Report - Issue 14, May 2003
Insurance for Trustees and Pension
Today's trustees need protection against the risks and costs associated
with regulation and reputation as well as the risks of legal liability.
Furthermore, trustees' exposure does not cease when they retire
- their post retirement situation may make them particularly vulnerable.
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 is playing an increasingly
important role in protecting pension funds as evidenced by the recent
experience of claims. This form of insurance covers claims made
during the period in which the policy is in place, regardless of
when the incident giving rise to the claim occurred.
To be of value, it is important to ensure that any insurance policy
provides compre-hensive 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.
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
Cover for Retired Trustees
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 (opdu
provides 12 year cover at no additional cost).
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.
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.
In order for insurance cover to be as valuable as possible, opdu
has developed optional cover for legal expenses incurred in those
situations described above, which do not necessarily involve a legal
liability upon the trustees.
It is in the long-term interest of pension schemes and their insurers
for them to be effectively governed so as to reduce the possibility
of claims. An independent risk management review can assist in this
respect by strengthening the benefits of belonging to an occupational
pension scheme at a time when members are becoming better informed,
more critical and more demanding of good value and service. It can
also help to keep the cost of insurance cover down, as it provides
insurers with additional comfort.
The purchase of a properly drafted insurance policy that incorporates
cover for the risks identified above is a cost-effective means of
protecting the assets of the pension scheme, the sponsoring employer
and individual trustees and administrators from losses resulting
from claims, be they well-founded or not.