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The opdu
Report - Issue 17, November 2004 Trustee Liability The current trend is for greater emphasis to be placed on risk in relation to occupational pension funds including strategic, operational, financial and regulatory risks. These are all issues for which trustees have ultimate responsibility. The Pensions Bill also includes a requirement for all scheme trustees to have “knowledge and understanding” across the full range of their responsibilities The potential personal legal liabilities of trustees and administrators of occupational pension schemes are, therefore, 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. This is evidenced by the number of claims against trustees and employers which has increased dramatically in recent years. The position is likely to be further exacerbated with the increasing number of scheme closures and wind-ups. 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. Who should be protected All those individuals involved in the administration of an occupational pension scheme should be covered by the insurance policy. Although there may be technical difficulties over the legal persona of the pension fund, it is sensible to verify that costs or liabilities, which fall to be paid out of the scheme's assets, can form claims on the insurance policy. The insurance policy should include protection for:
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. 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. What should be covered
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 (12 year cover is available). 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, optional cover has now been developed 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. 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 are excluding 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. Jonathan Bull
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