The issue of protecting trustees from liabilities has become particularly topical following the various headlines reporting the liability of trustees including the incorrect authorisation of unsecured loans to sponsoring employers. While such cases will be assessed on their individual facts, insurance is nevertheless playing an increasingly important role in protecting pension funds as evidenced by the recent experience of claims. The view has also been expressed that any scheme in deficit may be under an obligation to consider insurance.
Insurers are seeing a general increase in claims as well as an increase in litigation. These increases stem from the greater potential for mistakes to occur which amount to a breach of trust, statute or maladministration. This is due to the proliferation of legislation and regulation as well the inevitable uncertainties as to how the Pensions Ombudsman and the courts will decide matters.
Trustees and schemes therefore face a multitude of risks and the responsibilities of a trustee are onerous. Pension schemes need to be effectively governed which will also help reduce the possibility of claims. However, history demonstrates that errors can occur even in the best managed schemes particularly in the increasingly dominant environment of defined contribution schemes. Liability for breach of trust is a personal liability and a trustee is liable to both the scheme beneficiaries and to scheme creditors. Professional advice should be sought when appropriate and failure to do so may in itself be held to be a breach of trust. If trustees are uncertain as to how to exercise their powers, they can also apply to the court for directions (see under: Court Applications).The risk is potentially greater after a winding up where there may be missing beneficiaries or other contingent liabilities and no assets. A trustee or trustee director is also potentially at risk of having to pay a civil fine for breach of the Pensions Act 1995. Fines for individuals range up to £5,000 and for corporate trustees £50,000
Limited Protection: Exoneration & Indemnity clauses
Many trustees will have the benefit of clauses within the trust deed and rules exonerating them from liability and in many instances, an indemnity may be given by the scheme or the sponsoring employer company. However, it is not always appreciated that such clauses are subject to statutory limits. For example, s.33 of the Pensions Act 1995 prevents an exoneration clause or indemnity from the fund operating for any breach of trust relating to investments and s.256 of the Pensions Act 2004 prevents the scheme from indemnifying trustees for civil fines and penalties. In addition, the problem with relying purely on exoneration and indemnity provisions is that they merely transfer any liability between the trustees, the beneficiaries and the employer. More importantly, why should a pension member, who has a valid claim, be defeated by a legal technicality i.e. an exoneration clause. Insurance, however, is available as an external resource of protection and should stand in front of such indemnity and exoneration clauses.
Wider Insurance Protection
In considering such insurance, the fundamental concern is as to the nature of the insurance cover being offered. Insurance cover can either be based on loss or legal liability. When considering whether or not to take out insurance, trustees will sometimes be advised that insurance merely covering their legal liability does not in practice give them any additional protection. This is because they would in effect only be insuring against the risk of failure for some reason of the exoneration and indemnity clauses.
However, insurance which is based on loss can be more valuable in providing protection for the trustees, employer and ultimately the members. Although the trustees might not be personally liable they will know that the insurance policy should meet claims that arise from negligence. Thus the trustees can give a higher level of comfort to members that their interests are being looked after properly in preserving the fund assets which is particularly important today when deficits are common. The members would have recourse, effectively against the insurer, if a loss resulted from negligence.
The purchase of a properly drafted and comprehensive insurance policy can be a cost-effective means of protecting members benefits, individual trustees, the sponsoring employer, pension managers and internal administrators from losses resulting from claims, be they well-founded or not.
If the decision is taken to adopt insurance, it is important 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. Accordingly, it is not recommended that reliance be placed upon a Directors & Officers policy of insurance as the cover will not be tailored to meet the specialised requirements when dealing with pensions and potentially there will be competing calls on the policy.
To be of value, it is important to ensure that any insurance policy provides effective insurance protection with cover at corporate and personal level for all the parties involved in the management of the pension scheme. Accordingly, the sponsoring company should also have the benefit of cover which should include cover for any indemnities that might have been given thus helping to protect the company’s balance sheet.
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 scheme, it is sensible to verify that costs or liabilities, which fail to be paid out of the scheme's assets, can form claims on the insurance policy. The following should be included:
· Trustees
· Corporate Trustees
· Directors of Corporate Trustees
· The Pension Scheme
· Sponsoring Employers
· Internal Advisers
· Internal Administrators
· Internal Dispute Managers
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. Some policies do not afford cover for separate representation although there may be clauses providing for severability of facts and knowledge.
What should be covered
· Errors and omissions
· Employer indemnities
· Regulatory civil fines and penalties
· Exonerated losses
· Ombudsman awards
· Litigation costs
· Defence costs
· Retirement cover – 12 years