Many, particularly US, companies question the reasons for, and indeed the need for, trustees when setting up their retirement programmes.
The current debate stops at the point of explanation that the present rules in Ireland, for example, require a pension scheme to be set up under trust. Furthermore, the law requires that the trustees take responsibility, separate from the company, for the proper workings of the pension scheme and the ultimate delivery of member rights.
However, in Ireland all this will change very soon. Following recommendations from the Irish Pensions Board (the regulatory and advisory body on pensions), employers will soon be able to set up retirement benefit programmes without the use of a trust.
This new concept (at least for Ireland) will allow employees to have personal retirement savings accounts (PRSAs) to which they and/or their employers can contribute.
As yet we have no knowledge of the detail of the proposed legislation but we can be certain, having regard to the recommendations of the board, that there will be no requirement to have a trust or trustees.
In other words, an employer setting up a pension scheme in Ireland will be able to choose between the trust-based approach and the PRSA approach.
So now we will have a genuine debate as to whether or not the benefits of the trust approach are real.
Doubtless the PRSA approach will be attractive to many. The employer will have the obligation only to pay over the contribution. It appears likely that PRSAs will be structured to permit an employee-only contribution approach if required.
Once the contribution is paid the proper workings of the PRSA will largely be the responsibility of the employee and the chosen PRSA provider (bank or insurance company etc) as appropriately regulated.
But the employer who has a real interest in ensuring that the maximum potential is realised from the retirement benefit programme provided will have to consider seriously the advantages of the trust-based approach.
The first of these is the whole question of the regulation of the conduct of pension schemes. In Ireland (as in the UK), the Pensions Act is clearly directed at the trustees of pension schemes and assumes that a small and readily ascertainable body of people will be responsible for the conduct of the schemes and answerable for compliance with the various provisions of the act.
This becomes much more difficult in a non-trust situation, where benefits are administered piecemeal for different members by different providers and where no one is responsible for the maintenance of any uniform standard in matters such as disclosure of information and even the obligation to pay benefits in accordance with scheme rules.
Under current legislation it is the trustees who have the responsibility to ensure that the rights of members are protected. The trustees are independent of the employer and their primary focus is to ensure that members’ rights as laid down in the trust deed are honoured. This must be a major plus as far as members are concerned, particularly taking account of the fact that, under current law, the members have a right to nominate some of the trustees. Thus, members have through their representatives a direct influence on trustee decisions.
The second major consideration is investment. Studies have shown that if investment decisions are the responsibility of the employees there will be some who will adopt an over-optimistic approach, but invariably the vast majority will be more conservative than they need to be.
The result is that fund growth and, ultimately, retirement pensions are likely to be significantly less than might otherwise have been the case.
And here of course the employer has a real interest. If, as a result of lack-lustre investment performance, the available retirement benefits are less than the employees might have expected, then there is likely to be pressure on the employer to increase his outlay.
An employer wishing to avoid this can, of course, make investment advice available to all members on an ongoing basis but quality advice in this area does not come cheap – especially if it must be directed to each employee individually.
Advice on investment is far more cost-effective if delivered to the trustees acting on behalf of the employee.
The existence of employees whose legal obligation is the proper investment of the fund, who regularly review investments, take advice and act accordingly is a source of considerable comfort to a great many employees who would not feel confident enough, even with good quality advice, to make appropriate investment decisions.
Other benefits of the trust-based approach can be considered as follows:
q Death benefits Under most trust- based schemes it is the trustees who have responsibility for adjudicating between conflicting interests following a member’s death. This will be of particular importance to employers who, after all, are paying the cost of providing death benefits on the assumption that those benefits will be used to look after the real dependants of the member.
Experienced trustees know only too well how fruitful a source of conflict this can be. The failure of scheme members to make adequate (or even realistic) arrangements for the disposal of their personal assets in the event of death is all too common. Non-trust pension assets will, if precedent is followed, always revert on death to the estate of the member.
q Management time This is not an issue for the employer that is content to pay its contributions and leave everything else to the member. However, most employers will have a wish to see that the retirement arrangements are operating properly and effectively. In a trust-based approach, the trustees have the responsibility for the proper running of the scheme. Without trustees the burden will certainly fall on management shoulders and, in the tough business world in which we now operate, may be bottom of a manager’s priority – until irreparable damage has been done.
q The over-zealous salesman In a free market where members have the choice of PRSA provider, there is the obvious danger that the advantages of certain products will be emphasised with the disadvantages, at best, played down. This might be a particular concern in the event that certain types of PRSA provided greater income to the provider and/or the salesman, than others.
In trust-based schemes, the trustees, if they are doing their job properly, will guard against this and ensure that the investments, regardless of charges, are the most appropriate for the needs of the members.
q Equal treatment Under Irish law the trustees have the responsibility to ensure that there is equal treatment between men and women in occupational pension schemes. If a scheme discriminates, the trustees have the legal responsibility to rectify matters.
It remains to be seen how equal treatment will be safeguarded under the PRSA regime.
It is, of course, early days. We have not at time of writing seen the detail of the PRSA legislation. We expect it will be available very soon but it will take much longer for us to experience its actual effects.
It has to be said that the main reason for the introduction of PRSAs is to make it easier for small employers to operate pension schemes for their employees in a cost-efficient way. It is hoped that there will be no significant switch to the PRSA approach by employers who are already operating pension schemes.
Alan Broxson is a director of Irish Pensions Trust in Dublin