The Legal 500

Trustees of most trust-based occupational pension schemes will need to urgently check what action they need to take to secure compliance with the new requirements relating to member-nominated trustees (MNTs) and member-nominated directors (MNDs), which were introduced on 6 April 2006. These require trustees to ensure that arrangements are not only in place but also implemented to ensure that at least one-third of trustees or directors are member-nominated.

A draft Code of Practice (the Code) and separate further supporting guidance has been issued by the Pensions Regulator to provide trustees with practical advice on putting arrangements in place to ensure that the new MNT/MND requirements are met.

Putting the arrangements in place and implementing them will require the trustees concerned to consider, design and build an arrangement which satisfies the new requirements and then to operate it. Unlike earlier legislation covering MNTs, the new legislation aims to allow trustees a degree of flexibility to design arrangements that best suit their pension scheme, although certain basic requirements have to be met.

From what date do the new MNT/MND requirements apply?

The commencement date for arrangements to be implemented and in place for one-third of MNTs/MNDs will vary depending on what the current trustee arrangements for the scheme are, and in particular whether an opt-out is in place from the current MNT/MND regime.

If the current trustee board was appointed under what is known as an MNT/MND opt-out facility provided under earlier pensions legislation, and that opt-out was still in place on 5 April 2006, then the commencement date for the requirements will be the earliest of the following dates:

a) the date the member approval of the opt-out ends;

b) the date the trustees or the employer bring the opt-out to an end;

c) 31 October 2007.

Trustees appointed under an opt-out will note that opt-outs are no longer permitted under the new legislation and there is no way that an opt-out can be maintained outside the above dates. This may come as a surprise to trustee boards that are presently elected under the terms of an opt-out.

The date at (a) above, where member approval of an opt-out ends, will either be ten years from the date of the approval of the opt-out, if approval was given before 6 April 2002, or four years from the date of the approval of the opt-out where approval was given after 6 April 2002. Trustees will need to be wary of these dates to ensure they comply at the right time. For example, an opt-out approved on 7 April 2002 will come to an end on 7 April 2006 and the new requirements will apply from that date.

If there is no opt-out and the scheme retains MNTs or MNDs appointed in accordance with earlier pensions legislation, then the commencement date for compliance with the new requirements is 6 April 2006.

Finally, if the scheme is established after 6 April 2006 then the commencement date for compliance purposes will be the date the scheme commenced.

General principles

Once trustees have established exactly when the new requirements apply to their scheme, they must go about putting arrangements in place to comply with the new requirements within a reasonable period and must then implement those arrangements, also within a reasonable period.

The Code identifies three guiding principles which the trustees should follow in deciding on the arrangements for their scheme, namely:

a) proportionality (ie the costs and nature of their approach are appropriate to the circumstances of their scheme);

b) fairness (ie the arrangements treat all the members fairly); and

c) transparency (for example, the nomination and selection process and the method of selection should be communicated to the members involved).

Nomination and selection process required to appoint a MNT/MND

Under the new requirements a MNT/MND must be:

a) nominated as the result of a process in which at least the following are eligible to participate:

(i) all the active members of the scheme or an organisation which adequately represents them (for example a recognised trade union); and

(ii) all the pensioner members of the scheme or an organisation which adequately represents them; and

b) selected by some or all of the members of the scheme.

Arrangements

The legislation requires that arrangements which the trustees put in place and implement must provide for the following:

a) the nomination and selection process referred to above to take place within a reasonable period of the requirements applying to the scheme (see below on what is considered a reasonable period);

b) where a vacancy is not filled because insufficient nominations are received, for the nomination and selection process to be repeated at reasonable intervals until the vacancy is filled (and the arrangements may provide that where the number of nominations received is equal to or less than the number of appointments required, the nominees are deemed to be selected);

c) where the employer so requires, a person who is not a member of the scheme must have the employer's approval to qualify for selection as a MNT/MND; and

d) that the removal of a MNT/MND requires the agreement of all the other trustees or directors (unless the removal is by a vote of the membership under the terms of the scheme rules).

The arrangements may provide for a greater number of MNTs/MNDs than that required to satisfy the one-third minimum, but only if the employer has approved the greater number.

Finally, nothing in the arrangements or in the provisions of the scheme may exclude MNTs/MNDs from the exercise of functions exercisable by other trustees/directors by reason only of the fact that they are member-nominated.

‘Reasonable period'

The design of the arrangements and the implementation of the arrangements must be put in place within reasonable periods. The Code advises that a reasonable period will be around six months for the design of arrangements and a separate six months for the actual implementation of the arrangements (ie for a nomination and selection process to be completed). However, the Code anticipates that this period may vary depending on the size, structure and circumstances of the particular scheme, so it could be longer for a large scheme with members in various locations, for example, and shorter for a small scheme with a small number of members.

Communicating with the members

The Code also makes certain recommendations about what communications to the members involved in the process should contain, including that the nomination stage should involve (among others) communication of essential details such as the number of MNT/MND vacancies, what will happen if the number of nominations is less than or equal to the number of vacancies and details of the selection process to be used.

The Code also gives trustees certain flexibility as to the method of communication so that trustees can select a method which best suits their scheme. For example, if it is the scheme of a very large company, it would be acceptable to communicate by means of a prominent announcement in a staff magazine, and in the case of a small scheme with only active members who are all on one site, the Code recommends the use of a staff notice board.

Review of arrangements

The Regulator expects the arrangements for the selection of MNTs/MNDs to be kept under periodic review. While it will be for the schemes to decide what is appropriate for their scheme, the Regulator would expect a periodic review every three to five years, with an earlier review if there is a material change to the scheme's circumstances and/or membership.

Conclusion

The new requirements may well be seen as a further administrative hurdle for overworked trustees and their advisers to deal with. However, once the initial compliance exercise is dealt with, the new requirements are certainly more flexible than the earlier MNT/MND legislation, which was much criticised for its strict regime.

The flexibility should therefore reduce compliance costs in the long term, though this benefit may be missed in the short term as trustees seek to comply with the new requirements, and in particular where trustee boards are currently appointed under the terms of opt-out.

Finally, the government has indicated that it would like to work towards increasing the MNT/MND requirement from one-third to one-half by sometime in 2009, although for the time being trustees need only be concerned with securing one-third MNTs/MNDs.

 

Philip Goodchild is a partner in the pensions team at international law firm Stephenson Harwood.

Email: philip.goodchild@shlegal.com.