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IPE special report May 2018

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Ombudsman warns trustees over investment role

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  • Ombudsman warns trustees over investment role

IRELAND - The Pensions Ombudsman has warned it is time trustees of pension schemes, including professional trustees, recognise their responsibilities to members in areas such as investment.

The Ombudsman Paul Kenny revealed in his annual report for 2007 the investment of pension funds is a topic which is receiving "increasing attention, particularly since the state of investment markets has been so chaotic".

He said: "Investment is becoming more and more of an issue as people are getting to grips with how their funds are invested. A lot of people have fallen into the default option not knowing what they were, either because they didn't understand or they have a lack of confidence."

The report highlighted one case where trustees failed to demonstrate they had considered divesting funds representing Additional Voluntary Contributions (AVCs) when the scheme was in wind-up.

It was claimed the trustees "did not believe that it would be in the best interests of members to be out of the market for the wind-up period", yet the Ombudsman found no proof of this and when the trustees did act it was too late to prevent a significant loss, resulting in a complainant being awarded €35,000 in compensation.

The Ombudsman also revealed his office had received a number of complaints relating to AVCs and transfer payments which should have been invested on a defined contribution (DC) basis but were intead mixed in with the main defined benefit (DB) fund, which resulted in a loss to members.

"I wish to advise administrators and trustees that this will always be considered as an act of maladministration, unless it can be demonstrated that this treatment was a considered decision, not a default position due to laziness or neglect," said Kenny.

He pointed out current regulations requiring trustees to make investments with regard to 'the nature and duration of the liabilities of the scheme' are not a new idea and "merely gives some expression to what has always been a fundamental duty of pension scheme trustees - to adopt and keep to a properly considered investment strategy".

But the Ombudsman revealed in many cases "trustees rely on the notion that they can sit back and await instructions from scheme members, who often have no up-to-date information on how their funds are invested".

So Kenny warned: "Except under certain prescribed conditions, the sole responsibility for investment lies with trustees, and it is time that all trustees, but particularly professional trustees, woke up to their responsibilities to members."

Mary Hanafin, minister for social and family affairs, told attendees at the launch of the report "these are difficult times for pension schemes, in Ireland and throughout the world," although she added Ireland's DC system is "relatively immature so there should be ample time for many people covered by such schemes to recover their losses". 

That said, she admitted: "There are some people retiring now or who are close to retirement, whose funds have suffered badly in the past year. Enabling people to defer purchase of an annuity for a period of time is an option that might assist some and this option is currently being examined within the Department of Finance."

In the meantime, she has asked both pension fund managers and financial advisers to reconsider pension investment strategies, as the minister said she believed this would leave people with the comfort of knowing they are sheltered to a great extent from the volatility of the markets.

"If there was one lesson in relation to DC schemes we should take from the current difficulties it is that we must take a more conservative approach to pension investment, particularly for older workers in the last 10 years before they retire," added Hanafin.

The Ombudsman's annual report meanwhile highlighted the number of complaints received by the organisation had increased by 17% to 938 cases as it received 515 new cases in the year of which the majority, 72%, related to private sector occupational pension schemes.

Kenny also admitted the financial turbulence has meant 2008 is even busier, as the number of new cases opened between January and October is 49% higher than the same period in 2007, and confirmed, "there is every indication that our workload in 2009 will be heavier again".

In addition to complaints about the investment of funds, the Ombudsman received claims relating to the administration of public service pensions; a lack of clarity regarding target benefit schemes and the unguaranteed nature of the benefit promises, and losses arising from pensioners taking advantage of an incentive not aimed at them, and investing money from a Special Savings Investment Account (SSIA) into a Personal Retirement Savings Account (PRSA).

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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