Charlotte Moore looks at the ways trustees can protect themselves against risk

Spend more than five minutes thinking about the level of responsibility that a trustee shoulders and it seems extraordinary that anyone agrees to take on the role.

A trustee agrees to be liable for every stage of the management of the pension scheme, from ensuring that the right contributions are collected, through to ensuring the money is correctly invested and that the appropriate monies are paid to scheme members when they reach retirement.

Mayer Brown pensions practice head Anna Rogers says: “There are plenty of reasons that a trustee could, theoretically, be sued. They could be liable for anything that goes wrong from the moment that money is paid into the scheme to the moment it is paid out.”

But the designers of pension schemes know full well that individuals would not choose to shoulder the responsibility of administering multi-million pound schemes unless considerable protection was offered.

That protection for trustees comes in various different forms. There is an exoneration clause that says trustees are not liable for actions that are carried innocently or negligently. They also usually have indemnity protection from either the sponsoring company or the fund itself.

Most trustees are company employees and so are not well versed in investment theory or practice. The Pensions Act of 1995 recognises this skill gap and allows trustees to rely on the skill and judgement of their professional advisers.

As long as trustees properly appoint legal advisers, actuaries and auditors and follow their advice, they are protected from most problems that may arise.

But trustees can not abdicate all responsibility; they must choose the right advisers who will be able to cope if things go wrong.

Aon Hewitt principal and actuary Paul McGlone says: “Bigger advisers have deeper pockets. So if a larger adviser makes a modest mistake paying benefits, if it’s a big client with a long term relationship, they are likely to simply sort it out rather than resorting to an insurance claim.”

Giving away too much responsibility can also create problems. Schroders head of UK strategic solutions Mark Humphreys says: “Fiduciary management and implemented consulting is being touted as the answer to many of the governance challenges facing trustees.”

Hiring a fiduciary manager delegates much of the investment decision making but the trustees still retain responsibility if it goes wrong.

“We think that there is room for improvement in the way trustees go about selecting their fiduciary manager or delegated consultant to ensure that the right due diligence is carried out and an open-market approach is used rather than simply handing over the brief to an incumbent consulting adviser,” adds Humphreys.

Trustees also need to have their eyes wide-open about the way the market is structured. “They are asking advice from people who, in some instances, are incentivised to sell them products and services. Their main advisers are sometimes quite conflicted,” he adds.

In addition to the standard legal clauses, trustees can bolster their protection further against personal liability. One way to do this is to form a trustee company.

DLA Piper associate in the pensions team Ginevra Gatrell says: “The advantage is that it is the company becomes liable rather than the individual. Often the courts will not lift the corporate veil to see who is acting in the company.

“However, individual trustee directors should be aware that they could still face personal liability as an ‘accessory’ to the company if they have acted dishonestly in relation to trustee actions.”

While it is common practice for trustees to be protected by suitable indemnification insurance, trustees need to make sure what insurance cover applies to them.

Association of Member Nominated Trustees co-chair Barry Parr says: “It is common for the sponsoring company to take out that insurance. Policies usually cover directors and officers of the company, and there is a question whether trustees would be viewed as directors or officers of the company by the insurance company that provided the policy.”

This is another reason why it can make sense for the trustees to form a company. If that trustee company is set up as a subsidiary of the sponsor, then it is likely that the directors and officers insurance policy may apply. There is a catch, however – the policy may exclude anything connected with the pension scheme.

Rogers says: “If there are individual trustees and no trustee company, the sponsor’s group policy may well not apply to the trustees. So these trustees should be aware that if they want insurance they may have to find it for themselves.”

Trustees need to take the time to read the fine print of the company insurance policy carefully and double check the coverage with their legal advisers.

Nor can trustees afford to be complacent. They need to take the time to ensure that both the sponsoring company and the scheme provide all the necessary protection against personal liability.

It’s also worth noting that none of these protections will apply if the trustees’ mismanagement of the pension scheme could be qualified as criminal behaviour.

It’s important, however, to keep things in proportion. The reality is that the corporate law courts are not full of trustees being sued by their scheme members.

Rogers says: “The theoretical personal liability risk is very big but in practice the legal risks are highly mitigated, unless trustees are actually misappropriating trust money.

The burden of regulation placed on trustees along with the individual responsibility undertaken means that the value of training can not be underestimated.

According to The Pensions Regulator, by the end of October a total of 41,946 people had signed up for the online trustee toolkit, of which 23,334 were trustees. Only 7,547 had completed the online toolkit - this includes both trustees and other pension professionals.

Parr says: “It is of concern that only a small number of trustees manage to finish The Pension Regulator’s trustee toolkit.”

Mercer governance consultant Robert Plumb agrees: “Trustees need to get the basics right. One of the best things they can do is complete the trustee toolkit course.”

If all the right protections are in place and the trustee has undergone all the relevant training, the real risks are much more practical. “It’s much more likely that trustees will get dragged into complaints about benefits, bad publicity and regulatory investigations.

“The big court cases tend to be about what needs to happen under the scheme rather than personal liability,” says Rogers.

Plumb agrees: “The most common complaints come from scheme members feeling they have been badly treated. This is usually due to poor administration and communication.”

Minimising these kind of complaints is all about getting the basics right. “While trustees will not be personally administering the records, they are responsible that it is being correctly run and they need to exercise their critical faculties to monitor it properly,” he adds.

McGlone says: “Making sure that data is being collected, maintained and audited to the right standards is vital. If the scheme is not meeting The Pensions Regulator’s data standards, then the trustees are storing up problems and something will go wrong.”

For those considering becoming a trustee, the increasing complexity of managing a company pension scheme and the resultant burden of responsibility means the task has become a much more onerous proposition.

Plumb says: “Trustees tell me: ‘When I was considering becoming a trustee, I was told that it would involve four meetings a year with a couple of hours prep for each meeting. Now there are 25 meetings a year and the work takes half a day week.’”

Written by Charlotte Moore, a freelance journalist

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