|
OPDU Report 24
- May 2008
The thrust of the new pensions legislation has been to give greater powers to trustees of pension schemes. The Pensions Regulator interprets this to guide trustees towards taking a more independent position with the sponsoring employer and “acting like a bank”. This will mean more negotiations between the trustees and the employer. This briefing looks at the conflict of duty that can arise for the individuals concerned as a result. The briefing seeks to point to the factors that companies and individuals should take into account when deciding “Should the finance director be a pension trustee?” Overview There can be a difficult balance to strike as to whether or not a senior officer of the Company (e.g. a director) should also be on the trustee board of the Company’s pension scheme. Clearly the role of the senior officer may result in a conflict of duty between:
A conflict can arise for more junior employees as well, but in practice this is less likely to be an issue. In addition members of a trustee board may have a conflict as members of the scheme (although there is an express statutory provision allowing such member conflicts). Pension scheme rules often (but not always) contain an express provision allowing conflicts. The articles of association of any corporate trustee company also needs to be checked for any provision allowing for conflicts. However, a Senior Officer who acts in breach of any duty owed to the Company and/or the trustee board would remain personally liable for such a breach. Furthermore, a Senior Officer may perhaps be in breach of a duty to the scheme if he or she does not disclose to the trustee board any material information that he or she knows. It may not be a defence that this information is confidential to the Company. This is often not expressly covered by the scheme rules (or the trustee’s articles of association). The articles of association of a corporate trustee can be amended by the shareholders (often the Company) to make it clear that there is no auto-matic breach of duty in such a case. The scheme trust deed could also be amended to this effect, though this would usually have to be have to be agreed with the trustees and may be more difficult. A perception issue for the individual concerned would remain. How can he or she remain in a trustee meeting while possessing relevant information? Against this has to be balanced the desire to have relatively senior and experienced individuals acting on the trustee board, particularly on issues where there is no conflict (e.g. in implementing an agreed investment strategy). One solution is to have the Senior Officers not take part in any decisions the Company may be making. But in many cases this will be impractical. In our experience, many companies are now arranging for (say) the finance director not to be a trustee. This is because of the increased likelihood of a conflict issue in light of the increased powers of trustees under the pensions legislation and the views of the Pensions Regulator (e.g. in fixing contribution rates etc). It may well be possible to have a senior officer (e.g. the Finance Director) still attend trustee meetings (as an observer, not a trustee) or even (if this is allowed by the scheme rules or the articles of the trustee company – as a technical pensions matter this can be easier for a trustee company) sit on a separate committee in some areas (this may be more difficult in the investment area). If an actual conflict arises, this should be managed by parties – in particular by the Senior Officer in question. Typically this would involve abstaining from the trustee’s decision-making process and not taking part in any negotiations (or being present for the relevant part of meetings). The Senior Officer should also formally declare the potential conflict to the rest of the trustee board. Approaching the trustee board to discuss this issue may well lead them to consider what information flows there should generally be between the trustee and the Company. Broadly, it would be sensible for the Company to:
Level of skills needed by trustees In a defined benefit scheme, the employer is ultimately responsible for the funding. So it helps the Company having individuals on the trustee board who have a high level of commercial skills, knowledge and experience. This is particularly important in the light of:
However, there will be concerns that there will be occasions when a Senior Officer, as an officer or employee of the Company:
The nature of the roles of the Senior Officers within the Company means that this could be an ongoing concern. The conflicts issue Broadly, a conflict of interest or conflict of duty arises when there is a conflict between the interests of the Scheme and the personal interests or other duties of a trustee director. Where a person:
The general rule is that a fiduciary should not put himself in a position where his duty conflicts with his personal interests, or where a duty he owes to one party conflicts with a duty owed to another, without the informed consent of the parties affected or if the relevant constitution allows it. This general rule can be modified by the relevant governing document (here the articles of association of a company trustee and the scheme trust deed and rules). The general rule may (this is less clear, but there are court decisions to support this) also be modified by implication, given the circumstances of the pension scheme. Where a trustee director with such a conflict is involved in a decision by the trustee, the consequences could be:
The following questions need to be considered:
Can a Senior Officer act as a trustee despite the potential conflicts?
It is preferable to check the conflict provisions to clarify that a trustee director:
Pension schemes often include an exoneration clause providing that the trustee is not liable save for a deliberate breach of trust etc. The issue in a conflict situation will often be that the individual Senior Officer would be acting deliberately in the context of non-disclosure and so would probably not be able to take advantage of these provisions. Separate consideration must be given to how a Senior Officer should act in situations where his or her duties to the Company conflict with their duty to exercise their powers for a proper purpose and in the best interests of the Scheme. How should a Senior Officer deal with an actual conflict? An actual conflict of duty would exist if there were a specific transaction or matter affecting the relevant pension in which a Senior Officer were taking an active role on behalf of the Company, or in relation to which the Senior Officer had knowledge of information confidential to the Company. For example, the Company could be considering proposals to change future service pension benefits, or a transaction amounting to a Type A event for Pensions Regulator purposes (this is discussed below). Commonly trust deeds and articles of association allow for decisions to be taken by a majority of directors (e.g. regulation 88 of the 1985 Table A). A majority vote rule is helpful, as it means that the concurrence of a conflicted Senior Officer is not required for a decision to be taken by the trustee board. However, there may be a risk that a majority vote in such circumstances would not be conclusive. A court may be concerned over the degree of influence that the conflicted Senior Officer may have had on the Trustee Board’s deliberations. As well as being a legal issue, this is potentially an issue of whether the Trustee’s decision-making process on a particular issue would be perceived by members as fair and legitimate. Also relevant is the approach of the Pensions Regulator to
conflicts. The Regulator’s Guidance on Clearance Statements (issued
in March 2008) makes recommendations as to how employers should deal
with so-called Type A events. These are events which
may have a material adverse effect on the ability of an employer or
its corporate group to meet its pension In some circumstances, where an actual conflict of duties has not arisen, it should not be necessary for a Senior Officer who is involved in a specific transaction or matter on behalf of the Company to be excluded altogether from discussions in relation to that matter. It may be helpful to have the Senior Officer present at discussions in order to provide the Trustee with general information in relation to the matter. However:
The legal position is not absolutely clear on the position if an actual conflict were to arise, or if arms’-length negotiations with the Company became necessary. However, the safest approach would be:
There are various ways in which a conflicted Senior Officer could be excluded from a particular Trustee Board decision: Option1: Resign and replace All Trustee directors who are conflicted on a specific issue (e.g. a particular transaction in relation to which the Trustee and the Company must negotiate, and where they are involved in the Company’s decision-making) resign and are replaced by new directors not involved in company decision-making on the issue. Comment: Replacement trustee board members would be required in order to
comply with minimum number imposed under scheme rules/ Trustee
articles Option2: Abstain from relevant meetings/votes All conflicted Trustee Board members could absent themselves from meetings at which the issue in question is being discussed, and abstain from voting on the matter. Comment: This is permitted if the scheme rules or articles of the Trustee allows decisions to be taken by majority vote. The number of directors deciding the matter must satisfy the quorum requirements. Option 3: Step aside and delegate matter to sub-committee Decision on specific transaction raising the conflict may be delegated to a sub-committee of the Trustee Board. All conflicted persons would be excluded from the sub-committee and from the Trustee’s decision-making on any negotiations, but continue to participate in other Trustee/Scheme matters. This would be a more formal method of excluding conflicted persons from relevant meetings than 2 above. Comment: Formal delegation to sub-committee needs to be permitted under the scheme rules or Trustee articles of association. Formal delegation is better for managing perception of decision-making process and for creating a paper trail showing the Trustee’s efforts to manage conflicts. Conflicted Trustee Board members would remain potentially liable for the ultimate decision taken by the Trustee. Would not trigger any MNT/MND implications and avoids falling below minimum number of directors imposed by articles. Trustee Board would retain benefit of the current company-appointed trustees’ experience and knowledge on other Scheme matters. Option 4:Individual delegation to fiduciary or alternate director Each conflicted Senior Officer could personally delegate his or her powers and responsibilities in relation to the merger to a fiduciary agent, i.e. an alternate director. The agents would act for them in relation to the specific transaction, but keep all information and the Trustee’s position confid-ential. The conflicted person would continue to participate in other Trustee matters but take no part in decisions on the transaction in question. Comment: Would need to be permitted by scheme rules or Trustee articles and terms of MNT/MND opt-out. Would avoid falling below minimum number of directors imposed by articles. Each individual delegation would need to make clear that the fiduciary agent would not share information with or take instructions from the relevant Trustee. The delegation would also need to ensure that the fiduciary agent is protected against liability to the same extent as the Trustee/Trustee directors under the Scheme rules (e.g. by including a mirror indemnity/limitation of liability). Conflicted person would remain liable for ultimate decision taken by the Trustees. Fiduciary agents potentially liable to the conflicted person for a decision taken which exposes the latter to liability. Should a Senior Officer disclose to the Trustee information confidential to Company? A related point is the likelihood that a Senior Officer, by reason of his or her role at the Company, may become aware of confidential information that is materially relevant to the Trustee Board (e.g. knowledge of the Company’s negotiating position on a particular matter being discussed with the Trustee Board, or of the Company’s possible future intentions). This would put the Senior Officer in a very difficult position.
Clearly, he or she would have a duty to the Company not to disclose
the information without the Company’s consent.1 The decided court decisions in this area are not clear as to whether or not there is in fact a duty owed by a fiduciary (such as a trustee or director) to disclose to the other trustees all relevant information that he or she possesses. On balance we do not think such a duty exists (at least where the trustee/director has not committed any wrongdoing). But this is certainly something that is argued by some lawyers. As mentioned above, the Pensions Regulator has stated in its guidance that it expects trustees who could be involved on both sides of the negotiation over a type A event (e.g. those who are also Senior Officers):
There is also a perception issue. How will it look to outsiders (e.g. the members) if a Senior Officer has remained in a trustee meeting while possessing relevant information?
Some lawyers argue that he or she would still be in breach of a duty of disclosure to the trustee/scheme. We do not agree with this view. However, there is a risk that the Senior Officer would still be in breach of duty to the trustee. Another way of managing this issue would be for the Company to give its express consent to the Senior Officer disclosing any relevant information (including confidential information) to the other members of the trustee board. This would remove the conflict of duty – but obviously has the drawback from the Company’s point of view that it may not want confidential information being provided to the trustee board when this is not at a time of its own choosing. The articles of association of the Company also need to be checked to see if they allow for a director to have a conflicting duty. Conversely, there may be times when the Trustee Board wants the relevant Senior Officer to keep some information confidential from the Company. In practice in the past Senior Officers are often expressly used by Trustee Boards as a conduit for passing the views of the Trustee back to the employers. In that case, no confidentiality issue arises. But there may be other (more extreme) cases where confidentiality becomes an issue. It is also helpful to make it clear that the Senior Officers’ duties as members of a Trustee Board do not require them to disclose to the other directors confidential information, where to do so would put them in breach of a duty to the Company. This could be done by amending the articles of association of a company trustee (if the Trustee is a subsidiary of the Company, the immediate parent company could pass the necessary shareholder resolution). A change to the articles would protect the Senior Officers against a claim that they were personally in breach of their duties by withholding confidential information. To be valid, the amendment would need to be a proper decision under company law. Our view is that the decision to amend would be likely to be a valid one, given that the Company’s motives in so acting would be to help ensure that the Trustee Board includes people of appropriately high calibre and experience. A further issue would be the potential for a claim that the Senior Officer (or trustee company) is, by reason of a Senior Officer’s possession of material confidential information, in breach of its duties to the Scheme beneficiaries. Therefore, a further precaution would be to amend the Scheme trust deed to the same effect. Again, the amendment would need to be a proper decision under trust law. An effective way of managing this perception, and any concerns of the Trustee Board that they may be insufficiently informed, would be to agree with the trustee a protocol for the supply of information. This should be combined with a formal confidentiality agreement between the Company and the Trustee (these are becoming more common). Such agreements give the Company more comfort that any information provided to the Trustee Board on a confidential basis is kept confidential (and also helps listed companies show comp-liance with the Listing Rules). Preferably the individual trustees (or directors of a trustee company) and any advisers should also be asked to sign up to the confidentiality agreement.
David Pollard |
 |
|
|||||||||
|
|||||||||||
