Pensions assurance services

Investment transitions

Trustees will go through an investment transition from time-to-time, as it is part of the evolving cycle of managing each scheme's assets, whether through changes in the scheme's benchmark or manager appointments.

The main objectives of trustees during an investment transition are:

• Reorganising the portfolio to the new benchmark as soon as possible and/or maintaining benchmark exposure throughout the transition period
• Minimising the costs of the transition.

These objectives tend to conflict with each other; reorganising a portfolio more quickly will increase costs such as market impact and reduce scope for crossing transactions.

We provide trustees with assurance over the transition process by:

• Reporting on the risks and possible control mechanisms
• Reviewing the transition manager mandates (transfer methodology, performance measurement, proposed reporting and exposure to risk)
• Performing a post transition review covering:
  
  
  • confirmation that all stocks, cash, income and tax accruals transferred
  • verification of implementation shortfall, including trading costs incurred
  • review of derivatives positions held
  • analysis of efficiency of transfer.

Computer systems

Trustees are dependent on IT systems to carry out their duties, in particular where pension arrangements are more complicated and transactions more automated. These systems are operated by a number of different organisations (e.g. employer, administrator, fund manager).

Information provided by computer systems is often now the basis for decision-making (e.g. execution of trustees' discretionary powers, such as payment of pensions on early retirement). With increased dependence on computer systems comes the increased risk that, if systems are not available, the scheme will not be able to function effectively.

Pension scheme members increasingly expect greater access to information, a challenge which is likely to increase dependence on computer systems in the future. While web access can be a very valuable tool for members, there are associated risks.

Our computer specialists can provide trustees with assurance by performing:

• Detailed data interrogation and analysis
• Testing of system security and ability to withstand hacking
• Assessment of website capability and security
• Assessment of measures to protect confidential data as it is transferred or emailed to third parties
• Data validity checks.

Defined contribution

The demand for outsourced defined contribution (DC) services has grown dramatically over the past two years, as employers have switched benefit provision from DB to DC. To meet this demand several new providers have entered the market, and existing providers (of AVC products in particular) have switched to marketing a DC administration solution to complement their investment offerings.

These new DC schemes typically provide a greater level of investment choice than previous arrangements, and many allow members to switch investments during the year. Often, these switches are communicated directly from the member to the provider.

We regularly carry out reviews of the processes at the DC providers to provide the trustees with assurance that controls and procedures are in place and that they are operating as intended.

Tax

Although the majority of pension schemes do not expect to pay tax, there are a number of situations where a tax liability can occur, even in respect of simple pooled investments in overseas equities. Furthermore, in the current climate of changes in the way some schemes invest their assets and in the way income is generated, there is even more potential for a tax liability to arise. For example, many pension schemes are increasingly turning to property, venture capital funds, hedge funds and derivative contracts to generate returns or manage risk. These all have the potential to result in tax leakage where the investment is not properly structured or understood.

PwC has a tax team dedicated to pensions-related tax issues. We can assist trustees in dealing with tax matters, including:

• Review of investment mandates, fund manager and custodian activities to identify tax risk areas
• Advising on the tax implications of alternative investments (e.g. hedge funds, private equity funds)
• Minimise the potential for tax leakage through appropriate structuring
• Assisting with self-assessment tax returns
• Assisting with the identification and recovery of UK income tax where the scheme invests in UK unauthorised unit trusts, offshore unit trusts or private equity limited partnerships.

VAT

Given the nature of the investment activities carried on by trustees in most schemes, pension schemes will inevitably suffer the additional charge of the non-deductibility of VAT on costs. Our experience tells us that there are two main reasons why many schemes have not sought to maximise VAT savings:

• Trustees are largely unfamiliar with VAT legislation which can be complicated and errors may be made
• Most schemes do not have the internal resources to manage any additional compliance obligations.

We are able to assist the trustees in the following areas:

• Register the scheme for VAT, assisting with a retrospective VAT registration application
• Liaise with HM Revenue & Customs to agree the most appropriate VAT recovery method both on a retrospective and prospective basis
• Review scheme expenditure to ensure that it is correctly classified as administration or investment for VAT recovery purposes (by the sponsoring employer and the fund respectively)
• If the scheme is registered, ensure that the current processes maximise VAT recovery of the VAT charged on fund managers' administration and investment fees for both equity and property portfolios and, if necessary, negotiate a more beneficial VAT recovery method with HM Revenue & Customs.

Governance

For governance to be effective, a framework is needed to meet the scheme's objectives covering roles, structures, processes and relationships.

This was backed up by PwC's survey of 81 major UK pension schemes, the results from which were available in March 2006. The survey concluded that whilst overall trustees have taken steps to make significant changes to the management and control of their schemes more than 54% of trustee boards either do not have a formal governance policy or if they do, it is not used for decision making.

We are able to assist trustees by:

• Benchmarking their scheme to assess whether they follow industry best practice
• Facilitating workshop/trustee training specifically on governance
• Working with trustees in various other ways to enhance governance.

Risk

Risk management is becoming a top priority for trustees because of their onerous and wide ranging responsibilities. The Code of Practice on Internal Control issued by the Pensions Regulator in July 2006 recognises the importance of a good understanding of risk to facilitate effective decision making and governance. Trustees need to be sure that an appropriate framework is in place for managing their scheme effectively.

We have assisted numerous clients by:

• Facilitating bespoke scheme workshops to assist trustees identify significant business, operational, financial and compliance risks
• Assessing the potential impact and likelihood of risks
• Assessing the effectiveness of management of these risks
• Developing an action plan going forward.

Compliance

Faced with a myriad of additional Pensions Act changes, Codes of Practice issued by the Pensions Regulator and the changes in tax legislation, Trustees are seeking comfort on Compliance. "How do we as Trustees gain assurance that everything that should be being done is being done?"

We assisted clients by:

• Evaluating the processes and procedures to ensure compliance
• Undertaking compliance health checks
• Summarising the compliance status of a scheme against the legislative and other requirements.