Insurance is playing an ever increasingly important role, reports Jonathan Bull

Trustees have an increasingly difficult job to do. The Pensions Act 2004 increased the legislative burden on trustees giving the Regulator wide ranging powers if schemes are not being managed appropriately and various new codes of practice have also been issued recently.

The issue of protecting trustees from liabilities has also become particularly topical following the various headlines reporting the liability of trustees, including the cases involving the incorrect authorisation of unsecured loans to sponsoring employers. The Pensions Ombudsman's Office provides members with an easily accessible forum to pursue any disputes. Last year, in the ES Group Pension Scheme determination, the Pensions Ombuds-man found several breaches and the trustees were personally liable to pay in excess of £500,000.

As can be seen, therefore, the responsibilities of a trustee are onerous which is also borne out by claims experience which demon-strates 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. 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 pensions' legislation. 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, an exoneration or indemnity from the fund cannot operate for any breach of trust relating to investments and it is also prohibited for the scheme to indemnify trustees for civil fines
and penalties. It should also be appreciated that an indemnity from the employer would be of no value upon an insolvency when the trustees are still having to manage the scheme.

Exoneration clauses are also subject to several other limitations including not affording protection from claims involving third parties and they will always be construed restrictively by the courts. 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. In today's environment, trustees do not usually wish to "hide" behind exoneration clauses when facing such claims.

Wider protection: insurance
In these circumstances, insurance is playing an increasingly important role in protecting trustees and pension scheme assets. It provides an external resource of protection and should stand in front of such indemnity and exoneration clauses. 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, however, 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 (D&O) policy of insurance as the cover will not be tailored to meet the specialised circumstances relating to pensions, and potentially there will be competing calls on the policy.

Furthermore, D&O policies will often contain an exclusion for any acts or omissions while acting as a trustee or administrator of the scheme.

Claims
The value of insurance cover is, nevertheless, best demonstrated when it comes to claims which can affect even the best managed schemes. There is a continuing increase in the notification of claims. OPDU's own claims experience has seen issues which have involved individual claims sums of up to £20m to date.

Insurance is available as an external resource of protection and 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.

Jonathan Bull is executive director of OPDU

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