The Pensions Regulator ("the Regulator") has recently commenced consultation on new guidance in relation to: conflicts of interest; and choosing assumptions, especially mortality assumptions.
'Conflicts of interest' consultation
The Regulator regards the management of conflicts of interest as integral to good scheme governance. This guidance is part of an ongoing initiative of the Regulator to improve trustee governance.
The guidance includes five high level principles:
1 Understanding the importance of conflicts of interest
Trustees must be aware of their fiduciary obligations to beneficiaries and the occasions where they are most likely to find themselves in a position of conflict. The guidance encourages trustees to consider the role of the chair in identifying conflicts, the types of potential conflict specific to their scheme and whether newly appointed trustees will receive training regarding their role.
2 Conflicts of interest policy
Trustee boards should agree and document a policy for identifying, monitoring and managing conflicts, which should be kept under review. All trustees should be familiar with the features of the adopted conflicts policy.
3 Identifying conflicts of interest
Trustees must always consider any conflicts that may arise in the future and alert the trustee board as soon as they become aware of a conflict. An up-to-date register of interests should be kept. The guidance suggests that new trustees should be invited to declare any interests and potential conflicts and that key future decisions should always be considered to identify likely conflicts ahead of time.
4 Evaluation, management or avoidance of conflicts
Trustees should implement procedures for managing identified conflicts. Minutes of meetings should detail any conflicts that arise and record the action taken to manage the conflict. For any material conflict identified, the Regulator expects trustees to seek legal advice on the best way to manage the conflict. Options for managing or avoiding conflicts include:
- establishment of a sub-committee;
- withdrawal from the decision-making process;
- appointment of an independent trustee;
- resignation (or non-appointment) of a trustee; or
- in sufficiently serious cases, an application to the court.
5 Managing adviser conflicts
Trustees should ensure their advisers are able to provide independent advice and consider in advance potential conflicts where the adviser also provides advice to the sponsoring employer. The consultation paper also includes a precedent conflicts register and a policy, which can be adapted according to the trustees' particular scheme. The consultation paper is available at: http://www.thepensionsregulator.gov.uk/pd f/ConflictsOfInterestConsultation.pdf
The deadline for submission of responses to this consultation is 30 May 2008.
Funding assumptions consultation
This consultation has a special focus on mortality to reflect the recent developments in this area, namely that past allowances for future improvements in life expectancy have been found to be inadequate. The guidance is recognised to be technical, given the topic, and trustees are advised to ensure that their actuary takes them through the available options. The key points of the proposals are:
- Good practice requires assumptions to be:
- evidence based; and
- clearly and transparently described;
- Trustees should adopt terminology recommended by the continuous mortality investigation of the actuarial profession;
- There have been significant developments in knowledge of trends in mortality. Some common projections can no longer be considered to be reasonable;
- There are effectively two decisions for trustees on mortality assumptions:
- the baseline mortality table to be used; and
- the allowance for future improvements.
- An adjustment to the discount rate as a proxy for future improvements in mortality does not meet the statutory requirement to adopt a prudent mortality assumption.
The consultation also proposes introducing a further "trigger point" for the Regulator when reviewing the funding of defined benefit schemes: any recovery plan (based on valuations with effective dates from March 2007) with mortality assumptions that appear weaker than the long cohort assumption will attract further enquiry from the Regulator. This is a significant change as the Regulator's review of recovery plans published in September 2007 revealed that less than 0.5 per cent of schemes used the long cohort approach.
The net effect of introducing a mortality assumption trigger will probably be to strengthen assumptions and increase the liabilities of schemes.
The consultation document is available at: http://www.thepensionsregulator.gov.uk/pd f/LongevityConsultationDocument.pdf
The consultation is due to end on 12 May 2008.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
