Conflicts of Interest – Is your pension scheme at risk?
In our last article we looked at two of the key areas a pension’s trustee needs to consider in order to provide effective governance for their scheme.
These were having a trustee business plan and a pension scheme risk register. The full article can be found here.
In this article we look at conflicts of interest.
What are conflicts of risk and why are they so important to your pension scheme?
TPR describes a conflict of interest as follows:
‘A conflict of interest may arise when a fiduciary (which includes a trustee) is required to take a decision where:
1. the fiduciary is obliged to act in the best interests of his beneficiary;
and
2. at the same time he has or may have either
1. a separate personal interest or
2. another fiduciary duty owed to a different beneficiary in relation to that
decision, giving rise to a possible conflict with his first fiduciary duty, which
needs to be properly addressed.
Such a conflict can inhibit open discussions or result in decisions, actions or inactions that are not in the best interests of beneficiaries. This, in turn, may result in the trustees acting improperly, lead to a perception that the trustees have acted improperly, and may invalidate a decision or transaction.’
An example is where you are a director of the sponsoring company and also a Trustee of the pension scheme. As the director of the company you are bound to act in good faith and in the best interests of the company. And as the pension trustee your obligations are to act in the best interest of the scheme and its members, requiring impartially.
That’s not to say you can’t be both. There are benefits to having the skills and knowledge of a director from the sponsoring employer on the Trustee Board. We sit on Boards where this happens, but it’s important to be aware there are potential risks of conflict as a consequence.
It’s about being aware of what the Pensions Regulator considers to be conflicts of interest and making sure they are managed properly particularly where the interests of the company and the pension fund diverge.
By identifying those areas, it enables you to take action – to exclude yourself from certain trustee responsibilities, decision making or voting as examples.
The Institute of Chartered Accountants produced a technical paper for FDs involved in pension schemes and the below table is from this paper. It identifies the most common conflicts of interest with possible options to deal with them. The full paper can be read here
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Trustee Board with conflict of interest
Conflict of interest
Negotiations for funding scheme deficits
Disputes between a scheme member and the employer
Calculation of technical provisions
Deciding whether to report to the regulator
Instructions to withhold information from Regulator which FD believes to be a breach of law or where there is a difference of opinion as to the significance of the breach.
Funding and investment strategy
Proposals to modify member’s benefits
Applications for clearance
Scheme mergers
Possible options
Trustees appoint an independent trustee*
FD abstains from discussions/decisions
If any disputes arise, consideration of Alternative Dispute Resolution processes
Declaration of conflict
Trustees appoint an independent trustee Trustees and/or employer obtain independent advice
Declaration of conflict
Seek input of independent trustee
Seek input of independent professional Conflicted trustee abstains from decision making process
See Guidance notes for regulatory code of practice No. 1 issued by the Pensions Regulator, which can be found here
Refer to code of practice No.1 – is it ‘serious’? What are consequences of not reporting?
Try to persuade the employer as to legal requirements.
Can independent legal advice be taken for employer?
Is there legal protection if choose to disclose? Seek independent legal advice which considers personal position.
Resign as trustee with advice.
Trustees appoint an independent trustee Trustees and/or employer obtain independent advice
Conflicted trustee abstains from decision making process (because there will be negotiations taking place and the conflict will be insurmountable)
Declaration of conflict
Conflicted trustee abstains from decision making process
Seek input of independent trustee
Seek input of independent professional
Declaration of conflict
Conflicted trustee abstains from decision making process (because there will be negotiations taking place and the conflict will be insurmountable)
Seek input of independent trustee
Seek input of independent professional
Declaration of conflict
Conflicted trustee abstains from decision making process
Trustees appoint an independent trustee Trustees and/or employer obtain independent advice
*An actuary or other professional advisor may be a suitable alternative to appointing an independent trustee for some schemes
What do you, as a Pension Trustee, need to do?
If you don’t have one, you will need to create a Conflicts Policy. This will set out your approach to dealing with any conflicts. Having to create a policy whilst you are in the middle of a potential conflict is not to be recommended.
You need to make sure you have identified the conflicts of interest and the actions you need to put in place should they arise. You will need a register of interests which records all actual or potential conflicts and review this at each meeting.
When you appoint new trustees, advisers and service providers, they will need to let you know of any possible conflicts of interest and sign a declaration to this effect.
A process for declarations when trustees, advisers and service providers are appointed, including ongoing declarations by advisers and service providers as soon as they arise and declarations at the start of trustee and sub-committee meetings. You will need to make sure you have an on-going process to make sure that you are monitoring and managing the conflicts.
You can read the full guidance from the TPR here
And their toolkit which contains a module on Conflicts of Interest can be found here
Even as a professional trustee there is the risk of conflict of interest. After all we are being paid by someone to provide our service and therefore at risk of being ‘persuaded’ to someone else’s position as a consequence. However, it’s all about having a plan in place before conflicts becomes an issue and managing this when a conflict arises.
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