Time to commit a breach of trust?

GMP equalization costs: judicious breaches of trust

Sometimes it’s good to be bad. The costs of implementing GMP equalization following the Lloyds court cases is proving more complicated, time-consuming and expensive than any eventual improvement in benefits for those adversely affected may result. English law has long recognised that unscrambling a legal omelette is no function of the courts, and it is disappointing that it was not pointed out to the judge that reconstituting records over thirty years is in most cases an all but impossible task and wholly disproportionate to any benefit.

Judges who are given the pension brief might be offered by the PMI/PLSA some initial training in basic pension issues before producing complex judgments.

Meanwhile lawyers will recall the oft-cited remark that ‘My old Master, the late Lord Justice Selwyn, used to say: ‘The main duty of a trustee is to commit judicious breaches of trust’’ (the remark was attributed by Sir Nathaniel Lindley in the course of argument in Perrins v Bellamy [1899] 1 Ch 797-8 and most recently cited in Armitage v Nurse [1997] EWCA Civ 1279). Provided trustees have thought about the problem, and perhaps prepared a paper on the disproportionality of effort, the Trustee Act 1925 and provisions of the deed will normally be a robust defence to any suggestion of breach of trust – and in any event if a member claims, and can show they have a claim, the trustees would of course pay. It is not a criminal offence for them not to follow a civil decision of the court to which they are not a party. Common sense (and a common sense judge and a common sense regulator) would not take steps against trustees who do not follow the Lloyds judgments. It might even be argued that a trustee who over-zealously followed the judgments might be in breach of trust by spending trust assets that might be hard to recover. The best advice for sceptical trustees might be for them to (1) prepare a document and file it with the board minutes rehearsing the argument for and against spending money trying to resolve the unresolvable, and (2) wait and see. Given the nominal amounts involved for each individual member it is improbable that there would be any repercussions ever. As the judge in the Armitage case said:

‘. . .[the clause exempting trustees from liability] exempts the trustee from liability for loss or damage to the trust property no matter how indolent, imprudent, lacking in diligence, negligent or wilful he may have been so long as he has not acted dishonestly.’

There are times to commit a nominal breach of trust, and not implementing GMP equalization may well be one of them.

Market intervention

The FCA has issued a Report (on insurance for multi?occupancy buildings, September 2022) which follows the Grenfell tragedy and the high cost of insurance and repair for owners of flats in high-rises. It proposes an astonishingly expensive and complex solution, and it is misbegotten. What would be simpler and infinitely cheaper would be the intervention of the state. This is one of those few cases where government can really help where the market cannot; it should offer state insurance at cheap levels and it would make a profit, given that the claims would be rare. It would free up ‘Grenfell prisoners’ to move to other accommodation and make more housing available. What’s not to like.

Meanwhile Con Keating, the gadfly of the pensions industry, comments (Anatomy of a crisis) in a ?Playpen blog (we might have to pay for access now) on LDI; he makes the point that TPR has been pushing pension schemes to match their assets to liabilities artificially measured by reference to gilts, a so-called risk-free investment. He concludes that we are being required to invest according to the measure rather than the liability, and he is right. But hedging has allowed pension funds to continue to invest in return-seeking assets, and cut their deficits – and the collapse in gilts has resulted absurdly in considerable reductions in deficits. It is an Alice-in-Wonderland system designed to protect regulators rather than members and offers poor value for the UK economy. The press glee in market dysfunctionality of LDI is fun to watch but actually LDI has worked pretty well for a decade, and the risks, even with high leverage, gave not been any greater that the risks in investing generally – equities and gilts can also fall in value, as we all know. The only really safe investment is cash, or gold bars under pension managers’ beds, but rather expensive when inflation is nudging 12%.

Pensions ministers

Now that Guy Opperman is no more, it may be time to reflect: do we need a pensions minister? Technically we have not had one since July 2016 but we have had 15 ministers and quasi-ministers since 1998. It is hard to see how much benefit for members they have achieved in all those years (although Steve Webb fixing contracted-out must be a win). Maybe we might be much better off if the incoming incumbent spent his time in office playing golf rather than devising additional governance requirements (look at the recent new investment regulations for a statement of the absurd) and maybe slimming down TPR to a budget of around ￡10m pa.

TPR’s recent press release announcing the prosecution of an 83-year-old ?consulting actuary raises the continuing question about its role. It is inappropriate to discuss the case itself at this stage, but the issue of investigating regulators conducting their own prosecution has been the explored before – and making an adviser potentially criminally liable for alleged bad advice should send a shiver throughout the advice community.

RMT v TPR

The obsession with gilts as a measure of liabilities continues not only to cause industrial relations issues (ie strikes) in our universities but now also on the trains (Pensions Expert 26 Sep 2022). One of the reasons for rail strikes is TPR insisting on fixing gilt-measured deficits in the rail industry schemes. The particular problem with rail is that because costs are shared between employer and employee, fixing the purported deficits involves requiring an increase in employee contributions. The issue for regulation is whether TPR’s views are helping or hurting members.

Risk management and LDI

The LDI collateral calls at the end of September 2022 caught everyone by surprise, even those blessed with 20/20 hindsight. It followed those other profound but unanticipated risks, such as global pandemic, quantitative easing and negative-interest-bearing bonds. Nor did the regulator warn us that we should take these into account beforehand, though it did afterwards. Maybe it’s time to scrap the integrated risk management process since it clearly does not work in relation to the most dangerous risks (and indeed it is possible to argue that the TPR requiring schemes to move to gilts was the biggest risk of all, so we should add TPR intervention as the most expensive risk) and insist the PMI run courses for both regulators and scheme trustees on hindsight and the work of the Spanish Inquisition.

Meanwhile BlackRock are not only facing issues resulting from the LDI issues in the UK, but also in the States with a battery of lawsuits complaining that pension funds using its LifePath Index target date funds are focussing on low fees at the expense of performance (Robert Steyer, Lawsuits take aim with an unusual focus, Pensions & Investments, 22 August 2022). The Pensions Regulator already also under fire, might want to re-think its low fee pressures.

DEI

TPR has recently announced its proposals in relation to diversity and inclusion. A study last year in the United States (Heritage Foundation July 2021) noted that among the 65 large universities that comprise the ‘power-five’ athletic conferences there are nearly 3,000 employees dedicated to DEI. DEI staff listed by universities totalled 4.2 times the number of staff who assist students with disabilities in receiving reasonable accommodation, as required by law. DEI staff levels were 1.4 times larger than the number of professors in these universities’ corresponding history departments. Moreover, the average university had 3.4 people working to promote DEI for every 100 tenured or tenure-track faculty members.

Certain universities had strikingly large numbers of people officially labelled with DEI responsibilities. At the University of Michigan, for example, 163 people were identified as having formal responsibility for providing DEI programming and services. At the University of North Carolina at Chapel Hill (UNC), there were 13.3 times as many people devoted to promoting DEI as providing services to people with disabilities. At Georgia Tech, there were 3.2 times as many DEI staff people as history professors. At the University of Louisville, the ratio of DEI personnel to history faculty was 2.9. The University of Virginia had 6.5 DEI staff for every 100 professors. TPR has a way to go.

Pensions in the cinema

In Polar (2019) a retiring assassin (Mads Mikkelsen) suddenly finds himself on the receiving end of a hit, contracted by none other than his own employer seeking to cash in on the pensions of aging employees. If he lives, he gets $8M (the transfer value is high because the retirement age for assassins is 50) so it’s no surprise that the plan sponsor is trying to save money. A more responsible Mads, instead of fighting back causing death and destruction, should instead have called TPR, but it might have made for a less exciting film.