With the Pensions Regulator's increasing focus on good scheme governance, the start of the new year is an appropriate time for trustees to consider whether any key scheme documents need to be updated and included in the scheme's annual action plan.
In this Pensions Alert, we have highlighted some examples of scheme documents that ought to be considered and provided suggestions as to what is an appropriate period for review.
Consolidated trust deed and rules
It is common practice for schemes to make changes to their rules through amending deeds, rather than by entering into a new trust deed and rules each time. However, where this practice continues over a sustained period, it can become difficult to interpret the amended position.
The Pensions Regulator's trustee guidance indicates that it is good practice to consolidate rule amendments into a single document at least every five years.
We would suggest that it is particularly important to carry out a consolidation exercise where any of the following apply:
- The scheme rules have been amended on a number of separate occasions since the last consolidation exercise
- Certain rule amendments have been implemented on an interim basis (eg closure to future accrual, cessation of contracting-out and/or Finance Act 2004 modifications)
- Rule amendments include material alterations to members' benefits
- The scheme has accepted a bulk transfer from another scheme which has a different benefit structure to the scheme
Scheme booklet / online communications
In our experience, many schemes fail to keep their scheme booklets up to date and periodically issue separate announcements to members.
The Pensions Regulator's trustee guidance suggests that scheme literature should be updated when consolidation exercises are carried out. Accordingly, if you have not updated your scheme booklet in the past five years, or if the above risk areas apply, it would be appropriate to add this to your scheme's annual plan.
In addition, where schemes produce member communications online, it is important that they are updated promptly when any material changes affecting the scheme are introduced, given that members will have immediate access to scheme information provided online.
Scheme governance and policy
Trustees have a duty to monitor and review their scheme governance arrangements in order to ensure that they are robust and appropriate. This should include a regular review of various scheme policy documents, including:
- Policies relating to conflicts of interest and anti-bribery
- Member-nominated trustees/directors ("MNT/D") policy
- Internal dispute resolution procedure
- Terms of reference for sub-committees
- Data protection / information security policies
- Ill-health early retirement policy
- Policies governing early / late retirement
- Death benefit policy
- Policy regarding recovery of overpayments
We would suggest that trustees should consider whether their policies and procedures ought to be updated on a regular basis (typically 2 - 4 years) and particularly whenever a material change in circumstances takes place (eg scheme mergers / bulk transfers, material benefit changes, legislative changes or corporate activity which may affect scheme members).
For example, where a scheme has recently closed to future accrual, the MNT/D policy may need to be reviewed to take into account that there are no longer any active members.
Corporate governance for trustee
Trustee companies need to consider whether there are any additional statutory requirements that apply to their governance arrangements by virtue of their status as a corporate body.
For example, changes were introduced to the Companies Act 2006 on 6 April 2016, which require unlisted UK companies to take "reasonable steps" to identify those people with significant control ("PSC") over them and to record their details in a new statutory register, known as a PSC register. It will often be the details of a legal entity (such as the sponsoring employer) which must be entered on the trustee company's PSC register.
Trustee companies must take action to confirm the correct position, even if a company does not have a PSC, and will need to ensure that any changes are promptly recorded.
In addition, we are aware that some trustee companies which were established prior to the Companies Act 2006 have not yet fully updated their articles of association to take into account the current Companies Act regime. In order to ensure that the decision-making processes, including management of conflicts, are appropriate, trustee companies should consider adding a review of their existing articles to the annual scheme plan.
Internal controls: risk register
It is very important that trustees monitor, challenge and review their risk assessment and internal control procedures. This includes having an effective risk register, a conflicts of interest policy and a conflicts register in place.
The Pensions Regulator's guidance indicates that risk assessment is a continuous process and must take account of a scheme's changing environment. Internal controls should be reviewed periodically, at least on an annual basis, or sooner if substantial changes take place, such as a deterioration in funding, change in investment manager, or where a control has been found to be inadequate.