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The opdu Report - Issue 19, November 2005 The Pensions Act 2004 is intended to simplify the operation of occupational pension schemes while at the same time increasing the protection for members. However, the Act, which substantively came into force in April this year, has significantly increased the potential liabilities of pension trustees and company directors and officers. It will necessitate trustees reviewing their existing practices and implementing new procedures to ensure compliance. Wide-ranging proactive powers have also been given to the new Pensions Regulator which has replaced OPRA. Trustees knowledge and understanding The Act imposes a duty upon trustees and directors of trustee companies to be conversant with their own scheme documents and to have "knowledge and understanding" of funding and investment principles. In addition, trustees and trustee directors must also have knowledge and understanding of the law relating to pensions and trusts. The Regulator is issuing various Codes of Practice which will not have the force of law but will be admissible as evidence and taken into account by any court, tribunal, the Pensions Ombudsman or the Regulator when deciding whether trustees have acted properly. It is likely, therefore, that trustees will have to successfully demonstrate their reasoning for failure to adhere to a specific code. Codes of Practice are being issued to give practical guidance on the levels of
knowledge, training, experience and qualifications that trustees will be required to
attain. Trustees will have to determine their level of knowledge and
understanding that is appropriate for their own scheme and this will vary
according to the individual nature of each scheme. Trustees serving on Investment The European Pensions Directive has also had a bearing upon the investment of assets within the Pensions Act 2004 and requires an investment function to be performed in relation to the "prudent person rule". This will apply to both trustees and fund managers. The Pensions Act builds upon the framework set out in the Directive and replaces the existing prescriptive MFR with a scheme-specific approach. The above new provisions are intended to ensure that trustees acquire sufficient
knowledge to make informed decisions and to be able to critically evaluate
professional advice received. Nevertheless, it is of concern that good candidates
for trusteeship will be deterred from standing which is contrary to the
Government’s stated aims. However, this may not happen if sponsoring
employers provide trustees with adequate time and training to perform their role
effectively. In addition, many trustees and sponsoring employers now appreciate Insurance A combination of various forms of protection can be utilised but comprehensive insurance can be regarded as the ultimate safety net. A statutory indemnity might be applicable but only if the trustee has acted honestly and reasonably and, in the opinion of the Court, ought to be excused for any breach of trust. This will be decided, however, after the event. In addition, many trustees will have the benefit of clauses within the trust deed
and rules exonerating them from liability and in many instances, an indemnity
may be given by the scheme or the sponsoring employer company. However, 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 may 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 In any event, 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. Also the problem with relying purely on exoneration and indemnity provisions is that they merely transfer any liability between the trustees, the beneficiaries and the employer. Insurance, however, is available as an external resource of protection. There have also been recent changes to the Companies Act 1985 which potentially have a bearing upon the indemnification of company directors. Although the intention of the legislation was to relax the previous restrictions on such indemnities being given, some commentators have suggested that, in relation to pension schemes, the new provisions might affect the validity of such indemnities in the form that they are currently granted. It is recommended that trustees consult with their advisors and insurers on these issues. 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. Therefore, all parties should be entitled equally to the protection of the insurance so that it is not in the interest of any party to create a liability on the trustees purely to get the benefit of the insurance. This makes the cover much more valuable than pure legal liability insurance for the trustees only. Cover for Retired Trustees Trustees’ exposure does not cease when they retire and their post retirement situation may make them particularly vulnerable. Accordingly, it is important to check that the position of retired trustees is properly protected. The 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 (opdu provides 12 year cover at no extra cost) as well as whether a separate premium is payable and, if so, by whom. Insurance Rates Until recently, market rates for all classes of insurance were rising dramatically and the Professional and other Errors & Omissions liability sector particularly suffered. Various factors contributed to this situation including: significant claims payments; poor investment returns preventing insurers from subsiding underwriting losses from investment income; and a reduction in the number of insurance companies. In addition, some insurers reduced the limits of liability that they were prepared to underwrite while at the same time increasing the deductible (excess) to be borne by the insured. Underwriters have also become increasingly concerned about scheme deficits and some insurers have excluded cover for sponsoring employers as a result. Risk Management Trustees have a duty to monitor the management and administration of their scheme to make sure those providing services to them carry out their responsibilities properly. Trustees should therefore ensure that objectives and procedures that are appropriate to their scheme are identified and implemented. Managing risk also gives trustees the opportunity to embrace best practice and review external standards. Conclusion The purchase of a properly drafted and comprehensive insurance policy can be a
cost-effective means of protecting the assets of the pension scheme, the
sponsoring employer, individual trustees and internal administrators from losses
resulting from claims, be they well-founded or not. Furthermore, effective risk
management procedures can play a significant role in minimising liabilities which
should be favourably taken into consideration by their insurers. Also potential
candidates for trusteeship should not be deterred from playing such a vital
function if the above measures are adopted.
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