Indemnity: Why trustees need to be more risk averse

Sole corporate trustees don’t provide full protection and insurance hard to find

clock • 4 min read
Anna Rogers is senior partner at Arc Pensions Law
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Anna Rogers is senior partner at Arc Pensions Law

Key points

  • Adopting or changing sole corporate trustees can mean changes in member and trustee protection
  • Continuity can be written into contracts and provide some comfort around indemnity
  • Where no indemnity is provided from the employers, it is not unreasonable to ask

Changing a sole corporate trustee model or bringing a professional trustee on board could mean changes in trustee protection. Anna Rogers argues perhaps it is time trustees became more risk-averse.

Sole corporate trustees (SCTs) are coming under new focus for a number of reasons, not just the rise of the professional trustee. Changing to an SCT model, or changing from one SCT to another, can mean changes in member protection and trustee protection. The Axminster case raised some new issues. There needs to be a fair balance between trustees and members but trustees shouldn't run more risk than they need to. 

Members need there to be someone willing to run the scheme. Benefits should be funded by contributions and investment returns, not out of the pockets of their trustees. It is reasonable for trustees and trustee directors, professional or not, to seek appropriate protection. 

Why have an in-house SCT?

The ‘corporate veil' is not a suit of armour, and directors could still bring liability on themselves, but it's generally accepted that directors of trustee companies are not themselves trustees. It surprises the lawyers that those who volunteer to act as scheme trustees don't ask for this extra layer of protection. You can bet the sponsor board has it! 

SCTs also give continuity. This can mitigate legal risk in other ways, including for the sponsor, for example it can help avoid slips or delays in executing deeds. Member representation can be entrenched if that is important. 

Commercial protections between outgoing and incoming trustees are considered market practice in other contexts. The Axminster ruling potentially brings in a tough analysis:

  • a current trustee has no liability for any breach of trust that occurred before appointment; 
  • a former trustee remains liable for his/her/its breach of trust, but usually with a six-year limitation period. 

If strictly applied that would mean a change in trustees has an effect on underpayment claims and correction exercises.

Why should trustees be exposed to claims for six years after they have changed jobs or retired or brought in a shiny new sole professional trustee? Or are they exonerated by scheme rules, meaning underpayment claims are wiped clean? It's usually the employer's decision - it might even look like a solution. 

Pension trustee liability cover may end on appointing an SCT. Outgoing trustees should check what happens about claims made later. We recently saw a buried discontinuance option they can take out even though the scheme is ongoing - worth checking! 

Indemnity 

Outgoing trustees might be comforted by an indemnity from the new trustee(s), who will have the assets. Professional trustees are unlikely to agree. The incoming trustee might want an indemnity going the other way. The best position for members is probably the continuity we have always thought applied. It can be written in. 

Trustees can reasonably expect market standard protections that are not always present such as: exoneration from personal liability for current and former trustees and directors; pension trustee liability insurance; and, power to pay for winding-up run-off insurance from scheme assets. 

Where the scheme doesn't provide an indemnity from the employers it is not unreasonable to ask. It is not a good look to be seeking an indemnity in a specific uncomfortable situation - why shouldn't trustees have an indemnity from the outset? 

Directors of trustee companies should take care to hold the line that it is the company that is the trustee. Minutes, member communications or other formal documents may present them as trustees. Trust law is flexible and trusts can be implied. 

The trend towards professional trustees is gathering speed. No-one is looking to erect barriers to entry - or exit. But trustee changes can have implications for all parties and there are some commercial and fiduciary issues to think through. Scheme-specific solutions can be found. Yes, member claims have been rare, but we all know the pension trustee liability and run-off market has hardened significantly. If insurers are getting more risk-averse maybe trustees need to do the same. 

Anna Rogers is senior partner at Arc Pensions Law

 

Case in brief: Mitigate your risks 

As the pensions insurance market hardens, those in trustee roles might want to get a bit more commercial about mitigating their own legal risks. It's reasonable to seek market standard protections and it's in members' interests for there to be a supply of trustees. 

The in-house sole corporate trustee model gives its directors protection but is far from universal. A change of trustees can have implications for members, post-Axminster. It's not just about appointing sole professional trustees. Negotiated allocation of risk between outgoing and incoming trustees is not common in pensions - perhaps it should be. 

Key points

  • Adopting or changing sole corporate trustees can mean changes in member and trustee protection
  • Continuity can be written into contracts and provide some comfort around indemnity
  • Where no indemnity is provided from the employers, it is not unreasonable to ask

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