StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Current Law Regulating Pension Funds - Research Paper Example

Cite this document
Summary
The paper "Current Law Regulating Pension Funds" evaluates the status of the employee under the pension fund and argues that the ordinary principles of trust law are entirely unsuited for relationships that are not properly characterized as private trusts…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.8% of users find it useful
Current Law Regulating Pension Funds
Read Text Preview

Extract of sample "Current Law Regulating Pension Funds"

 Current Law Regulating Pension Funds Introduction The pension fund is gaining increasing significance as part of an employee’s benefits. In other words, the pension fund is no longer perceived as a discretionary “ex gratia payment” rendered by the employer.1 It is therefore hardly surprising that the pension fund has important consequences for the application of the ordinary principles of trust law, particularly from the perspective of the employee as the ultimate beneficiary of the fund. This raises the question of whether or not the ordinary principles of trust law can be adequately applied to the realities of the pension fund, particularly in relation to the status of the employee as beneficiary under the fund. This paper will evaluate the status of the employee under the pension fund and argue that the ordinary principles of trust law are entirely unsuited for relationships that are not properly characterized as private trusts. Current Law Regulating Pension Funds The pension scheme although to a great extent, characteristic of the private trust, has had an uneasy co-existence with the ordinary trust in the scope and range of trust law. In recent years there have been some significant developments in the law relating to pension funds. These changes came about primarily as a result of the growing social significance of the pension fund and in response to the Maxwell pension fund scandal which drew attention to the need to revise the laws relating to pensions.2 The Maxwell scandal involved the revelation that approximately 430 million pounds had been unlawfully taken from pension schemes controlled by Maxwell’s companies.3 The result was the creation of the Pensions Law Reform Committee which essentially suggested that the ordinary principles of trust law be used to regulate the pension funds.4 However the Pensions Law Committee recommended that the trust be used with alterations which subsequently materialized in the Pensions Acts of 1995 and 2004. The nature of the occupational pension scheme makes it difficult for it to be treated in the same manner as the private trust. The occupational pension fund is a private pension scheme arising between employee and employer.5 Occupational pensions are contributions made by virtue of direct voluntary payments by the employee to the pension scheme and are not parts of national insurance or tax systems.6 While occupation pension funds are regulated by ordinary trust laws, they are also organized pursuant to the relevant statutes which make provision for trustees’ duties and beneficiaries’ rights which are different from those of the private trusts.7 As Miller points out, the very essence of the ordinary private trust is the “separation of the roles of those involved”.8 Under the pension scheme the settlor can be both trustee and beneficiary and conflict of interests can compromise the legitimate treatment of the occupational pension scheme as a private trust.9 Some characteristics of the occupational pension however, are indistinguishable from the private trust. Although the Pensions Acts 1995 and 2004 apply to the occupational pension fund, some aspects of the ordinary trust laws do apply. One of the reasons for the continued application of the ordinary principles of trust laws relates to asset security. To this end, the legal title to the pension fund is distinct from the employer’s business and is seen as a method for placing the fund beyond the “reach of the employer’s creditors” in the event the employer’s business becomes insolvent.10 However, from the beneficiary’s perspective the application of the ordinary trust laws does not provide the beneficiary with asset security for two important reasons. First and foremost, there is no failsafe legal system that will safeguard any fund against incidents of fraud. Secondly, with respect to an employer’s solvency, only a scheme solvency can determine measure of security a member is entitled to. This will largely depend on the timing and degree of contributions and whether or not both correspond with the obligations under the pension plan.11 Legislators have come to accept not only the vulnerability of the pension fund to those who both manage and expect to profit from them, but also the vulnerability of those who contribute to the funds and yet have no control over the manner in which those funds are managed and no right to derive any benefit from investment returns on those funds. The Pension Act 1995 introduced a Minimum Funding Requirement12 which was replaced by the Pensions Act 200413. Trustees are required to agree with the employer on a number of issues that are relevant to the funding and if the parties fail to reach an agreement the issue is referred to the Pension Regulator who has the authority to resolve the issue. Another potential problem is also provided for by the Pensions Act 2004 and that is the situation where the business becomes insolvent and there are insufficient funds to satisfy beneficiary/employee entitlements. The pension protection fund (PPF) was established and funded by DB pension schemes.14 These protection schemes however are not retrospective and s a result the Pensions Bill was modified and a government-funded Financial Assistance Scheme covering 400 million pounds for a 20 year period was introduced into the Pensions Act 2004.15 The fund is available for the beneficiary/employee who loses their pension fund as a result of underfunding at the time of insolvency and the employer cannot make up the shortfall.16 Beneficiaries are not the only potential victims of mismanaged occupational pension schemes. The state can also be a victim, if the pension is left to maintain a strict trust. Tax minimization provides another significant reason for the continued use of trust law in relation to the occupations pension trust. In order to obtain maximum tax exemptions the pension fund must be set up as an irrevocable trust.17 Be that as it may, the trust continues to pay a pivotal role in the management of the occupations pension trust fund. The courts have consistently held that the trust fund, in relation to the duties of the trustee is to be regarded in much the same manner as the ordinary trust. Megarry V-C said in Cowan v Scargill [1984] that there was: No reason for holding that different principles apply to pension fund trusts from those which apply to other trusts.18 The reality of the occupational pension trust fund however, does not always permit the application of ordinary trust laws to the duties and obligations of the trustee. It is always possible for other legal doctrines and principles to arise with respect to the discretionary powers of the trustees and the employer. For instance it was held in Re Courage Group’s Pension Schemes [1987] that the pension plan’s provisions will be construed according to the relevant commercial facts and circumstances.19 By virtue of Sections 34-36 of the Pensions Act 1995 trustees of the occupational pension trust may exercise wide discretionary investment powers and may also delegate those powers. 20 Moreover, those investment discretions are not affected by the provisions contained in the Trustee Act 2000.Moreover, the employer’s authority over the pension plan is also regulated by employment laws. However, the trustee of the occupational pension scheme is required to first provide a written statement which delineates the governing principles of the investment. The Statement of Investment Principles must provide the investment policy, the kinds of investments, balances, risk, anticipated returns and the actual returns.21 Section 35(5) of the Pensions Act 1995 also requires that the trustees not only obtain but take into account the written advice of a financial expert and to consult with the relevant employer.22 Additionally, trustees of the occupational pension fund have wide powers of investments under the Trustee Act 2000.23 Legislators have also called for a socially responsible investment approach. The objective is to foster a long-term investment policy. The Occupational Pensions Schemes (Investment and Assignment, Forfeiture, Bankruptcy ect) Regulations (SI 1999/1749 reg 2(4) requires pension funds to reveal how they will facilitate ethical, social and environmental investments.24 Current Problems with Occupational Pension Trusts Laws/Tensions between OPTS and Trust Principles The potential for the employer to act as trustee of the occupational pension fund can be problematic, particularly since the trustee is also a beneficiary and quite likely, the settlor. The Pension Acts provide a statutory regulatory scheme which transcends the type of control relegated to the trustee under the ordinary principles of trust law. For instance, under ordinary principles of the law of trust the trustee may by virtue of contract limit some of their liabilities.25 Moreover, beneficiaries under the ordinary principles of trust law may rely on the beneficiary principle to ensure that trustees adhere to their respective duties under the trust.26 However, the pension trust statutes holds the fund managers to more precise standards of conduct and under scrutiny which goes beyond “litigation begun by beneficiaries under ordinary trust law principles”.27These statutory codes are invariably necessitated by the unique distinctions between the beneficiaries to the ordinary trust fund and the pension fund. The beneficiaries to an ordinary trust will quite often receive payouts that are not matched by their individual inputs. Beneficiaries under the pension fund actually contribute to the pension fund and earn it as a remuneration package. Therefore from the beneficiaries’ perspective, the trustee of the pension fund should indeed be help to a high standard. Many of the codified trustee standards pertaining to the trustee of the pension fund apply to investments. From the beneficiary’s perspective investment powers are entirely meaningless as the usual arrangements only call for an eventual payout that is equal to input. There is no real expectation on the part of beneficiaries to an occupational pension fund that they will benefit from any return on an investment. In fact, they have a real concern that their expected pay out might be adversely impacted by a failure of any investment. Therefore the necessity of permitting and regulating pension funds in the same manner as the ordinary trust is entirely unnecessary and can only benefit the employer as the settlor of the pension fund. The investment duties of the trustee of the pension fund invariably creates tension between the law of trust, the Pensions Acts and employment laws. This tension arises in trying to ascertain whether or not investment duties under the law of trust together with the Pensions Acts override employment law and the beneficiaries’ contractual expectation of payable pension. The question then remains, which of these applicable laws should prevail in questions arising over the trustees’ investment obligations, pension fund titles and the title to any surplus in the pension fund.28 Another source of tension arises out of the reality that the contributions made by employees who are parties to an occupational pension plans are perceived as a deferred payment plan.29 The nature of the employment contract the employer as well as the employee are under a duty to make contributions to the pension fund. This payment scheme is therefore viewed as an employment benefit to which the employee defers a part of his/her wages until she/he attains the pension requirements.30 It might be more feasible to treat the occupational pension as a contract without more. The contractual nature of the occupational pension fund makes it virtually incompatible with the ordinary principles of trust law. This is because the parties to an occupational pension have certain rights and duties that fall outside of the actual trust and operate under other heads of law. Moreover, the cards are stacked so as to unfairly disadvantage the employee. As Barnard et ales explain: The law treats an occupational pension scheme as the property of the employer. An employer is under no prior obligation to set up a scheme, it can use pension fund surpluses to reduce contribution rates and can close the scheme to new members, leaving employees to rely on a defined contribution plan.31 In this regard, the beneficiaries/employees have an entirely different relationship with the pension fund and the trustee than beneficiaries under an ordinary trust have the trust property and the trustees. To start with the purpose of the pension fund is not to provide the employee/beneficiary with optimum returns. It is merely or the purpose of paying back that which they have earned and contributed. The beneficiary under an ordinary trust is entitled to a gift that does not depend on their input. Moreover, unlike the beneficiaries under an ordinary trust, the employee/beneficiary to a pension fund have no real claim in the assets under the fund and they likewise have very little voice in the management of the trust fund.32 There is yet another important factor distinguishing the occupational pension fund from the ordinary trust. The employment relationship is an important aspect of the occupational pension trust that distinguishes it from the ordinary trusts. The fact that the occupational pension trust is the subject of an employment relationship means that the terms of the pension trust fund can be the subject of negotiation and consultation within the ambit of industrial relations.33 This aspect of occupational pension trust has an uneasy existence with the ordinary principles of trust laws. Settlors to an ordinary trusts enjoy autonomy over the settlement and distribution of the trust assets when creating the trust. The beneficiaries will take what they are gifted and generally have no negotiation powers. The powers of the settlers under the pension fund who are for the most part the employer retain control and de facto ownership of the fund. Quite often the employer is also a beneficiary under the fund and as such there is a potential conflict of interests. The employer as settlor may reserve to himself certain powers over the occupational pension trust. While the settlor of an ordinary trust may reserve the same powers to himself there is distinct difference between the settlor of an ordinary trust fund and the settlor of an occupational pension trust. The settlor of an ordinary trust fund typically settles the trust for the benefit of family members to which he has close personal ties and generally funds the trust himself. The settlor of an occupational pension trust typically funds the pension with funds earned by the beneficiary. In this regard, the funds in the occupational pension trust is the property of both the settlor and the beneficiary. In other words, unlike the beneficiary to the ordinary private trust, the beneficiary holds prior legal title to the funds and as much the de fato owner of the trust property as the settlor. Recommendations/Conclusion First and perhaps foremost, the question of ownership of the occupational trust fund requires resolution. The nature of the funding of the pension clearly indicates that the occupational trust fund is owned by both the employee/beneficiary and the settlor. It therefore follows that it is entirely incompatible with the ordinary trusts law and equitable principles for one settlor to exercise superior retention powers over other settlors unless it is explicitly agreed to by all of the settlers. If the question of ownership is resolved, this aspect of the occupational pension trust could work within the framework of the ordinary trust fund. Any surplus funds in the occupational pension trust should be applied to the scheme for the benefit of all of the beneficiaries rather than for the settlors. This aspect of the nature of the occupational pension trust is clearly incompatible with the principles of ordinary trust laws. Once these aspects of ownership and rights are cleared up it will be relatively easy for beneficiaries to have a voice in their capacities as settlors to influence the manner and procedures for investment of the occupational pension trust. Other reforms should also seek to improve the employees position as trustees of the occupational pension trust. While other laws will ultimately apply with respect to negotiating the pension fund contribution and the manner in which it is paid out, in the interim there is no reason why employees cannot enjoy the same duties and rights as employers. In this regard, ordinary trust laws would be able to accommodate the occupational pension trust. However, in its current state, the occupational pension trust is incompatible with the ordinary trust laws and principles. In all the circumstances it might more appropriate to treat the occupational pension scheme as a contract, in much the same manner as the employment contract. Bibliography Barnard, C.; Deakin, S.; Hepple, B. and Morris, G. The Future of Labour Law. Hart Publication, 2004.. Goode Report, Pension Law Reform, Cmmd 2342, 1993. Miller, M. “Pension Trusts: A New Trust Form? Conv. 1997, Vol. 61, 98 Hudson, A. Equity and Trusts. Routledge Cavendish 2005. Moffat, G.; Bean, G. and Dewar, J. Trusts law: Text and Materials. Cambridge University Press, 2005. Schuller, T.and Hyman, J. “Trust Law and Trustees: Employee Representation in Pension Schemes.” (1983) 12(1) Industrial Law Society 84-98. Table of Statutes Occupational Pensions Schemes (Investment and Assignment, Forfeiture, Bankruptcy ect) Regulations (SI 1999/1749. Pensions Act 1995 Pensions Act 2004 Trustee Act 2000 Table of Cases Armitage v Nurse[1998] Ch 241. Barber v Guardian Royal Exchange [1990] IRLR 240. Cowan v Scargill [1984] 2 All ER 750. Re Courage Group’s Pension Schemes [1987] 1 All ER 528 Re Denley [1969] 1 Ch 373. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Current Law Regulating Pension Funds Research Paper, n.d.)
Current Law Regulating Pension Funds Research Paper. Retrieved from https://studentshare.org/finance-accounting/1731017-the-developing-law-in-relation-to-occupational-pension-trusts-reveals-the-inadequacies-of-trust-law-to-deal-with-the-realities-of-anything-other-than-private-trusts-discuss-in-relation-to-the-status-of-beneficiaries-in-occupations-pension-trusts
(Current Law Regulating Pension Funds Research Paper)
Current Law Regulating Pension Funds Research Paper. https://studentshare.org/finance-accounting/1731017-the-developing-law-in-relation-to-occupational-pension-trusts-reveals-the-inadequacies-of-trust-law-to-deal-with-the-realities-of-anything-other-than-private-trusts-discuss-in-relation-to-the-status-of-beneficiaries-in-occupations-pension-trusts.
“Current Law Regulating Pension Funds Research Paper”, n.d. https://studentshare.org/finance-accounting/1731017-the-developing-law-in-relation-to-occupational-pension-trusts-reveals-the-inadequacies-of-trust-law-to-deal-with-the-realities-of-anything-other-than-private-trusts-discuss-in-relation-to-the-status-of-beneficiaries-in-occupations-pension-trusts.
  • Cited: 0 times

CHECK THESE SAMPLES OF Current Law Regulating Pension Funds

The Movement towards Convergence with International Accounting Standards

For many years accounting was about assessing companies' performance in financial terms.... Recently it has transformed from a set of regulations to a big industry, which brings us to the question: is financial reporting still a credible source of information on the business performance … Of course, regulations of financial reporting have to change ensuring better indication of performance....
9 Pages (2250 words) Essay

Social Security and the Downfalls of Early Retirement

For this reason, weighing the pros and cons of social security for early retirement is important to understand your rights, benefits and limitations so you could invest in other pension plans to support your retirement.... As it stands, the current health of the Social Security system is at a point in which there is great concern when it comes to the amount of beneficiaries there will be in the near future.... With such being the case, the level in which the system can support both current, as well as future retirees, is something that has many answers to it and great implications for the ultimate outcome....
12 Pages (3000 words) Essay

Personal Investment in the UK Is It Science or Matter of Good Fortune

Types of Personal Investment in United Kingdom and Popularity of UseIn United Kingdom the aspect of personal savings and investment gains attention in regards to categories like pension funds and other insurance related sectors.... In United Kingdom people tend to invest or conduct their personal savings through the use of different tools like investing in mortgage funds, investing on pension or other insurance related funds, depositing money in banks or in securities issued by different financial institutions....
8 Pages (2000 words) Essay

International Legal and Ethical Issues in Business IP Week 5

Based on the stiff competition currently experienced in the international market, it is essential for a firm that is focused at going global to undertake an… Additionally, it is fundamental to study the compensation policies that exist in the foreign countries to be compliant with the law thus ensuring the continuity of the business operations.... This law applies not only to manual laborers regardless of their salaries but also to all workers in Peninsular Malaysia whose monthly salaries is not more than RM1, 500 (Malaysia Labor Standards, 2012)....
4 Pages (1000 words) Essay

International Banks Functions and Regulations

The researcher of this essay aims at discussing international banks, its types, services offer by them, operational procedures risks that they face.... The researcher will pay special attention to the respective functions along with regulations of international banks.... hellip; The conclusion from this study states that the major functionalities of the international banks can be apparently viewed as offering financial assistance and promoting foreign investments among others....
7 Pages (1750 words) Essay

Insurance Company Ownership in the Netherlands

In the paper “Insurance Company Ownership in the Netherlands” the author researched on AEGON as a global institution that operates in the global business and conducted my research on it.... The research got done on all the organization's premises, its headquarters in the Netherlands inclusive....
10 Pages (2500 words) Assignment

Role of the US in the Vietnam War

The paper “Role of the US in the Vietnam War” entails the different global activities with which various organizations get themselves involved in international business.... The author has researched on AEGON as a global institution that operates in the global business and conducted my research on it....
10 Pages (2500 words) Assignment

Trade Relationships

n this vein, the Keck doctrine states that national rules concerning selling arrangements were not to be seen as measures of equivalent effect to quantitative restrictions, so long as they applied equally in law and in fact to foreign and domestic goods.... Definitely, the article by Davis urges for finding out the exact equilibrium and logic between the solutions by the European Court and current need of paying much attention to the socio-political reforms for the sake of the internal market positive development....
6 Pages (1500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us