The Pensions Pod S6:E1 – Benefit and documentation audits – what are they and why consider them?

So a really wide range of things and season six is going to look at some interesting stuff such as CDC, return of DP surplus reform, questions about policy, so adequacy, investment, mandation, employee engagement and decumulation in DC savings. So loads on the agenda for the new series. And if you’re listening to this and would like something covered then do please let us know. The pensions world is always changing, so there’s always something new to talk about and lots to discuss.

But for our first episode of Season 6, I would like to introduce our guests, both of whom work with me here at Burges Salmon. So welcome to Richard Pettit. Richard, hi. Can you tell us who you are and something about the work you do, please?

Richard Pettit (01:26)

Yes, of course Chris. as you said, I am Richard Pettit. I’m a partner in our Pensions and Lifetime Savings team. This September I came of age at Burges Salmon, so 21 years at Burges Salmon. Congratulations. Thank you. 10 years as a partner. We’re all, as everyone is in the industry, busy at the moment. So I’m doing quite a lot of de-risking, going like a lot of people in the market, as well as supporting a whole range of schemes.

Chris Brown (01:39)

Congratulations.

Richard Pettit (01:55)

and employers on business as usual, and a few interesting projects addressing things like historic benefit and documentation issues, some of which we’ll talk about later.

Chris Brown (02:05)

Yes, super. Thanks very much and welcome to episode one of season six. And we are joined by Elena O’Leary. Elena, hi. Tell us who you are and the type of work you do.

Elena O’Leary (02:15)

So yeah, I’m Elena O’Leary. I’m a senior associate in the Pensions and Lifetime Savings team. So really I’m advising trustees and scheme employers on a wide range of pensions legal issues. Particular focus on at the moment is advising schemes with complex legal and benefit issues. And I work very closely with Richard on the number of those and on benefit and documentation review projects, which we’re going to be talking about today.

Chris Brown (02:42)

Yeah, brilliant. So welcome to episode one. And that’s a really nice segue then into the subject matter of this podcast episode.

So you both do a lot of benefit and documentation audit work, but what are we talking about when we mean benefit and documentation audit work?

Richard Pettit (03:03)

Great question, obviously, as ever, Chris. I’m assuming everyone listening to the podcast is going to be aware and conversant with what a benefit specification is, that schemes will often do while they’re running on or to get ready for de-risking, so buy in or buy out, which does what it says on the tin. It’s a list of the schemes benefits checked against scheme rules, including historic rules. What we’re talking about when we say benefit audit and documentation review, it’s something slightly different that supports and builds on a traditional benefit specification. it’s rather than just taking your rules at face value and assuming that they’re valid and that everything works when doing a benefit specification, it’s doing some testing to check that everything is in order and correct. So making sure that the deeds are validly executed and could have been executed and could amend the scheme in that way, the basic sort of starting position.

A few things like looking at amendment power fetters as well. And obviously a lot of people in the industry have come across Section 37 issues recently. So it’s flushing out and resolving things like that. I’m assuming that for the chat today, the first few questions in everyone’s mind, are the same with most things are, what are we talking about? So what is this? And what’s the benefit? Documentation, audit, review. Why should I do one? If I’m a trustee, or if I’m an employer, why do I think my trustees should do something? Why do I need to do it now rather than just leaving it till later? And if I do one, what’s the outcome going to be? Is it going to cause me problems or are they going to be sensible solutions? So that’s the kind of thing, if it works for you, we’d like to chat through today.

Chris Brown (04:46)

Yeah, absolutely makes sense to me and that was going to be my first question. So, Elena, would you do a benefit and documentation review to supplement a benefit specification? Why would you do one of those reviews?

Elena O’Leary (04:59)

Yeah, so there are a number of reasons really. So I think the starting position, you know, as we all know, trustees are under a duty to pay the correct benefits. And obviously they’ve always got that duty. But if a material issue does come to light, then really they should be looking into that. And so undertaking the benefit and documentation review can give trustees the comfort that they are paying those correct benefits.

Often we also see when new scheme administrators are appointed, scheme admin comes under a bit of scrutiny, and we also see that that often triggers these kinds of reviews as well.

Richard Pettit (05:35)

Yeah, and think all of it comes back to you want to trustees, you want to be confident that you’re administering the credit benefits and you’re running the scheme correctly. And to do all of that, you can only do it if you’re clear on the governing documentation, how that fits in with things like a benefit specification and how you run the scheme. And there a number of triggers for looking at that specifically. So we’ve also seen all the examples that Elena mentioned, but we’ve also seen where a new professional trustee comes in or someone new in management comes in, new chair of the board, new FD comes in, just wanting to double check and be confident that you are where you think you are with the scheme. And again, it’s all about trying to, if there’s going to be a problem in a scheme, flush it out now when it’s easier to deal with, which is coming onto another question, we’ll deal with later, flushing it out and resolving it sort of early on, really.

Chris Brown (06:29)

Yeah, okay. And I suppose you can see why trustees and employer would want to, you know, have that confidence that the benefits in the scheme that are being administered are the correct benefits from the scheme and it feeds into employer points as well. Suppose there’s a surplus in the scheme, you know, is there really a surplus in the scheme could be a question so an employer would be interested too. But Richard, that’s sort of…Is there a duty for trustees to turn over every stone or to go looking for problems? How would you characterise that duty to have confidence and to understand what the benefits in the scheme are?

Richard Pettit (07:11)

It’s almost exactly what you said, Chris, which is it’s a duty to be confident in what you’re doing. So, but it’s really important to be clear. There is absolutely not a duty to investigate everything to the nth degree. And I firmly believe that with any scheme, however good the documentation is and however well run it is, if you got a good team of lawyers, like us to look into it hard enough, you could find a problem because there’s always something where a technical box won’t have been ticked and I dotted or a T cross and there’s certain things, know, it would be rare for it to be reasonable to dig into like authority for people signing documents, whether people are properly appointed directors. And sometimes it’s necessary, but in most cases it’s not.

So the most, I’d say the most important thing for any work we do like this, it’s all about scoping. We would never go in just with a blank sheet of paper saying, well, I’m going to look and try and find every problem. You agree with your client, whether it’s employer or trustee, the context and say, this is what we’re going to do so that you’ve got a reasonable level of confidence. And the reason we suggest our trustees would want to carry out some kind of review in, as you mentioned, the context of surplus or um, de-risking is a cover off the material risk, which is that you go on and run your scheme. Don’t investigate something until you get to a stage in 10 years time or 11 years time, whenever, and you do investigate for some reason, cause you’re giving a warranty on a buy-in or whatever. And the issue comes out as much more difficult to resolve, but absolutely no. It’s, it’s all a question of, as you said, Chris, confidence and setting that level.

Sometimes there will be occasions where that confidence is shown to be misplaced. So if you’ve got examples of things having gone wrong in your scheme, you might test those areas in more detail.

Chris Brown (09:17)

Yeah, OK, that’s helpful and makes sense. So it’s about having confidence in the benefits payable from the scheme. Elena, are there specific reasons why you might carry out an audit and a benefit audit and documentation review in addition to just generally being a sensible thing to do in order to have that confidence?

Elena O’Leary (09:42)

Yeah, are a number of other examples in addition to those we’ve already touched on. So, for example, big projects such as GMP equalisation or kind of connecting to the pension’s dashboards, which obviously lots of schemes are doing those kind of projects at the moment. As you said, Chris, it’s really important to have confidence in the data and in the underlying legal position for the scheme. So undertaking this kind of review before those projects are done or in conjunction with them.

It’s really helpful because before you spend all that time and money, you want to know that you’re not doing these projects based on foundations of sand really. And another things we often see is from an employer’s perspective, if they’re involved in M &A activity or other kind of corporate transactions, then inevitably the pension scheme is subject to due diligence and the employer will want confidence in the information they’re given in relation to the pension schemes accurate. So again, this kind of review can assist with that and to give them that confidence. But also if any issues are identified, the sooner they are, they can kind of be dealt with and hopefully they’re not hold up any transaction or allow for any issues to be kind of costed in. yeah, there’s a number of other reasons. Even in addition to those that we haven’t touched on today, but they’re just a few of why trustees and employers might want to do this kind of review.

Richard Pettit (11:04)

Yeah, and just to add to that, think those are really good examples, as Elena said, but if you take it all together, there are lots of reasons for doing the investigation and resolving them early because otherwise it’s going to cost more to sort things out later. As Elena said, you can cause delays at the worst possible time. We talked about it earlier on the podcast, but the context, as you mentioned earlier, Chris, of surplus and running schemes on, is potentially, I think, going to rise to trustees wanting greater confidence, both in employer covenant, which is an entirely separate issue, if you’re running on, but also in your comparing when you want to run on for surplus, can be covenant of the employer and your scheme funding support benefits in the future. And you need to be sure about covenant of yours and to be sure about what those benefits are, which means being sure of the docs. Again, it all comes back to the same kind of thing, really.

Chris Brown (12:00)

Yeah, okay, that’s really helpful. I’ll ask you in a minute about the of process of, you know, practically the process you go through on a type of review. So I suppose I was wondering in a corporate transaction situation, whether an audit and review could say focus on key risk areas. So, you know, big things that are known to be potential red flags in DB pension schemes over the years like barber equalisation say or closure or particular increased provisions. But I’ll ask you about that in a minute. suppose, Elena, is it better to undertake a review sooner rather than later? I suppose, I mean, I suppose it is. What would you say?

Richard Pettit (12:53)

Wow.

Elena O’Leary (12:55)

Yeah, think, know, from my views, definitely is better to undertake that review sooner rather than later. So we’ve already touched on, for example, the last thing you really want is for your scheme to get to buy out where you’re looking to secure benefits with an insurer and then an issue comes to life derailing the whole project. So, you know, that’s one example, but also just really from a practical perspective, if you look into things now, if an issue is identified, then it’s often more straightforward to deal with because in evidence is available and people’s recollections will be much better now if you speak to them now than in 20 years time say so just from a practical perspective the sooner you do and if there are issues really this is the better in my view

Chris Brown (13:40)

And Richard, I mean, this type of review is, I assume, is looking for pragmatic ways to resolve any potential issues and, you know, not going out of a way to look to sue people. But it helps if there is a liability question around potential claims to identify issues early.

Richard Pettit (13:58)

Yeah, I think everything point, know, claims against former advisors are obviously an asset of the scheme and trustees are under a duty to investigate. But all of this really is focused on the practicality. So yes, possibly there might be a claim that can help fund corrective action or investigations and it’s more likely to be in time if you look at it earlier. But there are a whole host of practical reasons as well for looking at things early as Elena said, you’ve got document and data destruction and retention policies, people’s memories, as Elena said. I mean, it’s, I find it difficult to think of circumstances where these kinds of issues don’t get worse and more difficult to resolve, particularly if you end up correcting benefits with the passage of time.

Chris Brown (14:38)

Actually, if a client is thinking about wanting to get that confidence and certainty over the benefits in their scheme, there is a practical point that that work will necessarily need to be done if there’s doubt. It necessarily need to be done as part of a risk transfer project. So actually, doing an audit before a risk transfer project isn’t duplicating work. It’s more just sort of moving work forward or front-end loading it.

Richard Pettit (15:10)

I think that’s it. think it’s about getting a scheme in a much better position to move quickly for de-risking. Obviously, we’ve seen a number of schemes recently want to move quickly across a variety of sizes to take advantage of opportunities in the market. And there’s a risk that if something comes out, it’s again a timing issue. Elena was talking about earlier, if you suddenly trip over the last minute because you uncover an issue, that can lose your opportunity in the market.

As you say, Chris, a lot of this work would need to be done when you get into the final de-risking stage anyway. And particularly, there’s more of it if trustees were exploring residual risk, which I suppose we’re expecting to become an option for a greater range of schemes with the new entrance into the insurance market. And again, it’s something you would need to just be clear because there will have to be an audit and due diligence process in relation to that residual risk insurance, which would cover a lot if not all of this.

Chris Brown (16:07)

Yeah, understood. that’s really helpful. So I suppose the question is, what approach would you take practically? What would the process look like for a client who was speaking to us about reviewing benefits and auditing documents? What does that look like?

Richard Pettit (16:27)

Typical lawyers answer from me, Chris, it varies. It depends on the client. But there’s a serious point there. So there’s definitely no one size fits all. As I mentioned earlier, it’s all really about scope. And that will be driven by a few factors. So one is the level of confidence that you as trustees or the employer want. So how far do you want to go in checking things?

Another thing is the second one is what areas of concern do you have? So if you’ve got a deed you’ve come across in a scheme that hasn’t been signed properly, you become more concerned and then it becomes to be more likely an onus on you as trustees to investigate what happened when similar people were in place for other deeds, could a similar issue have happened? But the other is, sorry Chris.

Chris Brown (17:19)

Well, I was just going to jump into it. So that’s interesting in it because that is so there’s no duty to go picking up stones and looking for issues. But if you become aware of a potential issue, then there is a duty to investigate a potential issue to some degree, would you say?

Richard Pettit (17:39)

Yeah, and again, I think it varies on your risk appetite as an employer and also very specifically on the circumstances because there could be lots of reasons where something could have been messed up for a specific reason and it doesn’t suggest that there’s a systemic issue, again, you trustees might take a take a view on that. Some of it is probably led by the point you mentioned you were going to ask me about. So I’m probably jumping ahead of your question, focusing in on the red flags. So yeah, exactly as you said earlier, as you would do if you were looking just to benefit issues in a scheme, you’d focus on areas which are likely to have the biggest financial impact for everyone. And also to be frank, areas where issues most likely arise. So as you’ve said, it’s things like equalisation, so Barber window issues, closures to accrual, anything to do with increases or revaluation.

And yes, absolutely, in the same way as you would do on a benefit specification, benefit audit on this, you might focus in on a few key deeds where they’re likely to make a difference. Because it is the point in some of the work we’ve done for some clients, you will come across a whole host of deeds that are invalid, but easily half of them, it doesn’t actually make any difference to liabilities because you’ve got things like deeds changing a scheme name or you’ve got deeds which were thought to be very important at the time like retaining the old pre-A day and Inland Revenue limits. But if you look into the facts on the scheme and find out that no one was above those limits, you’ve got no financial impact, then it’s very low impact. So lot of it again is making sure you don’t do legal work that’s only of academic interest. So you might only zoom in on deeds where you know there will be a financial impact either way.

Chris Brown (19:28)

Yeah, understood. Yeah, that that makes sense. yeah, so maybe you can focus your review and perhaps if you become aware of an issue, maybe then what we’re saying is there’s no duty necessarily to investigate similar circumstances. But if you’re aware of a potential issue, there’s a duty to consider the approach to that. Yeah. Okay. So Elena, what about potential outcomes? So client does a review of past benefits and documentation. What might be the outcomes of that type of review?

Elena O’Leary (20:10)

Yeah, Chris, so it could be that no issues identified and the schemes got a clean bill of health and you know, of course that is the outcome that everyone is hoping for. then, you know, trustees can move forward with confidence into those projects and transactions and things like that. So I’d say that’s probably the best case scenario. And then another potential outcome really is that some potential issues are identified. But as Richard’s just said, they turn out to potentially be easily resolved or immaterial. For the examples Richard gave where you look into it and the deeds, no one was anywhere near the kind of inland revenue limits and the things like that. And then I suppose you’ve got the worst case scenario situation, which is where you identify an issue, it looks like it could be potentially material. So further investigations and remedial action is required. But as we’ve just been discussing, if that is the circumstances, then scope is really key here because as Richard and you’ve just said, know, depending on the scope of the investigation, you can make that quite tight. So you’re just looking at very specific things and often that will allow a more pragmatic and proportionate approach depending again on the scheme circumstances and risk appetite and things like that.

Chris Brown (21:26)

Yeah, and Richard, we’ve got a lot of experience of assisting with a wide range of different reviews and different scopes of review.

Richard Pettit (21:32)

Yeah, exactly. So as you say, it ranges massively. We talked about the areas where people might focus a review and it does it tend it all varies according to what you find in the documents. But also, as I said, it’s risk appetite, the degree of certainty you want. It’s definitely not the case that you have to investigate everything. And I strongly believe the trustees are not under duty to investigate everything. We’ve obviously got trustees that come across this quite recently looking at Section 37 reviews before we had the fifth June announcement from the government around legislating to allow retrospective actuarial confirmations. I think it’s a lot of experience for a lot of trustees there on deciding only to investigate to a certain degree and then wait and see. That’s an example of pragmatic approach. There can be other areas.

Whereas Elena said something is a moot point practically in the scheme or it’s low risk or low impact. Yeah, sometimes you can, mean, one of the obvious things you can do if a major issue comes up and one obvious reason for doing things quickly is you can cap off, there can still be issues that are potentially running. You can have schemes that are still open with barber windows. You can have schemes that everyone thinks is closed to accrual, but might not be. And as bad the impact might be if you’ve got a scheme that’s been open to accrual for five or 10 years longer than you think. It’d a lot worse if you don’t take immediate action to close that window. And hopefully, and often is the case, you get comfortable that you can resolve the underlying issue and you don’t have a window, but it’s much better to close it. And yeah, we’ve seen various deeds to resolve issues. Sometimes actions supported by an indemnity from an employer to allow a pragmatic approach where it’s reasonable to do so. So there are a lot of sensible solutions that trustees can put in place.

Chris Brown (23:30)

Okay, so just in one sentence reply then to, I mean, I think you’ve covered it there, but in one sentence to reply to the three questions that you asked at the, you asked yourself at the top of the podcast then. So we’ve talked about doing a benefit audit and documentation review. Why should trustees and employers want to consider doing one?

Richard Pettit (23:53)

So you can be confident in the benefits you’re paying, the way you’re running your scheme, and if you buy out, you’re securing the correct level of benefits.

Chris Brown (24:02)

Perfect. Why should trustees and employers consider doing one and not putting it off?

Richard Pettit (24:09)

Because it avoids problems getting worse and they’ll be easier, quicker and cheaper to resolve earlier.

Chris Brown (24:09)

Perfect. And lastly, what’s the potential outcomes or what are the potential outcomes from such a review?

Richard Pettit (24:17)

Two extremes are, one you get a clean bill of health, to the other extreme you have a potentially material problem, but there are lots of things you can do to mitigate that problem. And again, it will always be better than finding out that issue later.

Chris Brown (24:24)

To know about it. Yeah, brilliant. Okay, well, thank you very much, Richard and Elena. That’s an interesting topic to kick off Season 6, and I think will be relevant to all trustees and employers of Defined Benefits Scheme. So great topic to kick off with, and great to be chatting again on the Burges Salmon Pensions Pod. So to all our listeners, if you would like to know more about our Pensions and Lifetime Savings team, and how our experts can work with you, then you can contact myself, Chris Brown, or any of our team via our website. And as we say every episode, all of our previous episodes are available on Apple, Spotify, our website, or wherever you listen to your podcasts. So don’t forget to subscribe, and thanks for listening.