Jonathan Bull answers the common questions trustees ask when looking into trustee liability insurance and provides a brief guide to insurance protection

Why do we need insurance when we have an indemnity and an exoneration clause to protect us against claims?
An indemnity may be given by the scheme or the sponsoring employer company and many trustees will have the benefit of exoneration clauses within the trust deed and rules excluding them from liability. 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 moreover, 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. Pension trustee liability insurance, however, will normally provide cover for the trustees, pension scheme and sponsoring employer. Insurance provides an external source of protection and should stand in front of such indemnity and exoneration clauses. In today’s environment, trustees do not usually wish to ‘hide’ behind exoneration clauses when facing valid claims from pension scheme members.

We have been told that we do not need trustee liability insurance as we are covered under the company’s Directors & Officers policy, is that correct?
The answer depends on the policy wording and terms of cover. However, Directors & Officers (D&O) policies will often contain an exclusion for any acts or omissions while acting as a trustee or administrator of the pension scheme. Generally, in any event, it is not recommended that reliance be placed upon a 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 which are outside the control of the trustees.

Are we covered for past actions that were taken before the date that we take out insurance?
Trustee liability insurance operates on a ‘claims made’ basis which means that there is potentially cover for claims made against the insured during the policy period irrespective of when the event giving rise to the claim occurred. Therefore, this is another reason to consider taking out insurance sooner rather than later to give protection for mistakes that might have already occurred in the past. However, this will be usually subject to not previously having had insurance and being unaware of a circumstance likely to give rise to a claim when purchasing insurance.

What is the position when a trustee retires – are they still covered?
A trustee’s personal exposure does not cease when they retire and their post retirement situation may make them particularly vulnerable. Problems in pensions often take a considerable time after the event to materialise. It is important, therefore, to check that the position of retired trustees and pension managers is properly protected. The solution is for these individuals to have the guarantee of cover in the event that the scheme ceases to be insured. They can then rest assured that they have cover personal to them, irrespective of what the employer or trustees have done, or not done, about insurance since they retired. It is again important to check the extent of cover provided in this respect as policies do vary (the OPDU Elite provides lifetime cover for retired trustees and other nominated individuals from the date of expiry of the main policy of insurance thus giving valuable peace of mind). However, if the main policy of insurance is renewed each year then the cover for retired trustees should remain in place.

Have claims been made against trustees?
OPDU’s own claims experience has seen issues which have involved individual claims sums of up to £20 million to date. One common feature is, as one would anticipate, the importance of the accuracy of data and we encourage trustees therefore to ensure that regular data healthchecks are undertaken. Other issues which have given rise to problems and potential liabilities include: incorrect formulas used for calculating benefits; interpretation of Trust Deeds; overpayment of benefits; misapplication of scheme rules; seeking court directions; early retirement and ill-health disputes; rectification proceedings, accounting irregularities; DC choices of investment funds; pension sharing orders; general administration errors; TUPE issues; misrepresentations by trustees; transfer values; incorrect quotations; discrepancies between scheme documentation and administration practice; delays in transfer and payments of benefit assets; and PPF levy issues.

Trustee liability insurance: A brief guide
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 when 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.

Insurance protection
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, as noted above, 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 circumstances relating to pensions and potentially there will be competing calls on the policy.

Retired trustees
A trustee’s personal exposure does not cease when they retire and their post retirement situation may make them particularly vulnerable. The solution is for retired trustees to have the guarantee of cover in the event that the scheme ceases to be insured. They can then rest assured that they have cover personal to them, irrespective of what the employer or trustees have done, or not done, about insurance since they retired. It is again important to check the extent of cover provided in this respect as policies do vary (as noted above, OPDU Elite Policy provides lifetime cover for retired trustees at the date of expiry of the main policy of insurance thus giving valuable peace of mind).

What should be covered?
The following is a guide to the main headings of cover which can be included:

• Errors and omissions
• Damages, judgments, settlements
• Regulatory civil fines and penalties
• Ombudsman awards
• Defence costs
• Full severability of cover
• Individual representation
• Maladministration
• Public relation expenses
• Extradition proceedings/
bail bond costs
• Prosecution costs
• Employer indemnities
• Exonerated losses
• Litigation costs
• Retirement cover – lifetime
• Costs regarding investigations by regulatory authorities
• Mediation and arbitration
• Court application costs
• Third party provider pursuit costs
• Emergency costs

Court applications
Trustees and pension schemes can also incur significant legal expense in going to court to seek directions or if they are joined by another party who is seeking the court’s directions. Insurance can be obtained to cover these expenses which do not necessarily involve a legal liability upon the trustees but the scheme will usually be responsible for the legal expenses of all the parties involved. There have been several high profile cases involving costs in excess of £1 million which have had to be met from pension scheme funds. (OPDU Elite provides an extension to reimburse such costs – it is important to note that this type of legal expense will not usually fall within the scope of ‘defence costs’ as defined in many insurance policies).

Claims
The value of insurance cover is probably best demonstrated when it comes to claims which can affect even the best managed schemes. Regrettably, there has been a continual increase in claim notifications which demonstrates that errors can occur even in the best managed schemes particularly in the increasingly dominant environment of defined contribution schemes.

In particular we are seeing an increase in matters relating to investment issues. As noted above, it is not possible for a scheme’s rules to excuse a trustee from personal liability in respect of the discharge of their investment duties. Importantly, investment issues for pension schemes have become much more complex and diverse. Classes of assets have widened and investment strategies have become more intricate with trustees making decisions relating to matters such as hedges, swaps and buy-ins. These factors have increased the potential for claims.

In addition, the conversion from defined benefit schemes to defined contribution schemes has also continued. This has generally meant potentially lower benefits under new schemes which has also given rise to closer scrutiny from members and trade unions with more issues arising for trustees to deal with as a result.

With this continued growth in defined contribution (DC) schemes, it is important to recognise that the trustees of such schemes face different legal risks and exposures from those of defined benefit schemes. DC trustees have ultimate responsibility for the accuracy of statements, market valuations and increasingly important, the selection and monitoring of investment vehicles offered. These factors increase the risk for claims occurring which has been borne out by claims experience

Wind up
Separate discontinuance and ‘run off’ policies of insurance can be purchased to protect trustees once a scheme has wound up. Cover can be provided to protect trustees against loss for liability or defence costs arising from breaches of trust whilst the scheme was ongoing. Another relevant consideration is that there may be missing or overlooked beneficiaries who surface when all the assets of the scheme have been distributed.

Cost
The cost of trustee liability insurance will naturally vary according to the size of the scheme but it is also dependent on several other factors. However, the cost starts at a few thousand pounds for a small scheme and an approximate indication of cost should be able to be obtained easily for any size of scheme without having to complete a full application.

Conclusion
By taking out insurance, trustees can be confident that they have protection against the liabilities that might arise in performing their duties while also giving members comfort that their interests are being looked after properly in preserving the fund assets which is particularly important today when deficits are common.

Written by Jonathan Bull, executive director, OPDU Limited

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