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The trm
Report - November 2003
Trustee Risk Management
Trustee Liability and Insurance
Jonathan Bull
Trustee Liability
The potential personal legal liabilities of trustees and administrators
of occupational pension schemes are in sharp focus. The risks they
face have grown, not only because of the proliferation of regulation
and the ease with which a complaint can be made to the Ombudsman,
but also because the UK is becoming an increasingly litigious society.
The position is likely to be further exacerbated with the increasing
number of scheme closures, wind-ups and the trend towards providing
defined contribution schemes.
Trustees can be personally liable for losses arising from breaches
of trust or maladministration, which can also include liabilities
to third parties. They can also have civil fines imposed on them
by the Occupational Pensions Regulatory Authority (Opra). These
potential liabilities continue even after a trustee has retired
from office. However, in practice, it is the cost of defending claims
which is sometimes not fully appreciated and these can be substantial
even when a claim is without merit.
Indemnity & Exoneration Clauses
Many trustees will have the benefit of clauses within the trust
deed and rules exonerating them from liability where they have been
in breach of trust but not acted dishonestly. They may also benefit
from an indemnity from the scheme's assets or the sponsoring employer
company. It is acknowledged that it is difficult to draft or amend
such clauses in a way which ensures that they are 100% watertight.
In the event of a claim, substantial legal costs could be incurred
in establishing the position and a loss to the fund or employer
may arise; or worse, the trustees may find themselves personally
liable without any recourse.
Such clauses contained in the trust deed will only be effective
as between the members and the trustees, they cannot provide protection
against claims from third parties or regulatory action. Furthermore,
such provisions simply transfer any liability between the trustees,
the beneficiaries and the employer. Insurance is available as an
external resource of protection.
Insurance
In the past most trustees relied upon exoneration and indemnity
clauses to shield them from personal liability, and viewed insurance
with some scepticism. However, many trustees and sponsoring employers
now appreciate the financial comfort that an appropriately structured
insurance policy can provide. Insurance should be considered by
all schemes and will play an increasingly important role in protecting
pension funds as evidenced by the recent experience of claims. Insurance
is available to cover claims made during the period in which the
policy is in place, regardless of when the incident giving rise
to the claim occurred.
A solution can be found in providing trustees with their own independent
insurance. Indeed, the last Ombudsman was reported as saying that
consideration should be given to making insurance compulsory in
order to protect the assets of the pension fund. Opra also requires
members of its trustee panel to have appropriate indemnity cover
in place at all times.
Today's trustees need protection against the risks and costs associated
with regulation and reputation as well as the risks of legal liability
and trustees' exposure does not cease when they retire - their post-retirement
situation may make them particularly vulnerable.
In some instances, extensions to existing D&O policies have
been given to cover trustee liabilities but this practice is not
recommended. It is preferable to have a policy specifically designed
to respond to the needs of trustees and other individuals involved
in the management of pensions. This is highlighted by the potential
conflicts of interest which commonly exist when a trustee is also
a director of the sponsoring employer company with duties to the
company and its shareholders. As a trustee, however, there is an
overriding duty owed to the scheme beneficiaries which is paramount.
To be of value, it is important to ensure that any insurance policy
provides comprehensive insurance protection with cover at corporate
and personal level for all the parties involved in the management
of pension schemes.
It is particularly important to ensure that the insurance policy
provides for severability of cover for the individual interests
so that even fraud by one of the insureds does not invalidate the
cover for the other innocent insureds. In the event of a problem
arising, individual trustees should be satisfied that the insurance
policy will pay for their interests to be separately represented
if appropriate and that they will not be overridden by the interests
of the other parties covered by the policy.
Cover for fines and penalties must not be paid for by the pension
fund as this would be in breach of Section 31 of the Pensions Act
1995.
It is important also to verify whether the insurance will still
respond where there is an indemnity, either from the scheme assets
or from the employer. It is possible for insurance to cover the
net loss to the pension scheme arising out of a wrongful act, even
where the trustees are exonerated.
Cover for Retired Trustees
As previously stated, trustees' exposure does not cease when they
retire and their position is especially vulnerable if there are
missing beneficiaries or other contingent liabilities - particularly
when the scheme has no assets and the company no longer exists.
Accordingly, it is important to check that the position of retired
trustees is properly protected.
The best solution is for retired trustees to have independent cover
in the event that the scheme ceases to be insured. They can then
rest assured that they have cover personal to them, irrespective
of what the employer or trustees have done (or not done) about insurance
since they retired.
The period of cover for retired trustees should be checked as well
as whether a separate premium is payable and, if so, by whom (opdu
provides 12 year cover).
Legal Costs
Trustees and pension schemes can also incur significant legal expense
in going to court to seek directions or if they are joined by another
party who is seeking the court's directions. Reported examples include
the High Court decision in the National Bus privatisation case with
costs exceeding £1 million; the South West Trains case in
which the pension fund paid £1.4 million in legal costs and
the National Grid litigation in which the legal costs were thought
likely to be in excess of £3 million.
In order for insurance cover to be as valuable as possible, opdu
has developed optional cover for legal expenses incurred in those
situations described above, which do not necessarily involve a legal
liability upon the trustees.
The introduction of pre-emptive costs orders for beneficiaries
to challenge trustees has fuelled the position. Even the preliminary
stage of deciding whether costs should be borne by the pension fund
can be expensive. Moreover, there are an increasing number of instances
in which trustees find themselves going to court to ask for directions
or being joined by another who is seeking the court's directions.
In these circumstances, it is usual for the scheme to be ordered
to meet the costs.
Conclusion
The purchase of a properly drafted insurance policy that incorporates
cover for the risks identified above is a cost-effective means of
protecting the assets of the pension scheme, the sponsoring employer,
individual trustees and administrators from losses resulting from
claims, be they well-founded or not.
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