How we have helped Pension Trustee Boards
Sometimes it’s easier to explain our work by sharing a case study.
This month we’d like to show you how we helped one client with a conflicts of interest issue.
Conflicts of interest
This is where the trustee may wear two or more hats. As a trustee, you have to act in the best interests of the Pension scheme, but there may be also some personal interest or a separate duty owed to a different beneficiary or entity.
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. These two roles may be in conflict with each other.
In the case of this client, the Pension Board, for a pension with a significant deficit, was made up of four trustees, two from the company and two from the members and they were all employed by the same manufacturing company.
The conflict of interest
The conflicts of interest were highlighted because the senior management were involved in discussions with the major shareholder about the potential sale of their holding and the subsequent sale of the Company. With two members of the management team also being trustees, it was clear that there was a potential conflict in that the pension scheme is a major creditor of the company because of the deficit. Equally, the two member trustees had the potential conflict about their jobs v their pension.
How we helped
As the professional trustee on the Board, we identified potential conflicts of interests which were that the company and the Trustees objectives were not the same. That’s not to say that the company wanted take actions that would damage the pension scheme, but the company had to deal and priortise all debtors secured and unsecured, including the pension scheme.
As such, some debtors would be treated in a preferential way to others. Clearly being a company director involved in these decisions and a pension trustee at the same time meant there was a conflict.
As key players in the company, and after lengthy discussion, it was agreed that the company directors would not participate in any part of the Trustee meetings around the potential sale. And, as importantly, they would not have access to any trustee minutes regarding this issue including the assessment of the potential purchasers’ covenant strength.
The remaining Trustees had to consider whether they had the necessary skills and access to the right advice. They also needed to consider the implications for the trustees and the scheme in order that they could continue to fulfill their fiduciary responsibilities.
Conflicts of interest protocol developed
Having established these we then, with the assistance of the scheme legal advisers, developed a conflicts of interest protocol which gave guidance to trustees about what action they should take if they felt they either were or could become conflicted.
It also identified the actions they should take in those situations, such as stepping out of the meeting for a particular agenda item, remaining but not participating or in extreme cases, the need to stand down.
Lessons learned – what should you do?
1. Looking at your own Trustee Board, the declaration of any potential or actual conflicts of interest should always the first topic on the trustees’ meeting agenda ensuring the importance of this issue is reinforced at each trustee meeting.
2. Having a professional trustee on the Board does not affect the conflicts which the other trustees may have, but does help by providing a sounding board to them.
3. By keeping the conflicts protocol under regular review there is no chance that this becomes a governance issue that is ignored. Conflicts, actual and potential, will always remain but by actively managing these, the Trustees are clear about what these are, and how they can be best managed. If you would like more information on how to manage conflicts of risk, this post may help