Protecting Trustees and Pension Schemes
Jonathan Bull advises trustees on how to avoid claims being made against them and ways in which to protect themselves if claims occur
The value of insurance cover is probably best demonstrated when it comes to claims which can affect even the best managed schemes. No trustee wants to be in the position of facing a claim by a scheme member, the employer or even the scheme itself. Having an awareness of the common pitfalls is one of the most effective ways of avoiding just such an eventuality.
Insurers are seeing a general increase in the notification of claims as well as an increase in litigation. OPDU's own claims experience has seen issues which have involved individual claims sums of up to £20 million to date. One common feature is, as one would anticipate, the importance of the accuracy of data and we encourage trustees therefore to ensure that regular data healthchecks are carried out. This issue has also been brought to the fore more recently with The Pension Regulator's tougher approach on poor record-keeping.
The following areas, for example, are currently giving rise to problems:
A continuing theme, both in past and current years, has been calculation errors. In terms of over-payments or over-quotations of benefits, a member is only entitled to compensation if he/she can demonstrate that there has been reliance on the error. Claims by members that they have relied on incorrect quotations to their detriment are common. The member will often seek to argue that he/she would not, for example, have taken early retirement were it not for the over-quotation and that he/she should be paid the benefits as quoted on the incorrect statement. There is often a small additional claim for distress and inconvenience.
In the case of over-payments, it may not be practical or possible for the trustee to recoup the over-paid benefits from the member. This can result in the scheme suffering a loss which they may look to the trustee or administrator to pay.
In terms of under-payments, the trustee is under an obligation to correct the error both retrospectively and going forward. Whilst this might not necessarily give rise to a claim against the trustees, the errors themselves can still be extremely time-consuming to correct. This is particularly the case where the errors go back many years (15 years is not unusual in our experience). Where the errors originate from the administrator, there may be a meritorious claim against the administrator for losses suffered. The employer and/or the trustees should consider whether or not they wish to include third party service provider cover within their policy of insurance to protect themselves against such an eventuality.
Another notification related to the equalisation of benefits which is likely to be resolved shortly by way of court determination. A number of members had complained that the sponsoring employer had not implemented this decision correctly and were seeking to recover about £15 million in benefits from the scheme. The investigation costs that have been incurred by the trustee's lawyers in negotiating with the employer and the members have been considerable.
Perhaps unsurprisingly in the current economic climate, there have been a number of notifications involving an allegation of "investment loss" against trustees.
Whereas in previous years, a delay of a couple of weeks by the trustees and/or administrator in transferring funds out of a scheme may not have given a member any particular cause for concern, those same delays against a backdrop of dramatic falls in share prices can have far more serious consequences.
Similarly, potential claims have arisen out of an allegation that the trustees failed to "de-risk" the scheme quickly enough (by reducing exposure to equity and property investments) following the onset of the financial downturn in 2007, and claims by members that they were not made aware of the risks attaching to some of the scheme's investments which were, in effect, "mis-sold".
When making changes to scheme benefits, the effect of a failure to correctly amend documentation can have serious consequences.
By way of example, in a case where the contractual documentation between the member and the scheme was amended, but the Trust Deed was not, the intended equalisation of benefits to age 65 was entirely ineffective. This meant that the scheme was obliged to pay benefits to members from age 60. The error did not come to light for several years with the effect that the scheme unexpectedly found itself facing an additional liability to its members in excess of £1 million.
In another notification involving the implementation of equalised benefits, the drafting of trust documentation was unclear and gave rise to two conflicting interpretations. In one interpretation, the scheme would have faced an additional liability of approximately £15 million to its members. Although there was no question in this instance of any wrongdoing by the trustee, the scheme had to incur significant legal costs negotiating with its members and entering into a court approved agreement. This case clearly illustrates the significant cost liabilities that a trustee is exposed to, even in circumstances where no actual claim has been intimated. (OPDU Elite provides an extension to reimburse such costs - it is important to note that this type of legal expense would not usually fall within the scope of "defence costs" as defined in many insurance policies.)
Early retirement requests have frequently given rise to complaints by members that the trustees have exercised their discretion improperly. However, recent claims experience suggests that, where the trustees consistently approve such requests, members are more likely to believe that the 'request' is in fact a mere formality. This problem has reared its head more frequently recently as harsh economic conditions (and large-scale redundancies) have meant that trustees have been more likely to refuse early retirement requests.
Although the Trust Deed may make it absolutely clear that such requests are within the trustee's discretion, that does not of course prevent a member from complaining to the trustee using the Internal Dispute Resolution Procedure ("IDRP") and, if that is unsuccessful, to the Pensions Ombudsman. Whatever the merits, the members' complaints can be time-consuming and expensive to defend.
Whilst it is never possible to eliminate the possibility of a claim entirely, the examples above may assist by illustrating some typical areas which are currently giving rise to problems for trustees.
This article first appeared on the Pensions Age website
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