Lucinda Hunn advocates the belt and braces approach of pension trustee liability insurance.

In recent years the duties and obligations placed on the UK trustees of pension funds, be they directors of a sponsoring employer company, or employees appointed by the members, have grown under a raft of new legislation. This started with the Pensions Act of 1995 that was brought in following the Maxwell scandal, with a further duty of care imposed by the Trustee Act 2000. Other legislation that may need to be considered by trustees includes that relating to age, sex, disability and religious discrimination.

The Pensions Act 2004 introduced legislation which covered areas such as scheme funding and winding up procedure regulations, put in place the Pension Protection Fund, empowered a new Pensions Regulator (replacing the Occupational Pensions Regulatory Authority), and imposed new requirements on trustees.

The Act sets out the basis of the requirement for trustee knowledge and understanding, which is a code of practice published by the Pensions Regulator. Trustees are required to be conversant with their own scheme documents, and to have knowledge and understanding of trusts and pension law and of the principles of funding and investment. Compliance with this code will be taken into account by the Pensions Ombudsman or a court in the event of a complaint or claim. If this is taken in context with the new requirement that one third of a scheme's trustees should be nominated and selected by members (rising to half from 2009), acting as a trustee is not a matter to be taken lightly. Such plans have been put in place to avoid the conflicts that may arise between the duties of directors of the company and trustees.

While a director's foremost duty is to the company, a trustee's duty is to the members of the scheme. Conflicts can arise when, for example, the company enters a period of financial difficulty. A trustee is responsible for ensuring that contributions to the fund are both collected and deposited on time, in accordance with the trust deeds, while a director may be more concerned about the solvency of the company. There have been cases where monies are paid to the fund, and then loaned back to the company to keep it afloat. In the case of insolvency, the scheme would likely be under-funded, and the members would be likely to have a case against the trustees for not acting in their interests.

Trustees have a number of fiduciary duties and statutory responsibilities for which they are personally liable. Trustees' liabilities are unlimited (despite the fact that most trustees are unpaid) and are not subject to the statute of limitations, thus going with them to the grave. This, coupled with a generally more litigious society and the increasingly high profile of pensions in the media, increases the wide-reaching and onerous exposures of trustees.

<B>Traditional protection</B>

Trustees have traditionally relied on the protection available to them from the following sources.

- Section 61 of the Trustees Act of 1925 allows a court to excuse a trustee who has been in breach of trust, as long as they have acted 'honestly and reasonably and ought fairly to be excused'. This protection, however, relies on a court's opinion, which is subjective.

- Exoneration and indemnity clauses are commonly written into trust deeds. Exoneration clauses offer an absorption of loss by the employer company or fund, while indemnity clauses offer the payment of the loss on behalf of the trustee. Both excuse liability arising out of a breach of fiduciary or other duty, provided it is innocent (but will not cover deliberate breaches or fraud). However, use of such clauses means that either the sponsoring employer or the fund suffers a loss. Ability to absorb this relies heavily on the continued financial strength of the sponsoring employer or the plan, which is something that can no longer always be taken for granted. Further, such clauses need to be drafted to cover a broad range of eventualities.

Where authority is delegated to a third party, a claim may be pursued against the service provider. However, claims are subject to a statute of limitation of six years and may be time barred. A breach of trust has no such limitation and trustees may find themselves liable for the mistakes of such third party service providers.

- Pension trustee liability insurance is seen as offering a belt and braces approach, providing cover not only for the personal liability of the trustees, but also balance sheet protection for the fund or sponsoring employer where they have exonerated or indemnified the trustee, or where a claim is brought against the company or fund.

<B>Trustee insurance</B>

Typically, a pension trustee liability policy should provide cover for the following:

- Individuals cover for past, present and future trustees, including their spouses, heirs and their estate (liability goes to the grave), and cover for employees, to include the director and officers of a sponsoring employer and employees undertaking administration duties relating to the fund, such as the HR director, or the pensions manager.

- Entities the sponsoring employer and its subsidiaries, and the pension scheme/plan/fund. A corporate trustee company could be either a company established by the sponsoring employer to act as trustee, or a third party corporate trustee company. It should be noted that professional trustees have a higher duty of care under the Pensions Act 2000, and should carry their own professional liability cover. It may be that the policy would not extend to cover such professional trustees.

The policy would provide cover where a claim is brought alleging a wrongful act in areas such as breaches of trust, breaches of duty, breaches of a statutory provision, negligence, errors and omissions, misstatements and misleading statements, and maladministration.

Some policies also provide cover for legal expenses incurred in respect of fact finding investigations, where no wrongful act has been alleged. Most policies will also provide cover for the civil fines and penalties imposed by regulatory bodies, providing that the premium for this cover is not paid out of the scheme assets. This can be overcome by the sponsoring employer paying the premium, or by this element of cover being provided as an extension, with a separate premium attaching to it.

Loss covered by the policy will include defence costs, awards, judgements and settlements. However, the policy is not there to act as a financial guarantee to the fund. It will pay the defence costs relating to a claim for a benefit, but will not pay the actual benefit as this is still the responsibility of the fund.

<B>Claims, what claims?</B>

Claims against trustees may allege the following.

- Breach of trust or breach of fiduciary duty is the most common source of litigation, which mainly comes from scheme members and beneficiaries. Matters are likely to relate to failure to pay the right pension to the right person, or the loss or of trust assets.

- Breach of statutory duty usually coupled with claims for breach of trust brought by beneficiaries.

- Contractual claims actions brought by those with whom the trustees contract.

- Tort a breach of duty of care owned in tort for negligence. Such claims can be brought by third parties who are not beneficiaries or in any contractual relationship with the trustees

The most common claims against trustees are those brought by a dissatisfied member of a scheme or beneficiary. The cases referred to the Pensions Ombudsman are most commonly from members. Others are from employers, trustees and managers.

The most frequent matters reported to the Pensions Ombudsman relate to:

- transfers where members believe that they have suffered a loss as a result of an incorrect transfer of membership from one scheme or arrangement to another

- discretionary decisions, such as death benefit, where relatives may feel that the trustees have not exercised their direction properly

- ill health cases - members may not always understand why an ill health pension is not paid, despite an employee being dismissed as they are not well enough to do their job

- winding up - when a scheme is wound up there may be a deficit in the funding, and in the case of an insolvent employer the member's benefit will be reduced. Conversely, where there is a surplus, trustees can decide how it is used and could, for example, increase the benefits for only one class of beneficiary. Others may feel that this is unfair and may make a claim against the trustees on that basis

- calculation of benefits, which includes basic calculation errors or an allegation that promises of certain levels of benefits have not been kept. Claims may be made where the beneficiary has made financial commitments based on the calculations provided, that can no longer be honoured.

Delegation of duties to specialists, including investment managers, does not remove responsibility from the trustees. Even the most unfounded claim will need to be defended, resulting in significant legal costs.

<B>Dispelling the myths</B>

Pension trustee liability policies are not compulsory, and the take-up is surprisingly low. This may partly be due to some of these misconceptions:

Myth 1: The company has directors' and officers' liability insurance, which will protect the directors who are also trustees. A D&O policy will usually exclude claims relating to pensions matters and therefore will not provide any protection, or at best will provide cover for indirect claims only.

Myth 2: High premiums. Cost is not as prohibitive as is supposed. Obviously premiums are directly linked to exposures, but a pension trustee liability policy may cost as little as £1,000 for a £1m limit of indemnity for a scheme with assets of £10m. The premium may be paid by the employer company on the trustees' behalf or from the fund, so long as the trust deed allows this.

Myth 3: It will never pay out. Claims are on the increase, with 15% of all notified circumstances becoming actual claims that incur costs under a policy. With the Pensions Regulator taking a more proactive stance than previous regulatory bodies, investigations into pension funds are on the increase, which may result in costs being incurred by the trustees even if they have done nothing wrong.

Myth 4: 'We have a defined contribution scheme, not a defined benefit scheme and therefore the risk lies with the member not with us'. In defined contribution schemes the members are responsible for selecting from a choice of funds. In practice the majority of these will pick the default fund, and it is possible that claims will subsequently be made against the trustees for a failure to provide enough choice, or advice in selecting the funds.

In summary, while some cover is offered to both directors who are trustees, and nominated trustees, neither an exoneration clause, nor the indemnification provided by the company or the fund offers adequate protection against the broad range of claims that may affect the trustees.

Pension trustee liability insurance provides vital protection to trustees where other sources cannot be relied on to cover their personal assets. The policy also serves to provide balance sheet protection to the employer company or fund, where they have indemnified the individual trustees.