Insurance Protection

As well as giving protection to individual trustees, insurance can be a cost-effective way of protecting the assets of the pension scheme and the company, thus ultimately benefiting scheme members.

Trustees and sponsoring employers of occupational pension schemes continue to face challenging issues, such as Retail Price Index vs Consumer Price Index, auto-enrolment and scheme compliance, guaranteed minimum pension (GMP) equalisation, The Pensions Regulator’s focus on improving defined contribution schemes, data protection, pension liberation, and a variety of pension de-risking exercises.

Liability for breach of trust is a personal liability and a trustee is liable to both the scheme beneficiaries and to scheme creditors. If trustees are uncertain how to exercise their powers, they can also apply to the court for directions. A trustee or trustee director is also potentially at risk of having to pay a civil fine for breach of pensions’ legislation.

The risks are potentially greater when dealing with the increasing number of defined benefit schemes which are winding up, where there may be missing beneficiaries or other contingent liabilities that materialise after completion of the wind-up when there are no scheme assets remaining to meet such liabilities.

Separate discontinuance and “run off” policies of insurance can be purchased to protect trustees once a scheme has wound up. The value of insurance cover is probably best demonstrated when it comes to claims which can affect even the best-managed schemes. Regrettably, there has been a substantial increase more recently in claim notifications which demonstrates that errors can occur even in the best-managed schemes, particularly in the increasingly dominant environment of defined contribution schemes. One common feature, as you would anticipate, is the importance of the accuracy of data and we encourage trustees, therefore, to ensure that regular data health checks are undertaken.

With the rise in the number of claims, insurance is playing an increasingly important role in protecting trustees and pension scheme assets from losses

A trustee’s personal exposure does not cease when they retire and their post-retirement situation may make them particularly vulnerable. The solution is for retired trustees to have the guarantee of cover in the event that the scheme ceases to be insured. They can then rest assured that they have cover personal to them, irrespective of what the employer or trustees have done, or not done, about insurance since they retired. It is important to check the extent of cover provided in this respect as policies do vary. The OPDU Elite Policy provides lifetime cover for retired trustees and company pension personnel at the date of expiry of the main policy of insurance, thus giving valuable peace of mind.

With the rise in the number of claims, insurance is playing an increasingly important role in protecting trustees and pension scheme assets from losses resulting from claims, be they well founded or not. It provides an external resource of protection and should stand in front of any indemnity and exoneration clauses that may exist.

If the decision is taken to adopt insurance, it is important to have a policy specifically designed to respond to the needs of trustees and other individuals involved in the management of pensions. This is highlighted by the potential conflicts of interest which commonly exist when a trustee is also a director of the sponsoring employer company with duties to the company and its shareholders.

As a trustee, however, there is an overriding duty owed to the scheme beneficiaries which is paramount. Accordingly, it is not recommended that reliance be placed upon a directors and officers (D&O) policy of insurance as the cover will not be tailored to meet the specialised circumstances relating to pensions, and potentially there will be competing calls on the policy. Some D&O policies also specifically exclude pension trustee liabilities.