In our third session, we look at the steps trustees and employers can consider in order to protect themselves from liabilities arising after a pension scheme has been bought out so that trustees can wind up the scheme in the knowledge that all benefits have been secured, and employers are protected from legacy claims relating to the pension scheme.
Transcript
Elizabeth Gane: Right, it is a couple of minutes past eleven so I am going to make a start, just conscious of everybody's time. So first of all welcome everyone, thank you very much for joining us for this the third and final instalment of our scheme sessions webinars. Today's webinar is on protecting the scheme on a risk transfer and I am delighted to be joined today by three experts on the subject, so first of all my partner Chris Stiles who is going to be looking at the legal angles of all of this for us today. Secondly Roisin O'Shea who works in Rothesay's business development team and who has worked on many large full community and other de-risking transactions throughout her career, and finally Richard Myrtle who is joining us from Universal Legal Protection so Richard is a broker specialising in amongst other things pension trustee liability insurance.
So just before I hand over to Chris to kick us off I have just got a couple of points of housekeeping. The session is scheduled to last for an hour. We will be speaking for around 40-45 minutes which will leave around 15 or 20 minutes for questions. If anybody does have any questions as we go along please could you type those into the Q&A function which is a button that you will find at the bottom of your screen and then I will pick up the questions and direct them to our panellists at the end of the presentations.
Today's session will be recorded and we will send out a link after the session and the webinar will also be available on demand on our website and finally just to say that we will circulate contact details of all of our speakers after the session in case you want to follow up directly with anybody if a question occurs to you after we have finished.
So thanks very much everybody and without further ado I will handover to Chris.
Christopher Stiles: Thanks very much Liz and good morning everyone. So we are talking today about how to protect against liabilities that remain after a pension scheme has been wound up and this is something that we are being asked about a lot at the moment because the improvements in funding positions have brought the possibility of buy-out and wind up much closer to a large number of schemes and we are going to go on to talk about the various types of insurance that are available against this risk of unsecured liabilities but before we do that I just want to say a few words to you because it is useful to consider who would otherwise be carrying the risk of a benefit that has not been correctly insured as part of a buy-out.
So I am just going to put a slide on the screen which will take me a moment to do. Hopefully that is now visible. So let us assume that a pension scheme has been wound up. All the known liabilities are brought out with a bulk annuity provider and an unknown liability then comes to light six years later. Maybe it is a beneficiary who was not included in the buy in, I will call him Mr Smith. So who are the possible candidates for paying Mr Smith's pension?
Well the primary responsibility for Mr Smith remains with the trustees. The fact that a scheme has been purportedly wound up does not relieve them of their fiduciary duty that they owe to a genuine beneficiary, if they did not properly discharge it in the winding up. But if the trustee was a corporate trustee Mr Smith has only come to light six years down the line, the corporate trustee has probably has probably been dissolved itself by now, that in itself is not fateful, a dissolved company can always be restored back onto the register but either way it is probably not going to have any assets and so it will not have any way of meeting Mr Smith's claim. And that is not entirely a bad thing because that does at least protect the directors of the corporate trustee against any personal liability by what we call the corporate veil but it certainly does not do much to help Mr Smith.
If we do not have a corporate trustee and the trustees instead were individuals then there is a risk of them having to meet claims out of their personal assets now clearly for the trustees that is unattractive and there are various forms of protection against personal liability for trustees as well as the insurance solutions which we are going to come onto. But if those protections were all to fail we could end up in the worst of all worlds where the trustees' personal assets are exposed and are still not enough to secure Mr Smith his pension so we end up with a situation in which literally nobody is happy.
So let us move on from the trustees and consider the position of the employer and the employer is the person who you might expect to have to make good this liability. If the pension scheme was still ongoing any unfunded deficit would be the employer's responsibility and so why would the same not apply after the scheme has been wound up if an unfunded liability emerges thereafter? Interestingly the system protect employers rather better than it protects trustees in this regard. Once the scheme goes into winding up that triggers a section 75 debt on the employer if the scheme is in deficit at that point and that debt crystallises the employer's obligation to the pension scheme, so once that debt is paid the employer has no further statutory obligation to the pension scheme. If the scheme was fully funded at the point where it went into winding up then the same applies, the fact that no debt was treated as becoming due at that point again discharges the employer from its statutory obligations.
And the same is likely to apply to the contribution rights under the trust deed as well. Obviously this will depend on the way the rules of the scheme in question were drafted but typically once the scheme has been terminated that relieves the employer from its obligation to make any further contributions under the pension scheme rules.
Now in reality of course even if the employer is not under any legal obligation to deal with Mr Smith's pension, in practice it probably is going to end up doing so anyway because the alternatives as we have said are either the embarrassing scenario of a corporate trustee within the group having to go through an insolvency process or trustees' personal assets being potentially exposed and often at the point of winding up employers will commit to the trustees that if this situation emerges they will stand behind any such liability by giving an indemnity in favour of the trustees at the point of winding up and if we have time later we might say a bit more about employer indemnities.
But before moving on we should not rule out a third possibility which is that actually nobody is obliged to fund Mr Smith's pension and the key point here is limitation. Now statutory limitation periods do not normally apply to pension schemes and that's because we're dealing with trust assets and the trustees are still in possession of those trust assets. But once the scheme has been wound up there is no longer any trust property. That analysis arguably changes and claims from former members can become time barred provided that sufficient time has elapsed before they bring the claim, but that topic could be a whole talk in its own right so I will not go into more details on it now and there are other possibilities as well that might let everybody off the hook, so scheme forfeiture rules might come into play or trustees might be discharged from liability under other provisions of statute – I think that is less likely to work but again I will not go into detail on that now.
So the outcome of all this analysis is not a very pretty picture, is it, because we have concluded that one of three things will occur. Either the trustees will have to sell their homes – that is not very likely and it is clearly not acceptable. Second, the employer will have to put its hands in its pockets in order to fund a pension liability for a scheme which it thought had been wound up which is... slightly defeats the object of winding it up, or Mr Smith is going to have to without his pension and Mr Smith incidentally is not the sort of chap who is going to take that lying down. He is going to bring expensive legal claims against everybody.
So let us now consider how insurance can help protect us against that situation. So there are two main types of insurance which are designed for this but there are others and there are some innovative ideas out there which is looking to blend the various types together as well but for the purposes of today I am going to focus on the two main types which are residual risks cover and run-off cover and my co-panellists are going to say more about these, so this is really just by way of introduction. But residual risks cover is usually bought from the same provider as the buy-out of the known liabilities and it is an additional layer of cover which says that if the benefits that have been bought and the buy-out contact are not the right ones the benefits can be adjusted accordingly. So the issue is resolved by the same pension payroll which is being used to cover the known liabilities. There is a lot more to residual risks cover than that clearly and Roisin will expand upon it.
The other option is run-off insurance and this is different, this is a form of liability insurance, so it's not designed as a way of paying pensions through a payroll, it is designed to protect trustees against liability. So a run-off insurer would look to settle Mr Smith's claim and to cover the trustees' costs of defending against him, and Richard is going to say more about the market for this. But the point I wanted to make is that conceptually the two types of insurance are very different, even though the risks which we are trying to cover is the same.
Before I hand over to Roisin and Richard, a final word on the trustees' legal duties and powers in this situation. Is the trustee obliged to buy insurance if it can afford it and if not but it wishes to do so anyway, does it have the power to buy insurance? And I am assuming here that we are talking about the trustee paying for insurance out of scheme assets but of course these issues do not arise if the employer is paying for it separately. So on the trustee duty side there is no legal duty to insure against risks that might not exist. If actually there are no liabilities that have not been secured in the buy-out then all the trustee is going to be doing is handing over trust money to an insurer for an additional layer of cover and it will never see anything in return for that and members and employers will argue, well, that is money that could have been used, you know, could have been repaid to us as a distribution of surplus. But the flip side of that is there is a requirement to secure the actual liabilities correctly so unless trustees are very confident that they have done so and they have not missed anything then insurance is a reasonable way to bridge the gap but it is not mandatory and the reality is of course a bit more complicated. The trustees cannot simply do an incomplete job and rely on insurance to fill the gaps but Roisin and Richard will elaborate on that.
Having established that trustees do not have to buy insurance, do they have the power to buy it if they want to do so anyway? And this will depend on what is written in the scheme rules but commonly there is a power to insure in trust rules even if there is not, if there is an amendment power it may be possible to insert one but because we are talking about trust powers here it is important to remember that these powers can only be used for a proper purpose and there is a key distinction here which is whether the insurance is being bought to protect trustees or whether it being bought to protect the beneficiaries of the pension scheme. Now those interests clearly overlap but there is a difference. If the trustees' reasons for buying insurance is because they had a genuine concern that there could be unknown liabilities out there, so this is a very large pension scheme, it has been in existence for decades, there are many thousands of members, with the best will in the world we cannot rule out the possibility of some liabilities having been missed and we simply want to make sure that there is an asset that will be available to meet those liabilities if they arise in the future. That is likely to be a proper use of the power.
If on the other hand the trustees think that it is not really very likely there will be any future claims, say we are talking about a very small scheme, there has only ever been a hundred members, we know who they all were and we have been in touch with them all, then... but the trustees still want to make sure that they personally are as protected as it is possible to be. That is more questionable and I think we would be looking then to see whether there is a power to insure specifically for the protection of trustees, so it is a fine distinction but an important one to be aware of.
So hopefully that sets the scene for what the potential risks are and the trustees role in doing something to prepare for them and I will now hand over to Roisin and Richard to talk more about the products that they are involved in in their day-to-day working lives. Roisin, I think you are going first with residual risks.
Roisin O'Shea: Thanks Richard. Hi everybody, my name is Roisin, I am part of Rothesay's business development team and as Richard said I am here to just give a little bit more detail on the residual risk option that is available to schemes and trustees that look to buy out. I am also going to share a couple of slides so I will just put these up on screen now... great, hopefully everybody can see those. So first I have got... I just wanted to touch a little bit on where the market is today and what we are seeing and how the landscape may have changed for pension schemes over the course of 2022.
So on the left hand side here I have got a graph that I took from XPS's website which is their XPS DB Funding Watch and it is just showing how they are tracking scheme funding levels and it is just showing how significantly funding levels have increased over the course of 2022. Many more schemes are now in surplus and are ready to consider where... what their endgame is and where they are going to... how they are going to achieve this. Most of this increase is driven by the rise in interest rates over the year and it is important now that schemes consider how they lock in these funding gains and, you know, what they may do with any additional surplus they now have. As I say, schemes from the start of the year to now are much closer to their endgame than they were at the start of the year.
So from the insurers' perspective we expect market demand to continue to rise over the course of the next couple of years as schemes are funding ready to buy out. It is probably also worth noting the amount of buy-ins we are seeing in the market has decreased significantly and the majority of liabilities now transferring across to insurer in the form of buy-outs. When you do a buy-out there are additional things to consider and one of those things is whether you will purchase residual risk cover or not.
So if I move on a little bit to talk about what is residual risk cover? So Richard touched on a couple of these topics in his slides, so residual risk cover is the insurance that the insurer will cover the unknown unknowns, so it is anything that this trustee does not already know about and that could be data errors, missing beneficiaries and things like that. I think as I mentioned before as funding levels improve there is surplus in the scheme and insuring residual risk cover becomes much more of a consideration for trustees that have the money to... to have the money to purchase it. So the residual risk cover can incept at various points in the process if you do go down a buy-out route. It can incept from inception of the BPA policy, it can incept at point of buy-out, so after you have done your initial data cleans, or it could incept at a later point if you have a longer buy-in period it could incept at the point of buy-out a few years into the future. This is all stuff that the trustee and the scheme should consider before they approach the market because it will determine when the insurer carries out their due diligence and how they carry out their due diligence.
So insurers often have a minimum liability size in which they will offer residual risk cover for, it is quite a heavy lift on the insurers' side to carry out all the due diligence that is associated with residual risk cover and therefore often there is a minimum size for which they will offer it. This varies by insurer, typically Rothesay does not offer residual risk cover to schemes with liabilities under £500 million. There are exceptions to this and we have done it for smaller schemes but as a kind of typical kind of liability cut-off that is probably where you should think about Rothesay.
As I mentioned before, insurers undertake a detailed due diligence process and good preparation by the scheme and their trustees is key to a smooth due diligence process and the overall transaction process. Therefore we do suggest that if residual risk cover is something you think you might want for your scheme, it is definitely worth thinking about and considering sooner rather than later. Schemes that kind of think about adding it on once they have approached the market or they have, you know, they are in the market, it is not, it is often not the best process that it could be.
The other thing to note is that there are usually exclusions from the residual risk cover so these could be an insurer's standard exclusions or these could be specific scheme exclusions that have been identified as part of the residual risk due diligence process. I will go on to talk a bit about the standard... the scheme-specific ones later but standard exclusions from Rothesay's residual risk cover would include things like any risk associated with liability management exercises, any tax related issues and expenses of the trustee, things like that, so missing documents. So we have a kind of standard set of exclusions that usually apply on all residual risk covers that we do.
I am going to talk a little bit about the due diligence process now, so for every transaction that we do we will carry out our standard due diligence process, that is where we kind of look at the admin system and the data that is held and make sure it is in line with the benefits, in line with the data that we have priced. We would also set up a meeting with the administration team of the scheme to understand how the scheme is being run and make sure it is all aligned with what we expected. So for a residual risk trade on top of that we will also do a full legal review of the benefits of the trust deed, the trust documents and the benefit entitlements under the scheme. This is usually carried out by external legal advisers and it is quite an onerous process. I think trustees would have to set aside a considerable amount of time in order to pull together the dataroom that would be required in order to allow insurers to carry out this to the best of their ability.
Missing beneficiaries, so we will have a look at the historical administration of the scheme, in particular kind of bulk exercises of transfers in and transfers out in order to form a view on the risk of missing beneficiaries under the scheme and this would form part of the admin due diligence we do alongside of our standard... alongside our standard due diligence.
The final bit of due diligence that we can do is the legal execution risk. Now this is not always a... this is not always a standard part of our residual risk. Most trustees choose not to insure this risk. We always ask trustees at the outset whether they would like to insure legal execution risk or not, so this is something you should think about before coming to market. So legal execution risk is kind of the risk that a document was not executed properly, so that could be the document required two signatures and only one trustee signed or it was not dated or various small things like that could mean that the document was not executed properly. It is a very... we see it as a very minor risk of claim from the trustees' perspective but if the insurer is asked to take on this risk we will look at every document and we will, you know, we will look to see that every document has been executed correctly. Once we have looked and opened Pandora's Box we cannot close it again and you, the insurer and the trustee will know that these documents have not been executed properly. So our usual advice is to 'do not look and leave it where it is' but if trustees do want to purchase this kind of... this legal execution risk to be part of the residual risk cover then it is worth noting that this... that we will look at every document that has formed part of the dataroom and ensure that it has been executed properly.
The bit that I have not mentioned on here but is probably worth touching on, as we see scheme funding levels increase we are now seeing lots of schemes that have done a series of buy-ins in the past coming for their final transaction in order to complete their buy-out, so wanting to insure the remainder of their pensioners and usually their deferreds and also seeking to get residual risk as part of this transaction. So some insurers are now offering wraparound cover and what this means is that the final insurer who has taken on the remaining liabilities of the scheme will provide residual risk cover on all of the previous buy-ins as well. I am guessing this will be something that continues to arise as schemes kind of come towards their endgame and there has been... buy-ins have been a popular tool in the past to de-risk by trustees. I guess it is just worth noting that, you know, each insurer will have their own view on whether they want to provide wraparound cover or not. Some trustees try to get residual risk on the various parts from the various insurers first and foremost with wraparound as a kind of last resort if they are unable to achieve this. There are lots of additional considerations around wraparound cover and therefore, you know, I do not think it is worth thinking that this will definitely be something that will be offered on every scheme.
If I move on... so once we have completed our data cleanse there is a couple of forms of conclusions that we can make on the various bits and pieces that we have found whether that be in the data or in the legal side of things, so we may know there is something wrong in your benefits spec or the benefit spec does not quite align to how the benefits have been administered. But we may say there is no further cleansing action required here and accept any further risk associated with this issue, so that would mean that any further risk associated with the issue we have identified would fall under our standard residual risk cover and therefore we can kind of put a line under that one.
The next scenario is that we include it as a data cleanse item, so if we have found something that is wrong or does not quite match up then we may ask the scheme and the trustees to kind of correct it as part of the data cleanse once the item is corrected then that would then fall into the residua risk cover going forward.
And the final option is... becomes a scheme-specific exclusion from our residual risk cover, so in some cases there may be issues that the trustee does not wish to correct or cleanse, they are happy to manage, you know, to keep that risk. It might be a very... a risk that might not come up very often so... but the insurer is unwilling to take it on as part of the residual risk cover, therefore we would include it as an exclusion under the cover at that point. So this is the process that we will go through when we are completing our DD. Usually there is a lot of back and forward between the scheme's advisers, particularly the legal advisers working through issues and things that have come up [audio drop-out 00:28:09]... and the pricing actuaries here at Rothesay who will be undertaking the kind of data due diligence. I think that early, you know, early interaction with your own administration schemes will be a key point to making sure that these processes run smoothly as often this is quite a heavy lift for administrators who [audio drop-out 00:28:38]... to allow insurers in to see all the documents and historic kind of member prints and things like that, that they will want to see as part of the due diligence process.
So I have just got one final slide before I handover to Richard. So the key takeaways I think in terms if you are kind of considering residual risk cover as an option for your scheme, decide if you want to purchase this cover before approaching the market, I think I mentioned this earlier, and ask your advisers whether it will be available for your scheme. As I said, not all insurers will offer it at the smaller end and perhaps that whittles down your choice of insurer before you actually get quotations. If it is definitely something that you know you want there might not be, you know, you might not invite every insurer to quote in your process if you know they are not going to offer it to you at your size. I think also if you know before you are approaching the market you are able to kind of start collating your dataroom, making sure all the legal documents are ready and the dataroom is as complete as possible as well as my next point, early involvement of your administration team and kind of talking to them around how insurers will gain access to the information to carry out their due diligence, so whether this needs to be on an onsite visit for a few days from the insurer or whether they can access this information remotely via some kind of remote read-only access from the admin team. I think knowing these points early will definitely help insurers plan how they undertake their due diligence.
And the next point is just decide when you want this cover to incept, you know, are you planning on being in buy-in for a long time, are you planning on going straight to buy-out, do you want all the risk removed at the point of inception under which we usually offer a single premium option as well where we underwrite the data cleanse items, so no further money would be required by the trustee post the data cleanse process. And then once you have decided when you want the cover to incept, how you plan to... how and when you plan to undertake the due diligence. So that could be in the form of a buyer's report which is done by an external independent legal adviser during the quotation process, whether you require the insurer to carry out their own due diligence during exclusivity or whether this is something you would want the insurer to do closer to the point of buy-out. And as I mentioned before, you know, think about execution risk and whether you would... whether you want this risk up front instead of halfway through the process when things might get a little more tricky.
That was all I was planning to cover today. I know residual risk is a wide topic and if I have missed anything please happy to take questions at the end and with that I will hand over to Richard who is now going to talk through an alternative approach to gaining this cover.
Richard Myrtle: Hi, good morning everybody. I am going to talk briefly about pension trustee liability run-off insurance. What is it? It is a liability insurance policy as Christopher said. First and... think of it first and foremost as a defence policy. The defence is for the trustees both past and present, an individual trustee's estate, corporate trustees and, depending on the insurer, professional trustees. The policy pays for the legal costs of defending an allegation of what is termed by the insurers as a wrongful act, in other words, alleged negligence on the part of a trustee or the trustees collectively. If compensation needs to be paid or for example and overlooked beneficiary has to be provided for, the policy will also pay that sum. Whilst Christopher correctly, and Roisin as well, said that it is not... it is a distinct product to residual risks, it is not always an alternative. They can work together even though they are different products, for example trustees often have both types of cover to fall back on as different layers of protection. For example a residual risk policy is unlikely to provide protection for the legal defence costs of a spurious allegation. Also smaller schemes are unlikely to be able to secure [audio drop-out 00:33:51] which Roisin touched on in which case pension trustee liability one off insurance is the trustees' best option.
The run-off insurance policy is for a long period and the premium is all payable upfront, that works. The policy is claims made, that means it has to be enforced when an allegation of a wrongful act is made against the trustees, that is why trustees want a policy in place for as long as possible. No-one can be sure when a claim will be brought but it could be brought many years from now, for example when a member retires and starts drawing their pension. The cost, i.e. the premium, can be paid for as Christopher just touched on, it can be paid for out of scheme assets if the rules allow for that or it can be paid for by the sponsor if there is one.
So what cover is available? At the moment in the market, up to 15 years' cover is currently available, could that duration increase? I do not have a crystal ball so it is difficult to be sure but one or two insurers who used to offer so-called lifetime cover but now will not, I do not think in my opinion that they are going to reintroduce lifetime any time soon. But if I am wrong, would be amongst the first to know and that would be a positive for the market. Very few schemes purchase less than the maximum duration available, in other words 15 years. The insurance market, the liability insurance market is limited as very few insurers want to commit to long-term policies but as the insurance market enters a softer cycle, new insurers may well enter the market especially if it is perceived as not generating the same level of claims as in other lines of business such as professional indemnity insurance or directors and officers insurance in which case premiums may start to come down again as competition grows.
At present the insurance market is what we term hard, that means higher prices and possibly restricted levels of cover. That said, we do not tend to find that price is as important to purchasers as the amount of cover, the scope of cover and the policy duration. There is no such thing as a typical scheme. We tend to recommend around 20% of scheme assets is a good starting point for smaller schemes when assessing an appropriate limited indemnity. For larger schemes the total purchase will be a smaller percentage of scheme assets and that is likely to be driven by market conditions. At present I would say it is possible for the right risk to secure a limit of roughly £25 million under a single policy and that is a lot of cover for most schemes.
So when and how do you seek cover? I would say between 12 and 18 months from the anticipated scheme wind-up date while some trustees and their advisers' approach is much closer to wind-up than that, most want to gain an idea of what a certain level and duration of cover is likely to cost perhaps in order to seek approval or to set a budget. Indications in the form of several alternative options in terms of different indemnity limits, policy durations from all available insurers can be obtained in return for a very basic form being completed, so very light touch. The really good news is that history shows us that the insurers are unlikely to change their terms near to wind-up when they formally quote much if at all unless there have been significant changes to the scheme and that is seldom the case. This allows for budgets to be set and the trustees to decide on the appropriate option for them. We then recommend the preferred insurer is reapproached around three months before wind-up is concluded as an insurer will only offer a quotation for a limited period, usually 30 days but sometimes possibly as long as 60.
The proposal form is not particularly arduous to complete and the supporting documents required for a binding quotation are the obvious ones like final scheme accounts and copies of communications to members, so it is not a heavy touch process. It is important to understand that a run-off policy cannot be incepted i.e. put in force until the scheme has completed wind-up and there is a signed wind-up deed or deed of termination.
Are any schemes very hard to get insurance cover for, for the trustees? Not that many I would say. Arguably for a very large scheme, for example a scheme of billions of pounds of assets, the liability insurance protection we can obtain from the market may be deemed insufficient to make a purchase worthwhile. That said though some very large schemes still want some defence costs cover just in case and the policy providing say £5 million or £10 million for defence costs it is still a valuable weapon to hold. High-profile schemes with known problems, especially problems that are in the public domain and commented negatively on in the media, they may well prove uninsurable. Schemes with known but untraced beneficiaries will not get full overlook beneficiary protection without some restrictions. PPF-plus schemes are more difficult but not necessarily impossible to arrange cover for but generally speaking if the trustees can demonstrates good due diligence during the buy-in and/or buy-out process there is no reason why an insurer or more than one insurer will not be prepared to offer terms of some sort.
So is this type of cover becoming more sought after? Yes, I would say trustees are more aware of its availability in particular where there are professional trustees involved. It personally costs the trustees nothing so it is a no-brainer from their point of view, why would they not seek as much cover or protection for their personal liabilities as possible? There is a perception that plenty of things could come back to bite the trustees notwithstanding their care and attention, for example the risk of some pensioners having been overlooked and therefore not provided for is quite tangible or record systems could have got mixed up or put to one side following mergers and acquisitions.
What about claims? Well we have not had many under the policies we have arranged. I do not know whether other policies which we will have not been involved with have fared better or worse.
To date we have arranged cover for about 140 schemes, and less than 5% of those have to date had to notify a claim or a circumstance it could rise to a claim.
Three examples of claims we have been involved with are summarised in our latest brochure, so my apologies for reading straight from it. The first one "Administration Error": due to an administration error member benefits worth half a million pounds but had been transferred into the scheme had not been included in the buy-out arrangements. "Overlooked Beneficiaries": following a company merger 32 people were transferred into a scheme from a plan originally run by the former employer. These members were overlooked during the buy-out resulting in a claim of over £1 million. "GMP Equalisation": the scheme wound up just after the 2018 Lloyds Bank judgement and it is alleged that GMP equalisation was not applied to all members that had previously transferred out of the scheme.
Is the future likely to see more claims or fewer? I do not know for sure but I would not bet on fewer, we do live in a blame culture where the duty of care by is set pretty high and arguably rightly so. I cannot see why any trustee would want to risk not being insured if insurance is available, even as merely adjusting case purchase.
Finally, what issues crop up most frequently in the insurance arranging process? We often get asked about overlooked beneficiary insurance. Can it be covered up to the full policy limit or can it not be covered at all, for example, because there are residual risks, and the answer is we can normally get what is required, i.e. the full cover, no cover, one or two insurers are fussier about it than others but we can normally satisfy what the purchasers want.
We also get asked often about the premium, if it can be paid over early. That is not easy because the default position is an insurer cannot take a premium until he issues a policy and having said that they will not and cannot issue a policy until the wind up has been concluded, it is difficult to pay a premium over early. There is a way round it which we often get asked to help over so it may be possible depending on the circumstances but it is not impossible to pay the premium over even though the scheme has not yet fully wound up.
Is there cover for professional trustees? Yes, although some insurers will not. One or two insurers do not exclude it. One or two insurers exclude it but you can buy back the exclusion and one or two insurers will not cover it. We are seeing more and more professional trustees involved either as sole or as part of the corporate or as one of several trustees.
For all schemes we do suggest that they try and differentiate themselves where they can. We get accused sometimes of the insurers just applying a standard rate no matter who the scheme is. They do not delve very deeply which is in contrast to what Roisin was saying. I think there is some truth in that, they rate principally on size and surplus and number of members and so forth. They do not look particularly deeply beyond that and if a scheme says to us "look we are really much better than the average", our response is "well help us demonstrate that and we should be able to get you a better price", and by in large we do.
Do the policy wordings we get asked vary in terms of what they will or will not cover? I will say the intention of the policy is to give roughly the same if not the same cover, but they are written in quite different ways. One or two are very full on sectionalised, one or two are quite short and all-risky. So we point out the differences where we can but definitely the [audio drop out 44:40] if not identical but very similar cover regardless of which insurer, and some people prefer heavy duty wording, some people prefer light touch wording.
Can we get a policy wording amended? Yes is the answer. Most of the time, it depends, but the insurers are flexible especially when scheme lawyers points out inconsistencies and policy wordings which does happen. Those are the sorts of things that we come across on a regular basis but I will shut up at this stage and we will see if people want to ask questions or not.
Thank you very much for listening.
Elizabeth: Thank you very much Richard and thank you also to Chris and Roisin for your sections. We have had a couple of questions on the Q&A front. Richard I think these are both for you. So you mentioned while you were speaking that when you were talking about the appropriate level of indemnity cover for schemes, and I think you mentioned that for smaller schemes you would be looking at something like 20% of scheme assets, and the question that has come in is "Can you define smaller schemes please".
Richard: Yes, I would say the vast majority of schemes that we get asked to assist with over insurance are beneath £150 million.
Elizabeth: So in terms of scheme asset size, 20% of scheme assets, we would be looking at if you are sub 150 million scheme that would be an appropriate level?
Richard: So what I said was there is about £25 million worth of cover available in the market at the moment. That comes and goes, that goes up and down. There will be more in the future if the market goes soft blah blah blah. For a scheme bigger than that, 20% is going to equate to a higher limit than frankly I reckon is available, but I did make the point that bigger schemes the 20% rule does not apply, you know, at a certain point it does not apply, and it is moot. All we can show is what other people have done in the past. If people say give us an example of what people have been buyer, we can do that on a spreadsheet.
Elizabeth: Yes, ok thank you. Then a second question for you as well Richard, "so of the claims that you mentioned that you referred to, so you gave some examples of claims that you have seen recently that came into you, were any of these accepted and settled as valid claims?"
Richard: The three I mentioned are all ongoing. There are about four others I did not mention, and the straight answer is I think one or two have been finished now because they were a while ago. I have no bad experience with the insurers on the way they have been handling so far. In other words the acquisition will be they will always wriggle, well yes and no, but at the end of the day the policy says what it says and to be honest because there have not been very many claims it has been less problematic than if for example directors and officers insurance where there are loads of claims all of the time, and I think insurers are more inclined but I do not know about that it is hearsay because I do not do very much, but I would say no real issues to date in terms of, you know, dream on, we are not going to pick that up.
Elizabeth: Yes, ok thank you Richard. And I suppose just to sort of give us an idea and sort of compare and contrast, we have talked about some of you know levels of cover available to the traditional insurance market. Roisin do you have a view and can you share with us a sort of level of costs associated with residual risks cover?
Roisin: Hi yes I am happy to cover that. So we do not really have a cap on liability, so the residual risk cover will cover whatever comes out. I think it is probably a little bit more expensive than one off cover, so I would say as a kind of point of ... it is probably about 1% of liabilities that are included in the transaction across the market. Rothesay's costs, like kind of standard cost is a percent for deferred members and half a percent for pensioners. But it is worth noting that anything that comes out of our due diligence that the trustee has the correct as part of the data cleanse process is not covered by the cover so we would expect, you know if there was any back payments to be paid or member benefits had to be increased, that data cleanse item would be covered by the trustee and then it would fall into the residual risk cover. If they go for a kind of residual risk cover from inception and they ask the insurer to underwrite the data cleanse then we would charge for what we think it would cost to correct for that issue and then whether it was more or less than that that would be our risk to take on. So I guess there is the cost of the standard cover and then there is the cost associated with anything that arises from the due diligence process.
Elizabeth: Thank you Roisin. I have probably got time for one, possibly two more questions. But Chris I am interested in your views, just picking up on something that Roisin mentioned. So one of the things that Roisin was kind of eluding to was just almost be careful what you ask for because you do not want to open a Pandora's box. From a trustee perspective, is it your view that trustees ought to be carrying out a level of due diligence before they approach the market or should they be careful of opening a Pandora's box, if for example they have decided they do not want to go for residual risk cover, what level of due diligence do you think they ought to be carrying out prior to approaching the market?
Christopher: Yes it is a good pointer but the Pandora's box is exactly the right way to look at it I think and is very much the fear among trustees. I think the way I put it is the first law of pensions is if you go looking for trouble you will usually find it because clearly any scheme that has got any level of history or any degree of complexity that most of them do have will have some problems. It is not possible to achieve perfection when it comes to managing a pension scheme from a legal or administrative perspective. I think it very much does depend on what level of protection you are putting in place because what you cannot do is just say "well it does not matter what problems might be out there because the insurers are just going to mop them up anyway". Firstly that is not really consistent with trustee duty which is to try to do things properly, but also Roisin described the due diligence process and all that means is the insurers lawyers will find them when they do due diligence anyway, by which time you are on the back foot as trustee. So I think certainly yes, if you are going for a residual risks transaction it is definitely advantageous for trustees to have done their homework, to have checked any ... if they are on notice of any problems to have investigated them and to have done some preparatory due diligence of their own in order to get their house in order.
If you are not going for a residual risks transaction the same issues apply to an extent with one off cover because you still have to disclose any known issues but I suppose the concern with that is, if the only reason you do not know of any issues is because you have not looked and you are just happy for them to be swept under the carpet, are you discharging your duty as trustees because when you have got an ongoing scheme insolvent employer it does not matter, you can sweep up the problems under the carpet and deal with them when they arise but when you are winding a scheme up that is your one and your final chance to get things right. So I think there is a need to be proportionate, Roisin mentioned an execution risk, that is a really good example of something which we would not necessarily advise trustees to reopen unless they are on notice as to a specific problem, but for big issues like equalisation of benefits between men and women, I think anything like that you do want to have done some work on in advance yes.
Elizabeth: Thank you Richard for that. We have got five minutes left. I think it is probably appropriate for me to just start wrapping up now. So first of all I just wanted to say thank you ever so much again to our speakers. For me if I was taking three key points away from the session today, I think it will be number 1 trustees need to know upfront what it is that they actually want when they go into this process, what level of cover do they think is right for them and right for their scheme. Number 2 it seems to me that preparation is absolutely key to all of this, so you have got to know what you want so that you know what level of due diligence and what level of enquiry you want to go into in the first place before you start approaching the market. And number 3 I think you know talking to the employer upfront about the way that any risks are going to be covered, so you know, are we going to pay for these insurance policies from the scheme, so for example if we are going for run off cover if that is something we would pay for from the scheme, is that something you want the employer to pay for, and actually do we want the employer to sit behind all of this and provide an indemnity as well if the insurance, you know, doubles or cannot pay out for some reason. So it seems to me that preparation and knowing what you want upfront is key to having all of these conversations and to Richard's point, you know, you need to be having conversations with brokers and things sort of 12/18 months at least out of the timeframe for wind up so that you know upfront what you are facing and what you are looking at.
So thank you very much again to all of our speakers. Thank you everybody for joining us and thank you for the questions that we have had and as I said the email with the link to the session will be sent to you all after the session, thank you.
Chair and speakers
- Chair - Elizabeth Gane, Head of Pensions at Gowling WLG
- Speaker - Christopher Stiles, Pensions Partner at Gowling WLG
- Guest speakers - Róisín O'Shea at Rothesay and Richard Myrtle at Universal Legal Protection.
There are three sessions in this series, the first and second are available to view on demand now:
Protecting the scheme in a corporate take over
Protecting the scheme in a distressed employer situation
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