Pension Trust Funds - Essay Example

To what extension do pension trust funds differ from traditional trusts In your opinion what effect have the pensions Act 1995 and 2004 had on this issue A trust is simply a means of allowing legal title to money or property to be held for the money of the other. Trusts are generally used in order to provide money or real property or other assets for the benefit of another person or persons, but to provide them in such a manner that the person benefiting from the trust does not control anything and may be able to avoid both tax liability and any risk of a creditor taking the assets to satisfy a debt. All Trusts have a Settlor (or Settlors sometimes called a Trustor or Trustors) who creates and funds the Trust, a Trustee who administers the Trust, and a Beneficiary (or Beneficiaries) who benefit from the Trust. Beyond that the flexibility and variety available with Trusts are almost infinite. Trusts can be classified into a large number of types such as express trusts, implied trusts, constructive trust, simple trust , special trust , private trusts, public trusts, fixed trust, discretionary trust , hybrid trusts, pension trusts and so on. Each of these differ from other in one or the other aspect. Pension trusts represent the largest accumulation of assets in many countries world wide. These trusts are generally distinguished from one another by three cross-cutting classes of characteristics: (1) by the type of employees they cover-either private or public sector workers; (2) in the case of private funds, by the nature of the benefit provider-either a single employer or multiple employers; and (3) by the type of employer obligation to employees-either a defined-benefit obligation, under which employers must provide employees a contractually-defined level of benefits, or a defined contribution obligation, under which employers purchase a contractually-defined value of assets for the trust, but have no obligation to insure eventual benefit levels paid out to employees. Pension Trusts and Traditional Trusts: Drastically Different Species of Trusts In pension trusts, where beneficiaries are also settlors with high expectations from having earned their rights (often to specific entitlements if specific circumstances exist in the opinion of the trustee), the scope for intervention by the courts (and thus the Pensions Ombudsman) is much greater than for traditional family trusts. Pension trusts thus need to be recognized as sui generis species of trust: decisions thereon should leave unaffected principles applicable to traditional trusts. Sui generis character of the trust relationship implies the characteristic of the trust to distinguished itself from other legal concepts, such as, for instance, powers and fideicommissum and usufruct respectively of Civil Law. Reformers hope to utilize pension trusts assets in amending industrial relations, securing job security and wage gains, and deploying capital to credit-starved industries and regions have hardly been legalistic in origin. The legal regulation of retirement benefits nonetheless figures as the most common and perhaps the most prominent subject of debate regarding the investment of pension assets. -> Pensions Act 1995 : The Pensions Act 1995 is a piece of United Kingdom legislation to improve the running of pension schemes.The main features of the Act include : (en.wikipedia) The establishment of the Occupational Pensions Regulatory Authority. The Minimum Funding requirement to ensure that all pension schemes had a minimum amount of money; A compensation fund for pension schemes in the event of fraud. Protection for existing pension scheme benefits so that they could not be refuse in the future. A requirement for pension schemes to have member nominated trustees Greater disclosure of information to members The introduction of clear documentation showing what should be paid into scheme and monitoring of those contributions. A minimum rate of increases to apply to pension once in payment. Many of the features introduced by the Act were abolished or amended by the Pensions Act 2004. -> Pensions Act 2004 : The UK Pensions Act 2004 came into force on April 6, 2005. It substantially affects companies with defined benefit pension plans in the UK and creates potential exposure for directors and certain control persons of companies with under-funded pension plans. For private equity sponsors investing in UK companies, it will be important for adequate diligence to be performed on pension plans of target companies prior to making an investment and to structure the investment and operate the company in a manner to reduce the risk that the new UK pensions regulator may assert a claim against the sponsor or its representatives under the Pensions Act. The pensions Act 2004 amends the investments provisions of the Pensions Act 1995 to implement changes required by the EU Occupational Pensions Directive. Two key features of the Pensions Act 2004 are: (i) it establishes a Pension Protection Fund to compensate members of under funded pension plans where the sponsoring company is insolvent and unable to continue as a going concern and (ii) it provides the pensions regulator with the power to make claims against third parties (in addition to the employer) for any funding shortfall in a defined benefit pension plan (the so-called "moral hazard" provisions). For private equity sponsors, the key area of concern arising under the Pensions Act 2004 is these moral hazard provisions, particularly the potential financial exposure they may create.( Bruce & John, 2000). Moral Hazard Provisions The purpose of the moral hazard provisions is to reduce the likelihood of pension liabilities being transferred to the Pension Protection Fund. Under these provisions, the pensions regulator has the power, subject to a reasonableness test, to: issue a contribution notice against any "associated" or "connected person" of any employer who has been involved in a deliberate act or failure to act, the main purpose of which was to avoid pension liabilities; and/or issue a financial support direction to any "associated" or "connected person" of any employer to put in place arrangements to guarantee the pension liability of an employer which is "insufficiently resourced" or which is a "service company" (a company is a service company if its revenues are mainly derived from providing employees to other companies in a group). The terms "connected" and "associated with" are broadly defined and include directors and "shadow directors" (a person or entity that effectively exercises control of a company even though not a director) of a company and all companies in a corporate group (and shareholders holding 33 1/3% or more of the voting rights). This definition could potentially pick up private equity sponsors, their funds, other portfolio companies and their representatives on the board. The pension regulator has not yet issued regulations as to the meaning of "insufficiently resourced" but has indicated that a company will be "insufficiently resourced" if its resources are less than 50% of the estimated Section 75 debt (Section 75 debt would arise on termination of the plans in the event of a sponsoring employer going into liquidation or upon an employer ceasing to participate in a multi- employer plan). The basis of calculating the Section 75 debt is due to change from the current fairly weak funding standard known as the statutory minimum funding requirement to a buyout basis sometime this summer. How a company's resources are to be valued has not yet been determined but hopefully will be set out in future regulations. Contribution Notices Under the Pensions Act 2004 the pensions regulator may issue a contribution notice against an entity other than the employer if: that entity is "connected" with or "associated" with the employer; a debt has or may become due under Section 75 of the Pensions Act 1995; the main purpose of the act or omission was to (a) prevent recovery of the whole or any part of the Section 75 debt or (b) otherwise than in good faith, prevent such debt becoming due, compromise or settle the debt or reduce the amount; that entity was a party to (or knowingly assisted in) the act or omission preventing recovery of the Section 75 debt; and the pensions regulator concludes that it is reasonable to impose such liability on the person in question. The pensions regulator can issue a contribution notice whether or not a plan is being terminated or wound up. It is not clear what acts or omissions could give rise to a contribution notice but potentially any act that reduces the assets available for the funding of a pension plan or the creditworthiness of the company funding the plan or affects the pension creditor is at risk, including asset sales, special dividends and granting of additional security over company assets. In order for the pensions regulator to issue a contribution notice against a director, another company or a shareholder, the pensions regulator will need to consider the degree of involvement of the person in the act or failure to act and all the purposes of the act or failure to act. The Pensions Act 2004 provides that the sum stated in a contribution notice is to be treated as a debt due from the persons specified in the notice to the trustees of the plan. The pensions debt would be an unsecured and non-preferential debt of the person against whom it is assessed. In considering whether to issue a contribution notice, the pensions regulator may only consider acts occurring on or after April 27, 2004 and may not bring any action following the expiration of six years from the relevant act or failure to act. This seems to be a good measure which may prove to be beneficial in the mere future. Financial Support Directions Under the Pensions Act 2004 the pensions regulator may also issue a financial support direction against an entity other than the employer if: the employer is "insufficiently resourced" or a "service company"; that entity is connected with or associated with the employer; and the pensions regulator concludes that it is reasonable to impose such liability on the entity in question using similar criteria to those considered prior to issuing a contribution notice. In addition, the pensions regulator must, before issuing a financial support direction, consider the value of any direct or indirect benefits which the entity has received from the employer. Specific regulations on this point are still awaited but indications from the pensions regulator are that it will be able to "look back" for up to nine months from cessation of connection for companies previously in the corporate group. This potentially puts sellers of a company at risk even if the under-funded plan is transferred to buyer when the company is sold and buyers of a company at risk even where the under-funded pension plan is retained by seller after closing. It should be noted that it is not necessary to have committed an act or omission to be served with a financial support direction. Further, financial support directions cover all ongoing pension liabilities (rather than just a one-off Section 75 type debt). Failure to comply with the financial support direction may lead to the issuance of a contribution notice. The provisions of the Pensions Act 2004 relating to financial support directions effectively mean that all companies within a corporate group are potentially liable for the deficit in a pension plan regardless of whether their employees have ever participated in the plan. There is a procedure (known as the clearance procedure) whereby a relevant party will be able to seek a determination from the pension regulator as to whether a given act, omission or set of circumstances would give rise to a contribution notice or financial support direction. Few funds expect the 2004 Pensions Act to contribute towards promoting occupational arrangements. Indeed, in this important area of extending occupational provision, most firms say the Act will be counter productive. It is acknowledged that certain measures, such as the introduction of the Pension Protection Fund, may bring added security to present members of defined benefit schemes, but in other respects the 2004 Act is found wanting. Schemes strongly support further pension reforms that will allow private schemes greater flexibility in confronting issues such as increased longevity - reforms that were largely subsumed by the protection dominated 2004 Act. Just as important firms say genuine reform of the State pension schemes is essential if the private reforms are to take off. The effects of the pensions act 2005 and the pensions act 2004 could be summarized in the following manner : Close to seven out of tem firms say the Government stated policy of promoting occupational pensions are not moving in the right direction. This view probably reflects the general reaction of disappointment with the final shape of the 2004 Pensions Act. It had initially been hoped this legislation would radically simplify occupational pension provision. However, the firms are very critical of the failure to pass legislation that will genuinely promote occupational provision. Aside from reduced regulation of occupational pensions, firms also rank reforms of State pensions as of key importance, ahead of greater incentives to encourage long- term saving and occupational scheme provision. Given the increasing costs falling on defined benefit schemes due to longevity and other factors, most of the firms says that there should be a more general relaxation of s67(which was designed to protect accrued rights)of the 1995 Pensions Act that has occurred in the 2004 Act. The following measures are highly advisable in order to overcome the effects mentioned above or any other such related effects: -> The Government must enact genuine pension simplification. -> In order to control long term costs, employers should have the options to change scheme rules retrospectively to avoid increase in cost due to unforeseen longer life expectancy, for example by raising normal retirement age. -> The government should provide a better incentive to encourage the development of good second-tier private pensions, particularly where employers continue to or decide to sponsor schemes that meets a certain standard. -> The governments encouragement of private pension provision above the higher consolidated Basic State Pension should continue by way of tax relief, with longer- term saving attracting a higher rate of relief than shorter terms savings products. -> Last but not the least, contracting-out should be abolished. The public would find a pension regime whereby private pensions are built on top of a consolidated State pension much easier to comprehend. CONCLUSION: - Most of the pension trend surveys held in 2005 suggests that firms feel that 2004 Pensions Act was a 'major lost' opportunity in addressing the need to promote wider occupational pension provision. Whilst the Act has attempted to better secure the pension benefits of members of existing defined benefit schemes, the absence of any significant measured designed to simplify the burdens of red-tape and to allow much greater flexibility to reduce forward liabilities means provision is, at best, becalmed in the doldrums. However it is to be understand that the Pensions Act 2004 is new and some regulations under it have not yet been issued and although guidance is given by the pensions regulator there is not currently a body of case law or practice to refer to and so how these provisions will be implemented is not yet clear. In addition, the enforceability of contribution statements and financial support directions on parties outside the UK is not yet clear. However, given the potential exposure to directors and certain control persons, private equity sponsors making investments in the UK will need to carefully consider the issues and potential exposure raised by the Act. REFERENCES : -> Alastair Hudson, June 2005 : Law of Trusts -> Bruce A Wol & John H Langbein, April 2000: Pension and Employee Benefit Law. -> David A. Littell & Kenn Bean Tacchino, April 2004: Planning For Retirement Needs. -> Jordon Elliot Goodman, 2001: Everyone's Money Book. -> www.wikipedia.org Read More