Zoe Staniforth clarifies the issues surrounding Pension Trustee Liability insurance

We are frequently asked by pension trustees about the liabilities they are exposed to and what additional protection Pension Trustee Liability ("PTL") insurance provides. Experience tells us that misconceptions still abound in the pensions industry about these important issues.

What are the liabilities faced by trustees?
The first point to make is that a pension trustee's liability for breach of trust is a personal one. It is up to the potential claimant (usually a scheme member or a third party creditor) to decide whether to bring its claim against some or all of the trustees (their liability being joint and several). The effect of this is that a trustee could find that he is personally liable for the decisions taken by another trustee of which he was not even aware.

The concept of 'breach of trust' is an extremely wide one. It includes unintentional administrative errors as well as negligent, fraudulent or dishonest ones. Broadly, a breach of trust may arise whenever a pension trustee does something he is not entitled to do under the Trust Deed or fails to do something he is required to do under the Trust Deed or trust/pensions law. A breach of trust can also occur if a pension trustee does not perform his duties with sufficient care and the scheme members suffer loss as a result. OPDU claims experience suggests that members frequently challenge discretionary decisions. Whilst the decision itself may be perfectly defensible, if the correct procedures have not been reached in coming to that result, trustees will find that claims arising out of such decisions are difficult to defend.

The particular risk with a pension trustee's liability is the ease with which one simple error can be replicated across an entire scheme's membership. The personal risk to trustees is increased once a scheme has been wound up. This is because such events give rise to an increased likelihood of claims from overlooked beneficiaries in circumstances where the scheme may no longer have sufficient assets to meet its liabilities. Furthermore, it is not unusual for the winding up of a scheme to go hand-in-hand with the insolvency or dissolution of the sponsoring employer, meaning that a trustee is a member's only recourse in the event that they are unhappy.

Another feature that distinguishes a pension trustee's liability from the liability faced by other trustees, is the length of time that it can take for errors and claims to come to light. This means that, many years into a pension trustee's retirement, he or she may suddenly find themselves on the wrong end of a claim in respect of something they did (or did not do) many years previously. Insurance policies usually provide retired trustees with up to 12 years cover from expiry of the main insurance policy so that retired trustees can rest assured that they are protected, even if the PTL insurance policy is not renewed by their successors. This is important because this type of insurance operates on a "claims made basis". This means that it is the insurance cover that a trustee has at the time a claim or circumstance comes to light that is important, not the cover that was in place when the act or omission occurred. By taking out insurance today, you will be covered for any mistakes that may already have occurred, provided that you are not aware of them as at the date that you purchase your insurance.

How are such complaints/claims determined?
On the exhaustion of the scheme's Internal Dispute Resolution Procedure (IDRP), a scheme member can choose whether to issue court proceedings or complain to the Pensions Ombudsman. In practice, given that the Pensions Ombudsman offers scheme members a far simpler and more accessible forum in which to have their disputes determined, the majority of complaints will follow this route. Whilst it is obviously in both trustees and members' interests for the Ombudsman forum to be available, trustees should keep in mind that they can be forced to incur substantial irrecoverable defence costs responding to member's complaints, regardless of their merit. Our claims experience indicates that the defence costs incurred responding to a member's complaint can in some instances dwarf the value of the claim actually being advanced. This is especially the case where a member is not legally represented.

Aside from the civil liabilities that trustees face, The Pensions Regulator also has wide ranging powers. By way of example, an individual trustee can be fined up to £5,000 and a corporate trustee up to £50,000.

Surely a trustee is already covered by the Exoneration & Indemnity clause in the Trust Deed?
Many trustees will find that they have the benefit of an Exoneration and Indemnity clause in the Trust Deed which exonerates them from liability and provides an indemnity from the sponsoring employer or the scheme. However, there are a number of reasons why these clauses should be treated with caution.

First, nearly all of these clauses are limited in scope and are, in any event, subject to statutory limits. By way of example, the scheme is prevented from indemnifying trustees for any breach of duty relating to investments or for any civil fine or penalty. Claims by third parties are also often excluded from the ambit of the clause, leaving the trustees entirely exposed to such claims.

Secondly, an indemnity from the employer will only be effective for as long as the employer remains solvent and sufficiently resourced. It is increasingly the case that trustees are still having to manage schemes long after the employer itself has ceased to exist. Given the length of time it can take for errors in relation to schemes to come to light, this is an appreciable risk.

Thirdly, it is no longer attractive from a regulatory or public relations perspective for a trustee to deny liability for a meritorious claim from a pension member, purely on a technicality in the Trust Deed. The courts and regulators construe such clauses narrowly and will strain to ensure that a scheme member with a valid claim is compensated.

Fourthly, even in circumstances where an Exoneration & Indemnity clause can be relied on, this only serves to transfer liability from the trustees to the scheme or to the employer. By having a comprehensive insurance policy, there is no need to incur time and costs considering whether it is the employer, the trustees or the scheme that has the liability and who should therefore deal with and respond to the claim. The policy stands in front of such clauses and insures all three for loss arising out of errors in relation to the pension scheme. This also removes potential conflicts of interest where, say, a trustee of a pension scheme is also a director of the sponsoring employer.

What about the sponsoring employer's Directors & Officers' insurance policy? Wouldn't that cover trustees too?
Directors & Officers policies often contain exclusions for acts or omissions while acting as a trustee or administrator of a pension scheme. These policies are also not tailored to suit the very specialised circumstances that are unique to pensions. Trustees might also find that the level of cover is exhausted by other, non-pension related claims on the policy.

Additional extensions to cover
As well as covering trustees, the scheme, and the sponsoring employer for losses caused by errors or omissions in relation to the pension scheme (including, of course, defence costs), OPDU Elite also offers cover for court application costs and third party provider pursuit costs.

There are many circumstances where a trustee board may be unclear about their obligations to scheme beneficiaries, for example if the Trust Deed wording is unclear. The only solution in such a situation to ensure that trustees are properly discharging their duties can be to make an application to court. The legal costs incurred in connection with these applications would not properly fall within the definition of defence costs since the costs would not necessarily be incurred responding to a claim.

By taking out OPDU Elite Court Application Costs cover, trustees and the employer can be confident that the costs of making such an application would be covered by insurance.

We are increasingly contacted by trustees considering bringing a claim against their former advisers (usually solicitors, actuaries or third party administrators). These claims are for losses suffered by the scheme as a result of allegedly negligent advice (in connection, for example, with equalisation of benefits). Professional negligence litigation is invariably complex, time-consuming and expensive, especially when more than one adviser is involved and their respective responsibilities are not clearly defined. Even if a claim against these advisers ultimately results in a successful recovery for all or part of the claimed losses, the trustees/employer will not recover all of their legal expenses from their former advisers. (OPDU Elite's Third Party Service Provider Pursuit cover can offer valuable protection to trustees/employer against such costs.)

It is recommended that pension trustee liability insurance should be considered both for trustees and employers as it can protect against claims. However, even for schemes which have insurance, it is probably sensible to review the policy and scheme rules carefully to identify any gaps in protection as insurance policies do vary.

Written by Zoe Staniforth, senior claims executive at the Occupational Pensions Defence Union

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