Your Money: Captain Bob's wake-up call
Take a greater interest in your pension scheme to avoid losing out, says Nic Cicutti
Sunday 03 November 1996
When the overweight rogue fell off his yacht - almost exactly five years ago - his death led to far greater public appreciation of the importance of adequate and safe retirement funding.
Millions of people are members of occupational pension schemes. When they retire, the schemes they belonged to during their working lives will pay them, with varying degrees of generosity, a retirement income.
Most of us seem content with a vague idea that we will be looked after when we retire. However, growing numbers of people are realising that a far more active interest is needed to ensure an adequate pension.
Almost 9 million people, for example, fell for the blandishments of the insurance industry and bought personal pensions. Many, including thousands of mine workers and nurses, who were persuaded to switch out of their company schemes, are discovering too late that they may have lost out.
The new-found interest in all types of retirement provision is important. The first step is to have a basic understanding of how company schemes, to which most of us belong, actually work.
The notion of an occupational pension first developed in the 19th century, but pension schemes received a major boost with the 1921 Finance Act. This allowed tax relief on contributions to pension funds by employers and staff, plus tax relief on the investment income of pension funds "approved" by the Inland Revenue.
Approval depends on separating pension fund assets from those of the company itself. The ideal vehicle for such a separation is a trust, whereby the needs of beneficiaries (pensioners) are met by the fund set up and part- or wholly funded by the employer, and "owned" and administered by trustees.
Running a pension scheme is - as we should have learnt in the post-Maxwell era - an important job. It requires meticulous attention to detail by an administrator, coupled with inspired investment by a manager who is there to ensure that the fund's performance delivers the returns needed to meet the pensions bill.
This becomes even more important in money-purchase schemes, where the pension is not guaranteed and only the fund manager's skills (plus the employer's generosity) will ensure a decent retirement fund.
Safeguarding the interests of pension-scheme beneficiaries are trustees, whose role is to obey the trust deed first set up by the employer and apply its provisions fairly. Trustees are primarily volunteers, often from among the ranks of scheme members, who give their free time to ensure that their scheme is properly run.
According to Hugh Arthur, a pensions lawyer at Biddle & Co, trustees must use as much diligence as a prudent "man of business" would exercise in dealing with his own private affairs.
"In taking investment decisions in relation to investments, trustees must take as much care as a prudent man would take ... for the benefit of persons for whom he felt morally obliged to provide," Mr Arthur says.
Trustees must become familiar with their scheme's rules, which may lay down a variety of details, including:
q eligibility for membership and how to join;
q what the benefits are at retirement date and before it;
q arrangements for transfers to other pension schemes;
q dealing with temporary absence, such as maternity leave;
q payments of lump sums in the event of death;
q payments of a pension to a deceased member's spouse or dependants;
q the potential to increase members' pensions where appropriate.
Discretion in many matters is possible, although trustees must be able to explain their decisions if challenged before a Pensions Ombudsman or the courts.
While it is accepted that pension trustees do not need to have detailed technical knowledge, they must be able to show that they have taken the advice of an expert before making a decision.
The introduction of the Pensions Act, due to come into force in April, will increase the responsibility of trustees in the eyes of the law. It also places an obligation on companies and pension funds to ensure that trustees are adequately trained.
Training is available from a variety sources, including the National Association of Pension Funds, which runs day and residential courses.
For scheme members, quizzing their trustees should be a regular part of becoming informed about their pensions. For would-be and existing trustees, gaining knowledge and skills is equally important.
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