Trustee protections – are we covered?

Discussions about trustee protection used to be pretty straightforward. Employers were mostly content to give, and trustees to rely on, a broad indemnity both during the life of the scheme and following wind up. Members would get their benefits, sometimes with an uplift, and everybody was happy.

Such discussions are now considerably more commonplace, and more complex.

Pensions are highly regulated, members are more engaged and the compensation culture has resulted in a significant increase in complaints and claims regardless of merit. In short, complaints are more frequent and defence costs are high. Data protection law caused many trustees to start to ask questions about their own exposure to potential seven figure fines. We can now add to that the weakening of many employers (and a weakening of what once seemed a strong indemnity) and ever increasing risk, including new potentially significant fines under the Pension Schemes Act 2021.

Against this backdrop, is it a surprise to read in the pensions press about a hardening of the trustee insurance market with fewer players, more carve outs and higher premiums?

So what questions should we be asking?

Trustees should be checking what protections they have in place.

Trustee protections come from a variety of sources – the scheme rules, statute, group insurance policies and trustee indemnity policies. Even the structure of the trustee board can help. However, even with a wide range of protections there may still be areas that are not currently covered.

As such, trustees often need help understanding how the different layers of their protection fit together. A sensible first step might be to do a ‘trustee protection audit’ to –

• establish what protections they have,
• identify any potential gaps or weaknesses, and
• identify options for strengthening the coverage.

When should we be asking?

If trustees haven’t reviewed their protection position for some time, it’s always a good time to do so. However, when does trustee protection really need to be at the top of your agenda?

When your insurance is renewed

If trustees are relying on insurance they should get actively involved in the annual renewals process so they can check:

• there are no material changes to the level and scope of the cover
• they are comfortable with the chosen provider, and
• any relevant disclosures are made.

Given the hardening of the insurance market, trustees may find that the next renewal process is not as smooth as it has been in previous years.

Following a material change in the trustee board and/or the scheme

Trustees need to be comfortable their protections are aligned with their structure and their risks. Therefore if either change (for example, if the scheme materially increases in size or complexity following a scheme merger), trustees should revisit their protections too.

Ahead of a big project

A big project always brings additional risks. Trustees should therefore check their protection is appropriate as part of the project kick-off.

When there are concerns about the employer’s financial position

If an employer indemnity is a key component of their protection, trustees should revisit their protection whenever there are material concerns about the employer’s financial position as this could affect their ability to call on the indemnity.

When you encounter a problem

If a material issue comes to light, trustees should promptly look at their protection arrangements. If you have insurance, what might it cover and what would be the process for making a claim? If you are relying on an indemnity, are there any notification or conduct of claim requirements?

As part of your exit plan (sustainability, buy-out and beyond…)

Trustees should think about their future protection package as part of any exit or journey planning.

If moving towards sustainability so they can reduce or eliminate reliance on the employer covenant to fund benefits in the long term, how would this impact trustee protection? Would the trustees still rely on an employer indemnity or for the employer to fund annual insurance premiums?

Trustees often think of a buy-out as the end of the line. However, as a buy-out will only discharge the insured benefits, any residual risk will remain with the trustees even after the scheme has wound-up. Trustees will therefore need to decide how any residual risks will be covered once the buy-out completes. Many boards will want some form of run-off insurance at least for the initial period after wind-up during which claims are most likely to arise. But this type of cover can be expensive.
Trustees should plan ahead so that:

• they can enter into discussions with the employer about trustee protection when they have their strongest negotiating position; and
• they are comfortable with their protections when they start making big decisions which might bring additional risk.

If such discussions are left to the end, the trustees may find they’ve missed opportunities to strengthen their cover. If trustees and employers can’t agree a protection package, or there is expected to be a sizeable surplus on wind-up, the question of whether trustees can purchase insurance from scheme assets could be key.

Don’t forget – prevention is better than cure

Of course, it goes without saying that the best way of avoiding liability is for trustees to take appropriate care and attention in the running of their scheme.

Good governance, proper decision-making processes, keeping good records and taking professional advice will all help trustees avoid potential liabilities arising in the first place.

Prevention, as they say, is always better than cure.

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