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The opdu Report - Issue 23, November 2007 Direct claims against directors of a corporate trustee in their personal capacity are rare. Normally directors would only have fiduciary duties to the trustee and not to the scheme members. For a claim against the directors to succeed, the scheme members would normally need to sue the corporate trustee successfully for breach of duty. The trustee could then bring a claim against the trustee directors - but this rarely happens. Of course a director could be liable to the member where he knowingly assisted in a breach of trust - (quite right too). Whatever the risk, the stakes are high. Where there is a successful claim the amounts involved will be large. Individuals can face bankruptcy as a result. Given this risk, most trustee directors want to ensure that they are properly protected. This protection takes a number of different forms: exoneration clauses, indemnities and insurance. Precisely what protection is available for each scheme will vary between schemes and will depend what the rules say. Most, however, have a mixture (or indeed all of) the three types. These are all covered by new provisions in the Companies Act 2006 which apply from 1 October 2007 and which place restrictions on the types of protections which can be given to directors. Directors should take note as they could loose their current protection if they fall foul of the new requirements. Exoneration provisions Exonerations are the best form of protection for trustees and their directors. If the act complained of falls within the exoneration provisions, the person getting the protection (usually the trustee and its directors) will simply not be liable for the act complained of. Trustee directors will be pleased to hear that the Companies Act 2006 does not change the previous restrictions, and no changes will need to be made to the exoneration protections contained in most pension scheme rules. Indemnities Indemnities differ from exoneration provisions as the trustee or director will remain liable for the act, but the person indemnifying him will ensure that he is not out of pocket as a result. Indemnities often come from the participating employers or the pension scheme funds. Indemnities are only as good as the person giving the indemnity. If the employer, for example, does not have the funds the indemnity will be worthless. For this reason, there is often a secondary indemnity from the pension scheme. Pensions legislation has limited what trustees can be indemnified for from the pension fund – for example they cannot cover fines or civil penalties from the Pensions Regulator. Company legislation has added further restrictions, but the precise scope of these will depend upon when the indemnity was given;
Trustee directors should note that the restrictions on indemnities given to associated employers are only a problem if the trustee company is owned by one of the employers in the group participating in the pension scheme. If the trustee is owned by someone else, for example the trustee directors themselves, any indemnity given by the employer will fall outside the indemnity restrictions set out in the Companies Acts. Possible problems The precise restrictions on indemnities depend upon when the indemnity was given. For many schemes the trust documentation pre-dates 2004. This is good news as long as nothing changes. This means no new directors and no replacement of the trust deed and rules. The problem is that this does not happen in practice. Directors want to resign or they leave the company. The trust rules will need to be updated to take into account legislative and benefit changes. So what happens if a new director is appointed after 1 October 2007? Well the short answer is that no one knows. The concern is that the indemnity protection for the new director will be seen as a new indemnity and therefore subject to the Companies Act 2006 restrictions. If this is correct then unless the indemnity falls within the pensions exemption it will not be valid. Ultimately it is for a court to decide whether it is a new indemnity or not, but the prevailing mood favours current best practice (ie as set out in the Companies Act 2006). A judge may therefore look for arguments to ensure that the new law applies. Similar arguments apply when new trust rules are executed. For directors who are concerned to protect their position, the safest course of action must be to ensure that any indemnity in their favour meets the restrictions. This is a simple amendment to make and could be included when other amendments are being made. What can directors do? If the trustee does not want to amend its indemnity wording in the rules, they could instead transfer ownership of the trustee so that it is not associated with any of the employers giving it an indemnity. This could be achieved by transferring the shares to some or all of the trustee directors. However, even if ownership is transferred, it is quite possible that an indemnity from scheme assets will fall within the restrictions on the basis that it is an indemnity from the corporate trustee (as owner of the pension scheme assets) to the directors. The only way out of this is to ensure that the indemnity falls within the pension scheme indemnity exemption. This must be the safest course of action. Insurance The final form of protection for many trustees is insurance against claims. Trustees covered by opdu (or other insurance) will be pleased to note that the Companies Act 2006 specifically allows for this type of protection. However, this type of insurance can only be paid for out of the scheme assets if there is power in the trust rules to do so. Nicola Bumpus opdu insurance cover avoids having to rely on exoneration and indemnity clauses. |
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