Conflicts of Risk – Is your pension scheme at risk?

Jul 9, 2019

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

i.    a separate personal interest or
ii.   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.’


It’s what we call the maiden aunt test. Can you explain what you did to your aunt and for her not to be disappointed in your behaviour?

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 impartiality. This could mean, for example, you have information about the financial health of your company which you are obliged to reveal to the board of trustees. But at the same time, you are bound by confidentiality from the company.

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 and we sit on Boards where this happens.  But there are potential risks of conflict and the consequences are that you could be personally liable for a breach which causes the scheme to suffer a financial loss.

You also need to be 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.

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.


1 An actuary or other professional advisor may be a suitable alternative to appointing an independent trustee for some schemes

2 https://www.thepensionsregulator.gov.uk/en/document-library/codes-of-practice/code-1-reporting-breaches-of-the-law


What do you, as a Pension Trustee, need to do?

The Pensions Regulator Guidance sets out the key principles which govern sound conflict management and governance. The key principles are:

•    Understanding the importance of conflicts of interest;
•    Identifying conflicts of interest;
•    Management or avoidance of conflicts;
•    Managing adviser conflicts; and
•    Conflicts of interest policy.

Conflicts Policy

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, what the criteria which a conflict would have to meet in order to need active management and the actions you need to put in place should they arise. And then if a conflict of interest does arise, then you need to keep records of the steps taken to manage it.

Training

All trustees should be made aware of, given training to comply with and sign any such policy.

Register of conflicts of interest

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

Process for managing conflict

And you will need to make sure you have an on-going process to make sure that you are monitoring and managing the conflicts. 

In addition to your Conflicts policy you might also consider:

Including express provisions in both the pension scheme rules and the articles of association for the company allowing certain types of conflict. For example, the articles of association could specify that an officer of the company will not automatically be in breach of their fiduciary duties by disclosing appropriate confidential information to the board of trustees for the scheme.

Have observers rather than trustees – this means having senior officers of the company attending as observers to provide advice and comment without breaching confidentiality. You still get the benefit of that advice and any useful insights that you might miss if they didn’t attend meetings.

Take legal advice particularly if the conflict of interest could have serious repercussions for the scheme.
Have an independent Chair of the Trustees, such as CBC, where there will be no conflict of interest issues.

You can read the full guidance from the TPR here

https://www.thepensionsregulator.gov.uk/en/document-library/regulatory-guidance/conflicts-of-interest

And their toolkit which contains a module on Conflicts of Interest can be found here

Conflicts of interests are inevitable when acting as a trustee. However, it’s all about having a plan in place before this becomes an issue and managing this when a conflict arises.


If you’d like to review your Conflicts of interest policy, or need help in setting it up, we’d be happy to have a chat with you. 

Sources:
https://www.icaew.com/-/media/corporate/files/technical/technical-releases/legal-and-regulatory/tech-06-07-managing-the-conflicts-where-fds-act-as-a-trustee-of-the-pension-fund.ashx 

https://www.aig.co.uk/content/dam/aig/emea/united-kingdom/documents/Financial-lines/PrivateEdge/ptl/thought-leadership-ptl-conflicts-of-interest.pdf

http://www.mondaq.com/uk/x/631526/retirement+superannuation+plans+pensions+schemes/Conflicts+of+interest+and+pension+scheme+trustees+Pensions+in+30+Podcasts+Episode+29


If you’d like to review your Conflicts of interest policy, or need help in setting it up, we’d be happy to have a chat with you. 

Do you meet the standards of the Pension Regulator

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