UK: Human Capital (Pensions) Alert - Regulator Publishes Draft Guidance On Trustee Conflicts Of Interest, March 2008

Last Updated: 16 April 2008
Article by Jay Doraisamy

Background

It is inevitable that a trustee body comprising both employer and member representatives will sooner or later have to deal with the tricky issue of conflicts of interest. A member-trustee will have an interest in trustee decisions over and above that of a trustee who is not a member. Likewise, a trustee drawn from the senior staff of the sponsoring employer will have an interest in furthering the success of the employer as a company, which may be difficult to reconcile with his fiduciary duties as a trustee.

The fundamental duty of a trustee is to act in the best interests of the scheme beneficiaries, and a trustee must not put him or herself in a position where other competing interests could have an adverse impact on that fundamental duty. In contrast, the duties of a company director are owed to the company of which he is a director. Where a trustee is also a director of the sponsoring employer, there will be times when these two basic principles have the potential to clash, and at that point a conflict of interest problem will arise.

It has long been recognised that a basic understanding of the potential for conflicts and how best to resolve them is essential. However, with the advent of the new scheme funding regime and the moral hazard provisions introduced by the Pensions Act 2004, the potential for conflicting interests as between trustee and employer has never been greater.

Regulator Guidance

Conflicts of interest are now a "serious concern" for the Pensions Regulator too, and it has recently issued for consultation draft trustee guidance on how to identify, monitor and manage conflicts of interest in the pensions context.

Whilst the proposed guidance does not contain anything new, it does give trustees some useful pointers on how to identify and deal with both personal and so-called "situation" conflicts. These are conflicts caused by a "situation" eg where the trustees and the employer are engaged in funding negotiations and a companynominated trustee finds himself suddenly trying to negotiate on both sides of a discussion.

The guidance picks out five high level principles, which include understanding the importance of conflicts of interest, how to evaluate, manage or avoid conflicts, and how to manage adviser conflicts. It acknowledges that in particularly acute or pervasive conflict situations, the only option may be for the affected trustee or trustees to resign, although the Regulator warns that even this approach has "potential issues" and should be discussed with a lawyer. However, the general tenor of the guidance is that in the majority of cases, conflicts can be managed, and various suggestions are given as to how to do that, which include establishing a sub-committee to deal with a potential conflict situation eg a corporate transaction or scheme funding negotiations, withdrawing from the decision-making process, appointing an independent trustee, and making an application to surrender the trustees' discretion to the court. The following further points for trustees can be distilled from the draft guidance:

  • Adopt a written conflicts policy which is adapted to your scheme and review it at least annually
  • Declare any conflicts on appointment and at regular intervals thereafter and record in a register of conflicts
  • Think ahead to identify any potential "flashpoints" which may crop up during the year eg the next round of scheme funding negotiations
  • Be aware of how a particular decision could be perceived eg by the members, whether or not it was influenced by an actual or potential conflict
  • Consider the role of the Chair of Trustees carefully – both in terms of overseeing the management of conflicts, but also check whether the Chair is himself in a conflict situation eg where the Chair is a senior company employee
  • Likewise, consider the role of the pensions manager, who is normally employed by the company but will have reporting lines to other parties.

However, the draft guidance does little more than skirt around the issue of how to deal with the complex subject of "confidentiality" conflicts. These types of conflict arise when a trustee owes a duty to disclose information to the trustees on the one hand, but he also owes a duty of confidentiality in relation to sensitive information to another party (usually the sponsoring employer) on the other. This is most likely intentional on the Regulator's part, given the complexity of this area of law and the difficulty of providing 'one-size-fits-all' guidance. What the draft guidance does say is that trustees in this situation will need to take independent legal advice in order to find an effective solution to the problem, which may include entering into a confidentiality agreement to facilitate the sharing of sensitive information without the concern that it will become public.

Nor does the guidance deal with the duty which will fall on trustees who are also company directors to avoid conflicts of interest under section 175 of the Companies Act 2006 when it comes into force in October of this year. This is yet another complex area, and, as the Regulator says, is beyond the scope of the guidance and trustees likely to be affected by the legislation should discuss it with their legal adviser.

Whilst the Regulator is muted in its praise of companyrelated trustees, saying merely that there are "some benefits" to having senior company employees as trustees, nevertheless such people have long been regarded as a valuable addition to the trustee board of many schemes, precisely because of the wealth of experience and knowledge of the sponsoring employer's business which they bring with them. The challenge, therefore, is for such trustee boards to find safe passage through the various conflicts with which they may be faced. In this respect the Regulator's guidance will be helpful, not least because it sets out a 'best practice' approach for trustees to adapt to their own schemes. In any event, the Regulator says it expects a "marked improvement" in the governance of conflicts once the guidance is fully in force, which is surely a hint that it may move to a less "voluntary" approach to conflicts if the marked improvement fails to materialise.

The consultation paper, Conflicts of Interest, is available to download at www.thepensionsregulator.gov.uk/pdf/ ConflictsOfInterestConsultation.pdf and the consultation period closes on 30 May 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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