, 1958 (the list of authorised investments has since been amended by statutory instruments) - most schemes confer wide investment powers

Trustees Duties - Investments Standard of care: - the standard of care is such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of people for whom he felt morally bound to provide (Learoyd v Whiteley) - Stacey v Branch

Trustees Duties - Investments Insured schemes: - assets of scheme invested in an insurance policy issued by a life assurance company - insurer reserves full control over investment strategy of assets - if trustees dissatisfied, can switch to another policy or life assurance company - costs incurred if switch

Trustees Duties - Investments Investment in the employer: - No direct prohibition on such investments - Indirect restriction arises under the Acts in relation to a defined benefit scheme

Trustees Duties - Investments - terms of trust deed may contain a restriction - investment in employer s business should be carefully evaluated and made only on commercial terms Investment Managers

Trustees Duties - Disclosure Information to be provided: Trustees must provide information to the scheme members and other prescribed persons as follows: - details about the constitution and rules of the scheme (i.e. legal documents governing the scheme) - basic information about the scheme, usually provided by way of explanatory booklet

Trustees Duties - Disclosure Information to be provided (contd.): - details of personal benefits (benefits statements to include accumulated value of individual retirement account, date of entry into the scheme, normal retirement age and date, contributions credited during the previous scheme year)

Trustees Duties - Disclosure Reports: There are three types of annual report, depending on the size and type of scheme: - Annual report (mainly for defined benefit schemes) - Alternative Annual Report Type A - Alternative Annual Report Type B Copies provided to members within 4 weeks of a request and automatically to trade unions.

Trustees Duties - Disclosure Disclosure and Electronic Communications Pursuant to the Electronic Commerce Act, 2000, trustees can fulfill their duties of disclosure through electronic communication provided certain statutory requirements are fulfilled

Trustees Duties Membership and Financial Records Trustees must ensure that proper membership and financial records of the scheme are kept Trustees have to ensure compliance with data protection legislation - Data Protection Acts, 1988 and 2003 - personal data - obligations of a data controller/processor - possible need to register with Data Protection Commissioner

Trustees Duties Membership and Financial Records Financial Records: - trustees should establish a trustee bank account for the purpose of receiving contributions, paying insurance premiums and other expenses and for paying benefits - trustees must account for all monies paid out - accounts may require to be audited (be familiar with accounting policies) - duty to report misappropriation /fraud to the Pensions Board

Trustee Duties Preservation and Transfer Payments Trustees must ensure that the necessary arrangements are made in relation to the preservation of the benefits of early leavers or for the transfer of their benefits out of the scheme Trustees must ensure that members, on leaving employment, are provided with information on their pension rights and options and should recommend members take their own independent professional advice (but members are responsible for their own decisions)

Trustee Duties Equal Treatment Part VII of the Pensions Act provides that that there shall be no discrimination on the basis of sex, marital status, family status, sexual orientation, religion, age, disability, race, membership of the Traveller Community in respect of any matter relating to a pension scheme Previously Part VII only related to gender discrimination reflecting the requirements of Article 141 of the Treaty of Rome (Amsterdam Treaty) in respect of equal pay

Trustee Duties Equal Treatment Amending the rules: - Trustees have a duty to ensure that any discriminatory rule of a scheme is changed to comply with equality legislation and that all decisions and actions are in accordance with equality legislation - E.g. (i) access to the scheme (ii) retirement ages (iii) survivors benefits (iv) levels of contributions

Trustee Duties Equal Treatment - where existing rules discriminate between men and women - where existing rules discriminate on any of the discriminatory grounds other than race or gender - where existing rules discriminate on grounds of race

Trustee Powers In order to carry out their duties, trustees are normally conferred with extensive and often discretionary powers by the trust documentation and under law, including: - augmenting benefits - allowing members retire early in certain situations - amending the trust deed and rules - deciding which dependent of a member receives death benefit

Trustee Powers Discretionary powers: - Certain powers conferred are discretionary, e.g. how to distribute a surplus on winding up - Thomas Edge and others v The Pensions Ombudsman and another

Trustee Powers Power of amendment: - Check its ambit as stated in the trust documentation - Trustees should carefully review any proposed amendments against the express wording of the power of amendment - Use the power of amendment to act in the best interests of the members

Trustee Powers Delegation: - only allowed if permitted by the trust documentation - the delegation does not absolve the trustees and they must supervise the persons to whom powers have been delegated

Trustee Consequences of Breach of Duty In general, a trustee is liable for a breach of trust Trustees fearing a breach cannot retire and believe this escapes liability. They must investigate any matter and take any action required e.g. court order There are a number of protections available to trustees

Trustee Consequences of Breach of Duty Exoneration clause: - It is usual to incorporate a specific exclusion from liability for trustees into the trust deed governing a pension scheme - Exclusion of liability except in certain circumstances, e.g. fraud and/or dishonesty and/or wilful default

Trustee Consequences of Breach of Duty Trustee indemnity (Section 24 of the Trustee Act, 1893): - an indemnity clause provides financial cover to the trustees against liability - effect of s.24 is that a trustee is only personally liable in respect of breaches of trust which he himself has committed

Trustee Meetings For trustees properly to discharge their duties and exercise their powers, they need to hold regular meetings Timing and frequency of meetings may be set out in the trust deed At the very least, trustees should meet after the end of scheme year to consider the annual report, scheme accounts etc.

Ombudsman The Ombudsman may investigate and determine: - complaints by or on behalf of an actual or potential beneficiary of a pension scheme who alleges that he has suffered financial loss as a result of maladministration on the part of those responsible for the management of the scheme (e.g. trustees, administrator or employers) - disputes of fact or law in relation to a scheme

Ombudsman Maladministration: No exact definition in the Pensions Acts Examples include: - irregularities or mistakes in the administration process - discrimination or unfairness - delay in making payments or giving information - failure to take advice

Ombudsman Actual or Potential Beneficiary: In relation to a scheme, this means a member, an external member, any person who has been a member, any surviving dependant of a deceased member, any person claiming to be a member or a surviving dependant of a deceased member, a personal representative of deceased member or a widow or widower of a deceased member

Ombudsman Internal Dispute Resolution (IDR) Procedure: - Ombudsman cannot investigate a complaint or dispute until the matter has been submitted to IDR and the trustees have issued a decision - Trustees obliged to put in place IDR procedures for dealing with complaints and disputes - The legislation leaves the trustees to determine exactly what form of IDR they will put in place

Ombudsman No jurisdiction: - Disputes between an employer and trustees - Disputes between 2 sets of trustees - Disputes outside certain time limits - Disputes which are the subject of court proceedings - Disputes which are not ones of fact or law or complaints which do not involve maladministration - Disputes which have not first gone through an internal dispute resolution procedure

Redress The Ombudsman will be empowered to give directions and to award financial redress which does not exceed the amount of the actual loss of benefit The Ombudsman will not be able to require an amendment to the rule of a scheme The Ombudsman will not be able to substitute his decision for that of the trustees where they have exercised their discretionary powers

Redress A decision of the Ombudsman will be binding on the parties involved There will be a right of appeal to the High Court An application can be made to the Circuit Court to enforce a decision of the Ombudsman The Ombudsman will not have the power to award legal costs

Pensions Board Set up under the Pensions Act, 1990 Main functions: - monitor and supervise the operation of the Pensions Acts and pension developments - issue guidelines on duties of trustees - issue codes of practice - encourage training for trustees - advise the Minister for Social Welfare

Pensions Board Empowered to issue determinations in relation to certain questions following the application for a determination by certain specified persons including trustees, members or prospective members Empowered to prosecute for breaches of the Pensions Act and to take legal action against trustees for the protection of members and their rights

Pensions Board Trustees should have regard to applicable Pensions Board Guidance Notes, e.g. on remittance of contributions

Occupational Pension Scheme Trustee Duties Defined Contribution Trustee Training 6 April, 2005 John Kettle Partner