Legal Panel (March 2008) - Keep focused

The panel

CHAIRMAN: Monica Ma, partner, Simmons & Simmons
Ma is a partner in the pensions department of Simmons & Simmons. She has a wide range of pension experience including the design, establishment, revision and winding-up of schemes. Ma also advises trustees and employers on their powers and obligations.

Jeanette Holland, partner, Baker & McKenzie
Holland is a partner in Baker & McKenzie’s pensions department and advises employers and trustees on the full range of issues arising out of the operation of occupational pension schemes. She is a member of the APL’s international committee.

Caroline Legg, solicitor, Sacker & Partners
Legg provides advice to employers and trustees on a wide variety of issues in relation to defined benefit and defined contribution occupational pension schemes, from scheme formation to amending benefits and closure to future accrual. Legg has particular expertise in relation to public sector pensions issues, and is a member of Sacker & Partners’ public sector solutions unit.

Damien Garrould, solicitor, DLA Piper
Garrould is a solicitor in DLA Piper’s Manchester office, having trained and qualified with the firm. Garrould has experience of a variety of pensions legal work, including advising both employers and trustees on compliance with pensions legislation. He also advises on mergers and acquisitions.

Kate Richards, partner, Nabarro
Richards is a partner in the pensions team at Nabarro. She specialises in advising companies and pension trustees on the formation, operation and winding up of pension schemes.

Edwin Mustard, partner, Shepherd Wedderburn
Mustard joined the firm in 1993. He has a wide range of experience in pensions law work, advising employers, trustees and pension providers on occupational and personal pension/stakeholder schemes. He is a full member of the Association of Pension Lawyers.


SIMMONS & SIMMONS partner MONICA MA introduces the background to March’s legal panel.
Conflicts of interest is one of the issues which most concern trustees of occupational pension schemes. Most occupational pension schemes have trustees who are senior executives of the sponsoring employer. Such trustees will frequently therefore find themselves in a position where their duties to their employer and their duties as trustees conflict. Other conflicts of interest may arise where a trustee is a member of the scheme and is asked to consider a decision which could materially affect the level of benefits which he is entitled to receive from the scheme.
In some cases, the existence of a conflict of interest may be acute and too difficult to manage. This may cause trustee discussions to be less open and frank than is desirable and may lead to decisions being made which are not in the best interests of the scheme.
In an attempt to assist trustees in identifying and managing such conflicts of interest, The Pensions Regulator has just published draft guidance on conflicts of interest and is running a consultation on this guidance until May 30.


MA: If the draft guidance is implemented, to what extent are trustees likely to need to alter their current practices in dealing with the issue of conflicts of interest?

HOLLAND: In our experience, some trustees already have in place a register of trustees’ interests and a conflicts of interest policy or protocol. Most of these were developed and implemented following the publication of The Pensions Regulator’s code of practice on internal controls, as part of a scheme’s internal controls procedure, while others pre-date establishment of the regulator. For such schemes, current practices are unlikely to require any significant changes.
However, for schemes that do not already have in place such documents and procedures, it will be necessary to address the recommendations in the guidance. There are also some aspects of the draft guidance that may be new to all schemes, such as the suggestion of including conflicts as a standard agenda item at each trustee meeting or, more fundamentally, the potential role of independent trustees in managing conflicts.

LEGG: It is clear the regulator sees conflicts as a serious concern, the draft guidance stressing the importance of having conflicts of interest arrangements in place.
The guidance builds on existing guidance on conflicts in other TPR publications, such as the code of practice on scheme funding. The extent to which trustees are likely to need to alter their current practices will depend on the nature of the arrangements they currently have in place, and the extent to which those arrangements reflect the detail and spirit of the guidance. However, as the guidance recommends trustees implement a written conflicts policy any informal policies will need to be formalised to meet this new minimum standard.

GARROULD: For many trustees, compliance with The Pensions Regulator’s best practice principles will require a formalisation and documentation of an existing conflicts of interest policy operated in practice. Where there is no documented conflicts policy, trustees will be expected to put one in place.
The regulator’s emphasis is on the requirement for trustees to be accountable in respect of their decisions concerning a conflict of interest. This can be achieved, at least in part, by trustees referring to a documented conflicts policy in order to justify their approach to a conflict of interest.
The draft guidance suggests there will be more rigorous scrutiny by the regulator of how trustees are managing conflicts of interest when important decisions are made.

RICHARDS: Understanding the importance of conflicts should in theory involve no more than trustees are already doing, as it is one aspect of trustee knowledge and understanding, though additional trustee training specifically on conflicts is likely to be required.
However, there will be a greater obligation to put procedures in place, regularly review them, take action to avoid conflicts and keep more comprehensive records than may previously have been maintained. All schemes will have to review their current arrangements and put in place arrangements and documentation which the regulator will expect them to have, such as a conflicts of interest policy, register of conflicts and declaration of interests form.
One area where current practices may have to change is in relation to whether a trustee should withdraw from meetings, discussions and all stages of the decision-making process in relation to which he is conflicted. The regulator makes it clear that attending a meeting and merely abstaining from voting may frequently not suffice.

MUSTARD: The consultation document goes into some detail over the process the regulator considers scheme trustees should go through in managing scheme conflicts – from understanding the importance of conflicts through to adopting a conflicts policy and then evaluation and managing conflicts.
The practice of some large well run schemes will already cover many elements of the Regulator’s suggested approach, but many other schemes will not.
Even in cases where schemes have been actively considering the issue of conflicts, that are at least 20 points on which the regulator would trustees to take action, and it is unlikely schemes would have followed all of these.

MA: The draft guidance introduces five “principles of sound conflict management arrangements”. To what extent do these principles provide clarity for trustees in how to manage conflicts of interest?

HOLLAND: The five principles clearly set out the regulator’s expectations in relation to the management of conflicts of interest.
Helpfully, the draft guidance provides details of the practical steps that should be taken by trustees, such as providing induction training for new trustees on their roles and responsibilities. However, there is a heavy emphasis throughout the draft guidance on the importance of obtaining legal advice when dealing with conflicts of interest. This may mean that trustees decide first to seek legal advice, and hence the specific steps to be taken will await the outcome of that advice.

LEGG: The five principles are helpful in that they contain large amounts of information and case examples which illustrate the regulator’s view on the best practice for identification and management of conflicts. However, the appropriate trustee response will be scheme and fact specific. For this reason, the regulator emphasises throughout the draft guidance (in fact 39 times) that trustees should seek independent legal advice.

GARROULD: What the draft guidance does clarify is that there is no “one-size-fits-all” solution to managing conflicts of interest. The options available to manage the conflict will depend on the particular circumstances of the conflict and the risks that it presents.
Although principle 4 provides some useful guidance for trustees on evaluating whether a conflict needs to be actively managed and possible options for managing the conflict, the draft guidance rightly emphasises the need for trustees to take independent legal advice when deciding how to best manage a conflict of interest. The guidance provides a useful summary of the relevant principles, but trustees will generally require legal advice when faced with a concrete situation.

RICHARDS: The draft guidance makes it clear that managing conflicts is a scheme-specific matter but the general principles give trustees food for thought and may help them focus on the issues they should be considering and the range of solutions which may be available in the context of a given conflict, actual or potential.
The regulator points out that in extreme cases of conflict the only solution may be resignation of the conflicted trustee and the appointment of an independent trustee. Other points it has usefully drawn attention to are the possibility of adopting a conflict management solution as an ongoing, long-term measure or just for the purpose of a particular trustee decision; and the need to consider conflict management where there is no actual conflict but there could be a perceived conflict, e.g. where a decision results in a benefit to an individual trustee.

MUSTARD: The options the regulator suggests are available for trustees to manage conflicts once they have been identified (for example, establishing a sub-committee, appointment of independent trustees) are not particularly novel, as these options have typically been suggested by pension scheme advisers in the context of conflict management, although it is useful for the regulator to list these in comprehensive form.

MA: Principle 2 states trustees should agree and document their policy for identifying, monitoring and managing conflicts while principle 3 states trustees should maintain a register of trustees’ interests. Will these requirements assist trustees in managing conflicts or will they merely place an additional administrative burden on trustees?

HOLLAND: Putting in place a conflicts of interest policy and a register of trustees’ interests is likely to assist trustees in managing conflicts and for this reason, as mentioned above, many trustees have already adopted such documents.
However, the schemes which do not currently have such documents are likely to be smaller, less well-resourced schemes for whom such requirements may well be perceived as an administrative burden. Although the draft guidance recognises that smaller schemes need less detailed policies than larger or more complex schemes, it specifically states that the need for a documented policy applies to all schemes.

LEGG: Documenting a conflicts policy (with a register of interests at its heart) is a key stage in identifying actual and potential conflicts.
Where a conflict is identified, and where the conflict could be “materially detrimental to the conduct or decisions taken by the board of trustees”, the draft guidance suggests that mitigating action must be taken. Advance planning in this way will enable trustees to identify when a potential conflict may become an actual conflict in the context of an upcoming decision. This ensures minimal disruption of trustee business and prevents the suggestion that the conflict has tainted the decision made.

GARROULD: The process of producing a policy on conflicts of interest, or review of an existing policy, should focus trustees’ minds on the subject.
The conflicts policy will provide a point of reference for trustees when dealing with conflicts of interest. In particular, the draft guidance provides that a conflicts policy shall include possible options for the trustees in managing conflicts of interest.
The draft guidance includes an example conflicts policy and example conflicts register and, although The Pensions Regulator expects trustees to tailor these documents to the particular circumstances of the scheme, these should help to minimise the administration required in producing the documents.
Trustees are required to disclose conflicts of interest and the register of conflicts is simply a formal record of these disclosures. If, as the draft guidance suggests, trustees incorporate conflicts disclosures and declarations into their agendas for trustee meetings then recording any disclosures in the register as well as the minutes should not be a significant additional administrative burden.

RICHARDS: The requirement to have a written conflicts policy will undoubtedly place an additional administrative burden on trustees, especially when the policy is first put in place (or, if one already exists, reviewed as a result of the guidance). However, given the importance of avoiding conflicts, it is probably useful to have a written policy; and being able to demonstrate that it is in place and has been implemented could prove invaluable in the event of a challenge to a trustee decision on the grounds of a conflict.
The regulator acknowledges that the extent of these obligations will vary according to the size and complexity of the scheme. The example conflicts policy appended to the draft guidance is not unduly long. The difficulty may lie in deciding how detailed the policy should be.
How much of a burden will be imposed by the need to review the policy regularly will depend largely on the complexity of the policy and the extent of potential conflicts for the scheme. The regulator is at pains to emphasise the need for legal advice, both on this and most of the issues covered by the draft guidance, and for trustee training, both generally and specifically on the conflicts policy.
The register of trustees’ interests should not impose a huge burden, but if it is unmanageably long, this should prompt trustee boards to review whether individual trustees with many interests should be replaced or not.

MUSTARD: For some well run schemes in which the issue of conflicts is already actively addressed, it is difficult to see that going through the process of following the regulator’s suggested approach will move the trustee governance arrangements on. For other schemes considering regulator’s examples and sample documents will help identify gaps in the trustees governance arrangements.

MA: Principle 5 of the draft guidance deals with the issue of adviser conflicts. What, if any, problems is principle 5 likely to create for trustees of schemes?

HOLLAND: Not surprisingly, the regulator has also highlighted the issue of the suitability of trustees sharing advisers with the sponsoring employer.
For example, it is relatively common for the trustees and the sponsoring employer to be advised by the same law firm or actuarial consultants, and often there is a “Chinese wall” in place between separate teams within the same firm proactively to deal with any potential conflict issues. In practice, given respective professional requirements, most advisers will already have in place mechanisms to deal with disclosure of potential conflicts and management of these. No doubt trustees will be keen to ensure the existing practices are appropriate. The draft guidance also highlights the role of in-house pensions managers, but without providing much direction as to how potential conflicts in this area might be managed.

LEGG: The guidance places an increased onus on trustees to examine their relationships with their advisers (and potential advisers during the appointment process) to be sure that the adviser is able to provide independent advice. For example, trustees may wish to use an adviser who does not have a potential commercial conflict, such as acting for the bidder of the sponsor’s business. Trustees also need to address the adviser’s procedures regarding the identification and disclosure of conflicts, and their management.
In some situations trustees may need to change advisers. The draft guidance suggests that trustees would find it difficult to justify retaining a conflicted adviser in situations where an adviser with similar expertise could be retained without a conflict.

GARROULD: Principle 5 requires trustees to consider not only their own potential conflicts of interest but also those of their advisers. It is important for trustees to put the onus on their advisers to declare to them any conflicts that may arise.
The guidance helpfully discourages trustees from using common advisers with the employer in circumstances of potential conflict with the employer. The use of such common advisers by trustees may expose the trustees to legal claims by members after the event.

RICHARDS: Principle 5 serves largely as a reminder of the potential for conflict if the trustees and the employer use the same adviser. Trustees may need to review the arrangements they have to make sure they require the adviser to declare interests and provide regular updates on those declarations.

MUSTARD: In the case of adviser conflicts, the focus has traditionally been on the role of the adviser in establishing whether they can continue acting for more than one party in a potential conflict situation. The regulator’s consultation guidance approaches this issue from perspective of the trustees and the management of their adviser relationships. In particular trustees are asked to consider whether a particular adviser can continue to act in circumstances where a conflict with the employer may arise.
This approach may create issues for scheme trustees if they feel they are unable to carry on with a long standing adviser for a particular matter, in circumstances where the adviser is comfortable that they can continue to act.