Conflict killers

Pension trustees are facing increasing scrutiny over the potential conflicts created by their outside loyalties. But it is unrealistic to expect individual trustees to leave behind their other duties, roles and loyalties entirely while acting as trustees. In the modern world, conflicts cannot be avoided. They can, however, be managed. So long as trustees are aware of the potential for conflict and know what is required of them as trustees, they can still carry out their trustee duties.

What is the key problem?
The key legal difficulty for trustees is that the law does not allow them to put themselves in a position where their duties to beneficiaries conflict with duties owed to another principal or with their personal interests.

While there has been concern expressed about company directors who are also trustees, there is no clear demarcation between directors and other senior employees of the company. It is more important, from a legal perspective, to consider the substance of the duties owed by the individual concerned to the company, whether as a director or as a senior employee. A senior employee may owe similar duties of confidentiality, loyalty and acting in the best interests of the company as a company director. The same would be said of partners of law firms, who are also trustees of the firm’s pension scheme in relation to their duties to their fellow partners. Moreover, the position of a partner in a law firm may be more acute than that of a company director, because they will have a personal financial concern in the profit of the partnership.

Why is managing conflicts important?
Members may be more inclined to challenge a decision that adversely affects the scheme by way of complaint of maladministration to the Pensions Ombudsman. A lack of understanding as to the nature of conflicts and how to manage them may also lead to notification to the Pensions Regulator.

If conflicts are not managed, it may give greater credence to any allegation of bias in the trustee decision-making process or a breach of trust. There is some early authority that suggests a trustee decision made where there is a conflict shall be rendered void. The more recent cases, however, indicate that the decision may be valid, but the onus will be on the trustee to prove that the decision reached was fair and reasonable in the circumstances. If they are unable to do that, the trustee may be liable to pay compensation.

Why is there more scrutiny now?
There is now increased scrutiny because:
• members are more aware of the importance of their pension schemes;
• fellow trustees are becoming more prudent and attuned to the potential for challenge to their decisions; and
• we now have a more proactive regulator with extra powers that will seek to influence the administration of pension schemes and beneficiaries in a law firm’s pension scheme will, in particular, be aware of the regulator’s scope in dealing with conflicts.

What has the Pensions Regulator said about conflicts?
The Pensions Regulator has expressed its views as to the management of potential and real conflicts in a number of situations facing, or potentially facing, trustees in light of the Pensions Act 2004. These include guidance in the context of:
• guidance for trustees;
• clearance statements;
• withdrawal arrangements;
• trustee knowledge and understanding;
• internal controls; and
• scheme funding.

Managing conflicts – the tools
From points made expressly by the Pensions Regulator and from existing good practice and legal alternatives, there is a number of tools in place for protecting trustees from allegations that a decision is invalid. These include:
• Court sanction. This allows for certainty. However, because of the cost, it is only a viable option if the decision is particularly momentous or there is a substantial sum of money at stake.
• Member consent. This would need to be the informed consent of the members, but if the number of members involved is large, this is often not practicable.
• Permission under the trust deed. This could give some comfort to the trustees that their decision would not be rendered invalid solely on the basis of a conflict. In line with the recent authorities, the decision itself will need to be shown to be fair and reasonable.
• Company release. It may be easier for a director to obtain a release from the company (as opposed to from the members) by way of an agreement that permits the individual to give precedence to their fiduciary duty to the members over that to the company in specific circumstances. (Some people argue that this is already implied.)
• Use of confidentiality agreements. Agreements between the company and the trustee that allow the sharing of information early on between the two would help the company director to be completely frank with their fellow trustees about the company’s position.
• Resignation. This is an extreme solution but might be the only option in certain circumstances. However, in the main, resignation should be avoidable by using other management tools.
• Delegation to sub-committee. Often powers contained in the trust deed and rules allow certain decisions to be delegated. The use of this power can isolate certain conflicted trustees from being involved in the decision-making process or from voting on a particular decision.
• Good governance. This relates to the adoption of certain measures mentioned by the Pensions Regulator, including early disclosure, exclusion from meetings where the decision is discussed, absence from voting and independent legal or other professional advice. Governance would be aided significantly by the trustees adopting and following their own specific conflicts policy within a general trustee code of conduct.

The strength of a trustee’s position in relation to conflicts will be judged by the structures in place for managing conflicts. The greater transparency there is, the more likely that decisions would not be challenged. Greater transparency is important both in relation to the trustee’s own position as well as the relationship with their company and its members. It is always necessary to bear in mind the main question: how can the trustees take steps to ensure that they make a valid decision?
Arshad Khan is a solicitor at Sacker & Partners