Trustee Knowledge & Understanding
The Pensions Act 2004 introduced a requirement on pension scheme Trustees to have appropriate knowledge and understanding of the law relating to pensions and trust law, the principles relating to the funding of occupational pension schemes and the investment of the assets of such schemes.
Individual Trustees must also be conversant with their own scheme rules and other related documents. Conversant is taken to mean having a working knowledge of those documents so the Trustees are able to use them effectively when they are required to do so in the course of their Trustee duties.
This new requirement applies to all Trustees, corporate or individual, of all occupational schemes (including stakeholders schemes set up under trust) regardless of scheme size. The only exemptions are schemes with fewer than 12 members where, either:
- all members are Trustees and are equal decision makers; or
- all trustees are directors of a company which is sole Trustee and all members are equal decision makers.
Trustees in place at 6 April 2006 have until 6 October 2006 to comply with this new requirement. Any new Trustees, appointed after 6 April 2006, will have six months from the appointment date to comply.
Trustees who claim to be experts will be expected to be appropriately qualified.
Keeping up to date and filling any gaps in knowledge should be ongoing and any learning processes should be regularly updated. The Regulator will periodically quiz schemes on their learning processes.
- What is Trustee Knowledge & Understanding (TKU)?
Trustees will need to have an appropriate knowledge and understanding of pension and trust law and be familiar and conversant with:
- their own scheme documentation;
- any documents relating to the current administration of the scheme.
The degree of knowledge required, is that needed for the Trustee to be able to perform their functions as a trustee.
Different trustees may perform different roles. How much TKU they will need will depend on the nature of their scheme and their own role within it. For example, a trustee of a fully insured scheme may not be expected to have the same investment TKU as a trustee of a scheme that undertakes direct investment.
- How is Knowledge going to be tested?
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The Regulator will routinely question Trustees about their learning activities and on what steps they take to maintain their Knowledge and Understanding. The answers provided will form part of the Regulator's risk assessment of the pension scheme.
If a scheme is considered 'riskier' than the norm, it is likely that the Regulator will check the competency of that scheme's trustees on a more regular basis.
The Regulator will expect that a scheme review the Knowledge and Understanding of their trustees on an annual basis. Trustees therefore need to be ready to display their TKU achievements, e.g. examination results, courses attended etc., in case the Regulator asks.
It will not be mandatory for a pension scheme Trustee to have a formal qualification.
- What if the Regulator thought a Trustee was not up to their job?
If the Regulator reached a decision that a Trustee was not up to performing the role expected of them, they will have powers to have them removed, and to bar them from taking up a Trustee role in the future.
- Over what areas does Trustee Knowledge & Understanding cover?
The items Trustees will need to cover is quite extensive, with the main areas as follows: -
- Trust Law: Trustee duties, powers and obligations.
- Pension Law: The key provisions of legislation that affect pension scheme.
- Investments: The different asset types available for investment and their characteristics.
- Funding: For defined benefit schemes (DB) this covers, funding principles, financial strength of the sponsoring employer and the value of the scheme's liabilities. For defined contribution schemes (DC) this relates to funding principles and the risks borne by members.
- Contributions: This concerns DB schemes, in particular the assumptions used in setting contribution levels.
- Strategic Asset Allocation: This again concerns DB schemes and refers to the suitability of different asset types in relation to the liabilities of a pension scheme.
- Investment Choices: The area covered here centres on the principles relating to investment choice for DC schemes, including AVCs.
- Fund Management: How performance can be measured, including the principles of fund management.
- Document Types: The legislation requires trustees to be conversant with: -
- the Trust Deed and Rules.
- the Statement of Investment Principles.
- Statement of Funding Principles.
- Any documents regarding the current administration of the scheme, e.g. the scheme booklet, announcements, member communications, minutes of trustee meetings, and the annual report.
- Any other documents the Trustees decide they should be conversant with.
Q & As
