While there are risks associated with trusteeship, there are some straightforward steps trustees can take to protect themselves says Nick Boyes, independent trustee and director of Able Governance
The fact that you’re reading this means that you are probably a trustee who takes the responsibilities of the role seriously – or a pensions professional who recognises the quality of the articles in Engage Investor!
You will, therefore, appreciate the balance of fascination and fear that being a trustee entails. The intellectual stimulation that comes with the responsibility of handling such large sums of money, and the inevitable trepidation that you could be held personally liable if things go wrong.
Time to get spring cleaning!
The start of the year is traditionally a time to make resolutions to do things better in the year to come. I might be a bit late with this, so let’s call it an early Spring clean…
One of the most important facets of being a trustee is the management of risk. This ought to include the risk that you face in your role. Here are a few suggestions for things that you should consider addressing that may help you sleep more easily.
I have often come across schemes where there has been a real reluctance to seek professional advice”
As the governance of pension schemes, both defined benefit and defined contribution, becomes more complex and regulation-driven, it is vital that the trustees get decent professional input.
I have often come across schemes, usually at the more modest end of the spectrum, where there has been a real reluctance to seek professional advice. This is mainly down to cost considerations, but this can lead to real problems down the line which could have been avoided with some timely input from the relevant professional. I still come across schemes where Barber equalisation has not been properly addressed.
Where advisers are in place it is important to ensure that they can be held accountable for their advice. This might seem obvious, but unless there is a valid section 47 letter documenting the appointment of the adviser by the trustees (NB – not the sponsoring company), then there is the potential for problems should the actions of the trustees be challenged. This can be a delicate issue to raise where the advisers have been in place for many years, but these are precisely the relationships that may not have been formally documented.
The exoneration clause should absolve the trustees unless their actions were wilfully negligent, fraudulent or dishonest”
Most Trust Deeds and Rules (TD&Rs) will contain provisions to protect the trustees should things go wrong. The exoneration clause should absolve the trustees unless their actions were wilfully negligent, fraudulent or dishonest, whereas the indemnity clause should provide for the employer or scheme to reimburse the trustees where they are financially liable for actions that are deemed to be improper.
Although near universal, the wording – and effectiveness – of these clauses can vary from scheme to scheme. Ask your (properly appointed) legal adviser to run the rule over the clauses in your own TD&Rs and suggest any necessary alterations. Also, bear in mind that any indemnity is only effective while the employer exists. If the company becomes insolvent, this protection will disappear.
Many trustees are covered by the Directors and Officers insurance cover provided by their employer. Are you confident that this is adequate? It’s worth checking, and comparing to specialist insurance for trustees provided by OPDU. If there is no insurance in place you should question whether the employer fully appreciates the personal financial risk that you face as you grapple with the complexities of governing their scheme.
The experience gained from having dealt with difficult situations can be invaluable”
A more drastic step, but one that deserves consideration, is to incorporate the trustee board. This means that a trustee company is created with the existing individual trustees being appointed as directors. This provides protection to the trustees as they are protected by the ‘corporate veil’. This is definitely worth discussing with your legal adviser.
Finally, you would be surprised if I didn’t mention the merits of appointing an independent trustee. The experience gained from having dealt with difficult situations can be invaluable, as is input as to what ‘reasonable’ and ‘normal’ looks like.
So, whether you would call this call to action a New Year’s resolution or a Spring clean, we can agree that winter is no time to expose yourself!
Nick Boyes is an independent trustee and director of Able Governance