How to prepare for legal and regulatory change

Many of us have lived through substantial upheaval: the A-day changes to the tax regime in 2006, scheme-specific funding, automatic enrolment, defined contribution flexibility and the end of contracting-out to name a few.

This has also generated case law, which needs to be taken into account when considering how a particular aspect of legislative change may impact a scheme, such as the cases that have followed the change to consumer price index for statutory pension increases in 2011.

There is too much for most of us to keep up to speed with every twist and turn, but what do trustees need to do to prepare for and react to the changes?

Trustee requirements

Unlike professional trustees, trustees are not required to be legal experts. The statutory standard for trustees of occupational pension schemes to have knowledge and understanding is that the degree of knowledge and understanding is "appropriate for the purposes of enabling the individual properly to exercise his/her functions as a trustee of the relevant scheme". 

Trustees need to have a basic understanding of pensions law, which they can get by completing the regulator's toolkit.

They then need to understand the implications for their scheme of changes in the law and be able to consider with their advisers what options may be available to them and decide what action, if any, to take.

Best practice would be to have a legal update as a standing item on trustee meeting agendas so the legal adviser can distil the changes down to an update relevant to the scheme

The starting point, of course, is to learn about impending changes that may be of relevance. Trustees' legal advisers may produce updates and alerts covering recent developments as well as expected future changes. Inevitably, these updates will be of a general nature to cover the range of possible recipients.

Best practice would be to have a legal update as a standing item on trustee meeting agendas so the legal adviser can distil the changes down to an update relevant to the scheme.

In addition, benefit consultancies, actuaries and administrators will provide updates as well as reporting by the press. For major changes, it will generally be difficult not to be aware that something is afoot.

Sometimes there could potentially be an immediate impact on a scheme, such as when an increase in trivial commutation limits was announced in the Budget in 2014. In that situation, trustees will need urgent legal advice on the implications for their scheme.

When in doubt, go to the employer

Generally, significant changes will be communicated well in advance, giving trustees a period in which to consider the implications with their advisers and consult the employer on any changes it may wish to make to the scheme.

Trustees should be cautious about trying to do too much on their own. Sometimes trustees feel that it is in some way part of their job to encourage employees to save for their retirement or to seek to improve the scheme to provide more valuable benefits, perhaps because they have been told they should act in members' best interests.

Fundamentally, occupational pension schemes exist as a mechanism for employers to remunerate staff, albeit that remuneration is deferred. Scheme design is therefore normally a matter for the employer, subject to some important caveats.

Trustees will often have a role to play in making alterations to schemes; it is common for the governing documentation to require trustees' consent to alter the scheme rules, or they may be given a statutory power to amend the rules to bring them in line with legislation.

Alternatively, the legislation may override scheme rules completely, such as changes to statutory transfer rights or powers for trustees to pay flexible DC benefits.

Key for trustees in preparing for legal and regulatory changes is to maintain good communication with advisers.

Max Ballad is legal director at law firm DLA Piper