Implementing the new member-nominated trustee requirements
The Pensions Act 1995 introduced the concept that trustee bodies should have one-third of their number nominated by the members. However, the fairly simple idea was implemented by way of some of the most complex regulations issued under that Act and the complexity of those Regulations was heavily criticised. The Pensions Act 2004 sets out to simplify matters.
The Pensions Act 1995 regime allowed employers to “opt-out” of the statutory requirement for schemes to have one-third member-nominated trustees (MNTs) if the scheme members approved the employer's alternative proposals. The majority of schemes went down this “employer opt-out” route. The Government felt that some were not complying with the spirit of the legislation and it wanted to ensure that more members were involved in the running of their pension schemes.
As a result, the MNT provisions in the Pensions Act 1995 have been replaced with new requirements under the Pensions Act 2004. Broadly speaking, where an employer opt-out is currently in place, these new requirements will apply to schemes on the earlier of the existing opt-out expiry or 31 October 2007.
The Pensions Regulator has issued a Code of Practice which deals with the implementation of the new requirements and in most cases trustees will have a maximum of six months after the new requirements apply to them to decide on their arrangements for appointing MNTs and then a further six months to implement their arrangements (these are not rigid time limits and could be extended if circumstances warranted it).
What happens to MNT arrangements which are in place now?
There is nothing under the new legislation which provides for the automatic removal of MNTs appointed under existing opt-out arrangements and it is quite likely that their terms of office will not expire at the same time as the current opt-out arrangements.
There are several alternatives available to schemes, including:
• considering whether existing opt-out arrangements comply with the MNT requirements under the Pensions Act 2004 and existing MNTs can therefore be counted towards satisfying the one-third requirements.
• asking existing MNTs to resign and if they will not, the employer will probably have a power to remove them under the scheme rules (they will have lost any protected status they had as they are no longer MNTs).
• allowing existing MNTs to serve out the remainder of their current periods of office at the same time as the trustees implement the new MNT requirements.
Exactly which option is the best for a particular scheme will depend on the provisions of its existing opt-out arrangement and both the employer and existing trustees will need to discuss the best way forward for the scheme.
The new requirements – nomination
The nomination process must involve at least all of the active members and pensioners (or organisations which are adequately representative of them). The involvement of pensioners in the process may be something which schemes have not done in the past and they will need to give thought as to exactly how this is intended to work.
It is possible for trustees to use constituencies in the nomination process. The code of practice says that trustees may do this, for example, by site, by category of member, or by section of the scheme. However, "in considering the use of constituencies, trustees should have regard to the principles of proportionality, fairness and transparency. For example it would not, in general, be fair for a constituency of 100 members to nominate two MNTs, and a constituency of 10,000 members to nominate only one".
The new requirements – selection
When the number of nominations does not exceed the number of vacancies, the arrangements may (but need not) provide that the nominees are automatically selected. However, the trustees may still choose to have a selection procedure.
If the number of nominations received is more than the number of vacancies, the trustees must carry out a selection process. A selection procedure must involve at least some of the members (members for these purposes includes deferreds).
The Regulator's Code of Practice does not specify a particular selection process but suggests some possible selection methods, including member ballots, selection panels, and selection by representative committees, pension management committees, trade unions or the existing trustees themselves.
What is appropriate in any given case is likely to vary depending on the circumstances of the scheme, and a combination of methods may be the most appropriate. However, if selection is by a panel, other group or the existing trustees, then the trustees must ensure that it includes some scheme members.
Trustee companies
The MNT arrangements apply in the same way to directors of trustee companies. However, there are several additional considerations for corporate trustees:
• Are the articles of association wide enough to allow for appointment of directors in accordance with the new regime or do they need to be amended?
• If the company is trustee of more than one pension scheme, does it wish to treat all of the schemes as a single scheme for the purposes of implementing the MNT requirements (such 'aggregation' is allowed under the Act)?
Conclusions
The Regulator has said in its Code of Practice that the trustees' watchwords in meeting these statutory requirements must be proportionality, fairness and transparency.
The obligation to implement the new requirements rests with scheme trustees and they should be considering how they intend to do so now.
If elections for new trustees come up before the opt-out expires, trustees and employers should consider whether they should be appointed on a basis which complies with the new regime.
This article first appeared in our Pensions update bulletin, December 2006. To view this publication, please click here to view the pdf in a new window.
