On The Right Track

by Peter Murray

In extracts from a speech which he gave last year at a conference hosted by solicitors Freshfields, Peter Murray, Chief Executive of Railways Pension Trustee Company Ltd, tells a salutary tale that in part lead to Railpen joining OPDU and to the development of OPDU's new Litigation Costs Extension..

The Railway Pensions Trustee Company Limited is the trustee of some 10 different schemes in the railway industry. These schemes have a total membership of some 330,000 and assets of £16 billion. The largest of these, the Railway Pension Scheme which accounts for over 90% of the membership and the assets, is actually sectionalised into around 100 different sections. The trustee is responsible for what amounts to about 100 independent or semi-independent schemes ranging in size from the 1994 Pensioners Section which has 170,000 pensioners and deferred pensioners to some of the active sections which can in extreme cases have as few as one person.

'The trustees therefore have to run an extremely large, extremely complex network of schemes, the scope and opportunity for both errors and disputes is very large and therefore the risks not just to the schemes as a whole but to individual sections of the scheme are very great. Let's remember those risks are shared by the members as well as by the employers.

A Salutary Tale

About two years ago South West Trains reached an agreement with its drivers which involved amongst other things a 50% increase in pensionable pay but for future service only and not past service. For a variety of reasons, which I will not go into, South West Trains failed to ensure that the rules of RPS for the South West Trains Section were changed to reflect the agreement. Ideally this should have been done before the agreement was finally reached but very definitely before the new pay rates came into force. This was not done and on the face of it under the scheme rules the increase was pensionable not only for future service but past service also. After some delay one individual train driver with the tacit support of the trade union ASLEF complained to the Ombudsman that we had not implemented the new pensionable pay.

The Trustee, although it was not a party to the dispute, had to play a very active part in the proceedings in order to ensure all the key issues were clarified so that the trustee could properly administer the new agreements. It became clear very quickly that the only way to do that was to accept liability for everyone's costs including South West Trains' costs, ASLEF's costs and the costs of some other parties.

It all ended reasonably happily as a very wise judge ruled that it was the agreement between the drivers and the company that determined what pensionable pay was and that changing the rules of the section could be done afterwards as a matter of administrative good order. While that was a happy outcome the bill for everybody's legal costs was £1.3 million and that was payable by the fund. The whole thing, remember, was caused by relatively minor administrative slip-ups and just one member writing to the Ombudsman.

So here we have a case where the trustee has been dragged into a dispute to which it was not a party. As a result it has had to pay everybody's costs and impose these not only upon the employers but also 40% upon members, the vast majority of whom have nothing to do with this dispute either.

Now I tell this story, and incidentally I've left large parts of the story out, to illustrate 3 points.

• Schemes are now so complex and the laws are so complex that it is very easy to make a mistake which will have serious consequences.
  
  
• With the Ombudsman easily available and also easy access for people to OPRA, it is very easy for aggrieved members or even opportunist members to take action against trustees which in many cases will finish up in the High Court.
  
  
• There is an increasing tendency by judges to move away from the doctrine that the assets of a pension fund are there only to pay relevant benefits and to see them as some kind of convenient piggy bank from which to pay everybody's legal fees.

Trust deeds typically provide significant protection to trustees through exoneration and indemnification. The costs are then borne by the scheme or employer but that does not mean that the problems are over.

Which really raises the question of whether existing protections are adequate. Since most of the existing protections just protect individual trustees or managers that means that scheme assets are quite vulnerable in this situation. Now if the RPS was one single scheme with £16 billion worth of assets, then self insurance might be an option, but it only covers some of the risks. It would not cover OPRA fines, for example. But in fact RPS consists of nearly 100 individual actuarially independent sections, any one of which could be the subject of a large legal bill. In that situation self insurance is not really an option so the question arose about trustee liability insurance.

The whole point of trustee liability insurance is that it can protect the scheme as well as the trustee. It can provide run off cover to retired trustees and officers. Basically insurance adds external resources while all exoneration and indemnification provisions do is simply shift the liability between the trustees, the beneficiaries and the employers.

So why haven't we taken out insurance before?

Well basically there are two reasons:

The first reason is that before OPDU came into being the products then on the market were really variants of professional indemnity insurance and provided cover in only very limited circumstances which were unlikely to arise very often in practice.

A second reason is that until the 1990's the risks faced by trustees and pension funds from legal action were very small indeed. It was rare for trustees to be sued and they were unlikely to suffer any personal consequences unless there really was personal conscious wrong doing or total recklessness. Things are very different today. Today individuals can launch legal actions via the Ombudsman or OPRA for the cost of a second class stamp. Increasingly assets of funds are being used to finance expensive litigation. And I think things are going to get worse. We've got a completely different situation especially since the 1995 Pensions Act.

Basically the need for insurance is very much greater than it was before. Provided you can get a policy which covers you against the risk which you actually face then our legal advice from Freshfields has been that there certainly is a case in principle for insurance. But that's a big proviso. With the arrival of OPDU, however, things have changed. Not only is the OPDU cover substantially better than previous products but since the arrival of OPDU existing suppliers have been improving their products as well. But can we justify the cost?

So what does it cost?

Well insurance is worthwhile if there is a significant risk of loss, if the policy terms cover that loss adequately and the premium is reasonable. In our view trustee liability insurance is not prohibitively expensive and is cost effective in relation to the significant risks. With the increased competition in the market created by the arrival of OPDU, premiums are becoming much more reasonable. My own view is that the issue is not the cost. The real issue is whether cover is adequate.

The OPDU Policy

So what's so special about our new OPDU policy. Well if we can compare it with a traditional policy we can see there are very, very significant advantages.

• With a traditional policy the trustees may find that even if they have committed no wrong they may still have to finance their own defence in order to clear their names. This becomes a real issue if the trustee has retired from the board perhaps after a disagreement and has perhaps left the employ of the sponsoring company.
  
  
• Many traditional policies hid behind exoneration and indemnification clauses. It is not usually possible to make claims against them. There is not very much point in having an insurance policy if you can never make a claim against it where a loss situation arises. Also exoneration and indemnification clauses merely pass the loss on to the scheme or possibly the employer. That can be a problem, particularly in a shared cost scheme, with small sections and small employers.
  
  
• I have mentioned the prospect of OPRA fines. These cannot be paid from scheme assets but the OPDU policy will cover them. o Many traditional policies protected you only for a few years after you left the trustee board. In the new OPDU policy you are protected for 12 years which should be enough to cover you against most eventualities.
  
  
• Traditional policies of course did not cover internecine disputes like the South West Trains case. The new OPDU policy extension does cover these.
  
  
• One major problem with traditional policies was that once you made a claim, the under-writer was likely to take controlover the legal proceedings. In many cases, where the trustee is seeking clarification from the Courts during a dispute, the underwriter is merely seeking to minimise the size of the claim. This is a very unsatisfactory arrangement indeed. With the new OPDU arrangement you can brief your own lawyer.
  
  
• On a similar note, with traditional polices you had to wait until you were actually sued before you could go to court and be covered. With the new extension, OPDU recognises that it is necessary from time to time for trustees to go to court to obtain clarification or perhaps to sue first in order to enforce judgements against other parties.

As you can see from this brief description the OPDU policy fills in gaps which traditional insurance products have left open. In our view it really is a policy to meet our needs and covers the actual risks to which we are subject.

To summarise, insurance is simply a method of laying off risk. It's a subset of risk management but an important one. Risk and hence liability can be contained through other means but there is a strong case in principle for trustee liability insurance provided you can find the right product.We believe that we have found the right product.

Insurance is not a substitute for prudence and good management. At Railpen we like to think we do take measures to mitigate our risks and that our management is reasonably sound. I have to tell you that after the experience of the last couple of years I am really looking forward to supplementing these measures with a good insurance policy!'