I have recently been instructed by a trustee client to assist them in the merger of two pension schemes of the same employer. Great news of course especially for my bank balance, but it immediately started me thinking about possible conflicts of interest. Stay with me here and I’ll explain why.
A little unusually, the two schemes had the majority of the trustees in common. Now most Conflicts guidance, including that of the Pension Regulator tend to concentrate on the possible conflicts that can arise when a senior executive of the Employer also sits as a trustee and that’s fine and dandy but this was a bit different. So what were the trustees to do? Could they effectively and fairly negotiate with themselves when dealing with relative funding positions, future benefits in the merged scheme and the like?
Now the answer may indeed be an obvious one (and I’ll give my advice below) but it got me thinking about basic principles since managing possible conflict is key to good scheme governance and we know how keen the tPR is on this – and indeed, rightly so. But I am often asked how can we identify whether we have a conflict at all?
Here’s the tPR’s definition “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 a separate personal interest or another fiduciary duty owed to a different beneficiary in relation to that decision giving rise to possible conflict with his first fiduciary duty which needs to be possibly addressed.”
My guidance to clients generally goes like this: If it smells like 5 day old unrefrigerated haddock and/or you feel uncomfortable about it, then it’s probably a conflict situation and you need to manage it.You can either step back from the decision, you can appoint an independent professional trustee or you can resign completely.
In the case of my clients mentioned above, I advised a distinct unpleasant odour may arise. They are very sensible trustees – I am sure they will agree!!
Jennie advises large multi-employer schemes as well as smaller single employer arrangements and has wide experience of both Defined Contribution and Defined Benefit schemes. Jennie qualified in 1986 originally as a criminal prosecutor. She sits as a Magistrate in her local justice area and is an Approved Chairman and Deputy Chair of the Bench Training and Development Committee. Jennie was formerly Legal Director of the Occupational Pensions Regulatory Authority. When her busy practice allows, Jennie likes to indulge her passion for travelling. To consult Jennie on any corporate Pensions matter, please call her on +44 (0)20 7749 2700 or send her an email by clicking below:
“You can either step back from the decision, you can appoint an independent professional trustee or you can resign completely.”
I hadn’t considered the PT option for the resolution of conflicts. Maybe I’m a bit dim and inexperienced but to me this is an extremely good point which needs more promotion- especially by PTs!
It can be very difficult indeed to get trustees of schemes with the same sponsoring employer to engage on the full range of issues that need to be addressed. From an actuarial viewpoint the main issues tend to be:
Different buy-out funding levels
Different TP funding levels
Different balance between protected PPF liabilities and the excess above this
Different maturity levels
Different levels of employer covenant due to group structure
Different levels of investment risk
The actuarial certificate under GN16 is actually an extremely weak test and is only permissive and it is not enough to get a certificate, look at buy-out funding levels and say that’s alright then.
My view is you need different trustees, firms of legal advisers and actuaries on each side. Sooner or later one of these will go horribly wrong and the trustees will be sued.
And thats before even looking at the legal issues!
Very good point Brian and most helpful. You are of course entirely correct!!
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