'Pension trustees are putting their necks on the line'

The £700 billion in UK retirement funds is under the stewardship of voluntary and unqualified volunteers. The Pensions Act will require them to have greater expertise – and will hold them legally liable if a scheme collapses. Teresa Hunter reports

Savings in company pension schemes have historically been looked after by an army of well-meaning amateurs.

In recent years, more and more experts have questioned the sense of depending on volunteer trustees, often with no relevant qualifications, to safeguard the £700 billion held in nearly 100,000 occupational funds.

Concerns about the competence of trustees have increased as rumours have emerged of directors being allowed to transfer large sums from their company schemes just before they collapsed.

Two trustees of the Blyth & Blyth pension fund who were also directors are now being pursued by PS Independent Trustees on behalf of members because they took early retirement just before the company crashed. Retirement packages paid to directors just before the balloon went up at Courts, the furniture chain, and ASW, the engineering firm, have also been questioned.

In an attempt to answer the critics, the Government has framed the Pensions Act 2004 to place a much greater onus on trustees to have a high standard of knowledge and understanding of all aspects of the pensions businesses, including pensions law, actuarial matters, accounting, investment management, foreign exchange and so on.

Should it be proved in the wake of a scheme collapse that trustees had failed to meet these requirements, litigation would almost certainly follow. The pensions regulator would also investigate and publicly name and shame those responsible and bar them from holding trusteeships in the future.

Last week the Occupational Pensions Regulatory Authority (Opra) published a detailed list of requirements which trustees will be required to meet in future. The subject headings alone run to 13 pages, with separate sections for final salary schemes and money purchase arrangements.

The scope and depth of the knowledge this army of volunteers will be expected to acquire has led many in the pensions industry to brand it "unrealistic". They warn that, given the state of Britain's pensions industry, with its £350bn wind-up deficit, volunteering to be a trustee is beginning to look like one of the most dangerous things anyone could do.

"Becoming a trustee is not something that should ever be undertaken lightly," says Stewart Ritchie, the pensions director at Aegon and himself a pension fund trustee. "These new commitments will make people more fully appreciate the risks involved. You're putting your neck on the line. If something goes badly wrong, you're personally liable."

Ros Altmann, a pensions consultant and a governor of the London School of Economics, says: "These new obligations are quite unrealistic except for the professional trustee. It's impossible for laymen to acquire these skills. Being a trustee is already much more dangerous today because of the large deficits. It is no longer good enough to do your best. Unless you can meet these very high standards, you could be sued."

Ritchie adds, with commendable honesty: "Being a pension fund trustee is the most difficult thing I have to do. Trustees are going to face ever-tougher decisions, such as how much must they require an employer to pay into a fund with a black hole. They will have to balance the implications for jobs and the health of the company against the need to safeguard pensions."

Trustees normally seek some protection against litigation from either the employer or the pension fund itself. This can take the form of professional indemnity insurance, although cover can be hard to come by and is expensive. Frequently, the company will simply offer to indemnify trustees against legal action. But in many cases where the pension scheme has gone belly up, the employer has already disappeared, leaving the trustees defenceless.

For this reason, experts believe employers may respond to the tough new regime by attempting to do without trustees altogether. However, this is only viable for money purchase schemes, where there is no guaranteed pension on retirement, and the outcome relies solely on what is paid in and investment performance.

The expectation here is that many schemes which have been actively managed by trustees, actuaries and investment managers will be converted into group personal pensions and handed over to the insurance industry. However, not everyone thinks this is the most desirable outcome, given mis-selling scandals, concerns about charges and investment performance and other difficulties, not least events at Equitable Life.

Stephen Yeo, a partner at Watson Wyatt, explains: "If the consequence of these changes is that more company pensions money is controlled by insurance companies, I doubt if the result will be better pensions."

This is not an option for employers with final salary pension arrangements, who have no choice but to continue with trustees until the last pension is paid, even where the fund has long been closed to current employees.

Even so, volunteer trustees may well be phased out in favour of professional independent trustees with all the requisite legal, actuarial and investment skills.

But they will not be cheap. According to Paul McGlone, an actuary at Aon, charges are normally £1,000 a day, but someone with specialist skills can charge many times that. "You are usually looking at a basic cost of £10,000 to £20,000 for a single trustee each year, but it can be much higher."

Not only can this prove a hefty burden on a fund already in difficulties, but the costs can escalate because trust deeds often prohibit an independent trustee from being sacked. "Protection is necessary to prevent employers getting rid of them for being obstructive," Yeo explains. "But once you've appointed them you often can't get rid of them for whatever reason. People look on them as part of the solution but if you aren't careful they can become part of the problem."

Trade unions are looking into the possibility of training a body of quasi-professional trustees to represent employees. Meanwhile, the National Association of Pension Funds says it has yet to decide whether the new regime will improve matters or add to the problems.

Ken MacIntyre, a pensions policy analyst, says: "The latest guidance is too new. We need to study it carefully. Much will depend on how it works out in practice and how it is interpreted."

Having produced its syllabus, Opra is planning to publish guidance later in the year on how the rules should work in practice. The new requirements will then come into force at the beginning of next year, with a six-month interim period.

Malcolm McLean, the chief executive of the Office of the Pensions Advisory Service, welcomes the new regime. He says: "A little knowledge is a dangerous thing and no knowledge must be even worse. When you think about the money involved in running these schemes, it has to be a good thing to help trustees acquire the skills they need to do a good job."

But he would be concerned if the stricter rules deter lay trustees from volunteering for the job. "Good trustees can make an enormous difference, but they can't be experts in everything," McLean says.

"They have professional advisers which they rely on, but they need sufficient knowledge to challenge that advice."