Good Governance for Pension Schemes (Law Practitioner Series)

Contents......Page 6
Figures......Page 8
Tables......Page 9
Contributors......Page 10
Abbreviations......Page 11
1 Introduction......Page 14
The development of private pensions, their regulation and supervision......Page 16
The focus of regulation and supervision......Page 19
How is pension fund governance structured?......Page 21
Governance problems......Page 23
OECD Guidelines for Pension Fund Governance......Page 24
Supervising pension fund governance......Page 26
Competence/expertise governing body......Page 27
Accountability......Page 28
The governance of Pension Supervisory Authorities......Page 29
Regulatory context......Page 30
Institutional context......Page 33
UK regulation of occupational pension scheme governance......Page 34
Supervision of occupational pensions governance in the United Kingdom......Page 36
Conclusions......Page 39
Pension funds and long-term investment......Page 41
Emerging from the post-war environment......Page 42
How pension schemes provided finance for growth......Page 43
Pension schemes in the great equity bull market......Page 44
Attention switches to liabilities and bonds......Page 47
Entering a period of turmoil......Page 50
New definitions of scheme solvency......Page 51
A reassessment of equities......Page 52
Pension funds as suppliers of risk capital......Page 54
The search for alternative asset classes......Page 55
New approaches to risk......Page 57
Consequences of pension scheme closures......Page 58
The danger of a gap in the capital markets......Page 59
4 Social responsibility and fiduciary duties of trustees......Page 61
Historical origins of fiduciary duties......Page 62
The fiduciary duties of pension fund trustees......Page 63
Duty to act in the best interests of the beneficiaries......Page 66
Duty to act prudently......Page 68
Recent developments: the pension fund industry in the twenty-first century......Page 69
The Freshfields Report......Page 71
Principles of responsible investment......Page 72
Fiduciary Responsibility Report: ‘Freshfields II’......Page 73
Active ownership of pension fund assets......Page 75
Conclusions......Page 76
Moving towards better governance......Page 80
Structure......Page 81
Composition and operation......Page 82
Trustee knowledge and understanding (TKU)......Page 84
Accountability......Page 85
Members’ interests......Page 87
Employers’ interests......Page 88
Key issues on the trustee agenda......Page 89
Professional advisers and service providers......Page 91
Independence......Page 93
Liability for decisions......Page 94
The Pension Regulator’s Codes of Practice (as at April 2011)......Page 96
Conflicts of interest at common law......Page 98
Self-interest conflict......Page 99
Confidentiality......Page 100
The statutory obligation to avoid conflicts of interest......Page 101
Where the trustee is a director of the employer......Page 102
Where the trustee is a senior employee of the employer......Page 103
Pensions Regulator guidance......Page 104
Steps which can be taken to manage conflicts of interest......Page 105
Resignation of the conflicted trustee......Page 106
Background: the employer’s perspective......Page 107
Fiduciary duties: their existence is not fatal to dual roles......Page 108
The trust deed and rules: authorisation clauses......Page 109
The position of the finance director......Page 110
Confidential information......Page 111
Confidentiality agreements......Page 112
Adviser issues......Page 113
Identifying conflicts......Page 114
Confidential information......Page 115
Conclusions......Page 116
7 The pension scheme in the employment package......Page 117
Variation of rights......Page 119
Route 1 – express variation clause......Page 120
Route 3 – gain implied consent......Page 121
Pension consultation obligations......Page 122
Other potential consultation obligations......Page 124
Pensions issues on terminations of employment......Page 126
Simplified loss approach......Page 128
Pension claims in wrongful dismissal cases......Page 130
The sponsor and its owners and lenders......Page 132
The pension scheme and its sponsor......Page 133
The pension scheme as a creditor......Page 134
Need for trustees to be engaged with the sponsor......Page 135
Changing advisory dynamics......Page 136
The analytical standpoint and the sponsor covenant......Page 137
Corporate structure......Page 138
Financial performance......Page 139
Towards a new model for trustee engagement......Page 140
Corporate events......Page 142
Companies in restructuring or distress......Page 143
Dynamic covenant monitoring......Page 144
De-risking......Page 145
Conclusion......Page 146
Funding......Page 147
Pre Pensions Act 2004......Page 148
Accounting valuations......Page 149
Data......Page 150
Valuation method......Page 151
Assumptions......Page 152
Mortality – general......Page 153
Mortality – post retirement......Page 154
Salary increases......Page 155
Commutation......Page 156
Price inflation......Page 157
Discount rates – general......Page 158
Discount rates – funding valuations......Page 159
Recovery period......Page 161
Allowing for uncertainty......Page 162
Conclusions......Page 163
What is good administration?......Page 164
Trustee board......Page 166
Sponsoring employer......Page 167
Administration team......Page 168
Issues to consider when reviewing strategy......Page 169
Step 1: appoint a working group or sub-committee to oversee the process......Page 171
Step 4: issue a request for information (RFI) or invitation to tender (ITT)......Page 172
Step 6: review the contract and conduct due diligence......Page 173
Workflow and electronic document management (EDM)......Page 174
Data management, security and data audits......Page 176
Web interfaces for members......Page 178
Determining service levels......Page 179
Performance measures......Page 180
Operational risk management......Page 181
Numbers......Page 183
Culture and values......Page 184
Engaging stakeholders and clear accountability......Page 185
Introduction......Page 186
Governance and the trustees’ responsibilities......Page 187
Risk budgeting......Page 189
Investment beliefs and long-term investment......Page 192
Risk management......Page 193
Governance best practice and governance innovation......Page 194
A clear mission......Page 195
Manager line-up......Page 196
Supportive compensation......Page 197
Conclusion......Page 198
Risk......Page 200
Delta ladder......Page 201
Kite chart......Page 202
Liability profile......Page 203
Risk attribution......Page 207
LDI – managing risk......Page 210
Introduction......Page 220
Death: an uncertain certainty......Page 221
Risk management......Page 223
Managing longevity risk within the scheme......Page 224
Improving the calibration of a scheme’s underlying risk......Page 225
The future: measuring the immeasurable?......Page 226
Managing longevity risk by transfer to emerging markets......Page 227
Buy-outs and buy-ins......Page 229
Longevity hedges......Page 230
Coverage......Page 231
Price structure......Page 232
Longevity plus......Page 233
Managing longevity risk: looking ahead......Page 234
Conclusion......Page 235
Bibliography and further reading......Page 236
Background and development of the insurance market......Page 237
Risk management – buy-ins and longevity insurance......Page 241
Settlement of liabilities – insurance buy-out......Page 244
Regulation......Page 245
Pricing......Page 246
Costs:......Page 249
Considerations on a buy-in......Page 250
The insurance process......Page 252
Price and terms comparability......Page 254
Certainty versus best price......Page 255
Additional security......Page 256
Summary......Page 257
Pensions in context......Page 259
Liability management checklist......Page 261
Financial assets and financial liabilities – measurement and risk......Page 263
Pension fund risk measurement and limitations......Page 268
Longer term – an example......Page 269
Accounting......Page 272
Taxation......Page 273
Working with trustees and their advisers......Page 274
Asset-backed security, etc.......Page 275
Conclusion......Page 276
Design of suitable investment choices for members......Page 278
Responsibility......Page 279
DC pensions are guided consumer products......Page 280
Understanding member needs and expectations......Page 282
Level of financial understanding and familiarity with investment......Page 283
Risk appetite......Page 284
Attitude towards planning......Page 285
Inertia......Page 286
Setting an investment objective......Page 287
Monitoring member behaviour and results......Page 289
Monitoring investment performance......Page 290
Investment architecture and governance......Page 291
Contribution levels and persistency......Page 295
Switching......Page 296
Communication and engagement......Page 298
Labelling......Page 299
Conclusion......Page 300
18 Inside pension scheme governance......Page 302
Index......Page 310