Michael Klimes asks if introducing a requirement to appoint scheme lawyers would improve governance
The Pensions Act 1995 introduced the requirement for schemes to be audited annually and valued triennially.
This largely stemmed from Professor Roy Goode's 1993 report, which recommended a statutory obligation for scheme audits and actuarial valuations, but did not extend this to scheme lawyers. Instead, he said it was sufficient to let trustees decide to appoint lawyers where they deem necessary.
Since then, the volume of legislation and case law has steadily increased and the demands on trustees have risen accordingly.
Some argue trustees need a lawyer to help them do their job and that it should be mandatory to appoint one. Such a reform would require primary legislation and a decision on how often schemes would need to review the lawyer they have hired.
It is claimed this would reassure members they are in a well-run scheme, and allow trustees to keep abreast of the latest case law. Also, it could prevent an increase in what the regulator calls "second class pension savers", who are in schemes that are small, poorly governed and bad at delivering value for money.
However, others argue such a requirement would be very costly for schemes and that trustees should not be forced to get legal advice if there is no need for it.
Irwin Mitchell partner Penny Cogher, who thinks it should be mandatory to appoint lawyers in a similar way to actuaries, highlights the consequences of not taking good legal advice.
"It is astonishing in this climate of increasing regulation that there is no legal requirement for pension trustees, the guardians of billions of pounds of pension savings, to have legal advisers. There is a saying, ‘legal advice can be expensive but the cost of not taking legal advice can be even more expensive!' she says.
An example where a lawyer could add value to a scheme is keeping trustees informed of cases that might allow them to run a scheme more efficiently. Cogher points to the FDR Ltd v Dutton case in the Court of Appeal, which ended in March this year.
"This is borne out in the Dutton case where pushing on with a legal challenge over the right way to calculate cumulative pension increases saved the employer approximately £17m," she continues.
The case looked at how an underpin should operate in relation to increases to pensions in payment for an occupational scheme. The Court of Appeal ruled that a cumulative underpin, which is less expensive than an annual underpin, should apply.
Cogher asks: "How many pension trustees, without having the benefit of specialist pension lawyers, would know the potential impact of this case and the possible costs savings for their scheme?"
Spence and Partners lawyer Gino Rocco says trustees could review the legal advice the scheme receives in the same three-year cycle as valuations.
"I don't see any reason why a scheme could not do [a legal review] in a three year cycle. It is there as a point of concentration so the scheme can review the legal advice it receives on a regular basis.
"Sometimes specialist advice is required on rather tricky rule provisions. The sooner things are picked up, the less of a mess there is. It mitigates the cost of having the lawyer in the long run."
However, Pinsent Masons consultant Robin Ellison is firmly against the idea, partly based on his view of the current regulatory environment.
He says: "There are now around 160,000 pages of legislation and counting. There is no evidence that more legislation would make life better for members - which is what this is about. We are now supposed to have evidence-based rule making and one-in three-out rule-making. If we bring in a new rule, what are the three rules that need to go? And where is the evidence that we need lawyers permanently?"
Ellison says a parallel might be that every household is legally required to appoint plumber and electrician, he adds.
PTL client director Colin Richardson believes the current system is sufficient but thinks some schemes could commission more legal advice if they need it.
"Overall, some pension schemes should commission more legal advice in certain situations than they do. Most schemes do have an appointed lawyer at the moment. It is not clear that an appointment should be mandatory, but trustees should have the knowledge and experience to know when advice is needed and where to seek such advice," he says.
Aside from concerns there are too many regulations already, the main objection to having mandatory lawyers comes down to money.
Barnett Waddingham senior consultant Malcolm McLean warns says. "I am told it can cost schemes up to £1,000 an hour to appoint a lawyer from one of the big firms. Most small schemes would not want to pay that."
The arguments for appointing a lawyer are compelling but making it a mandatory requirement under law is unnecessary and too costly.
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