Pensions: Rock and a hard place

Pension fund trustees often have to negotiate with employers, throwing up a host of conflict issues. By John Papadakis and Rosalind Connor

One of the major effects of the Pensions Act 2004 has been to increase the number of situations in which trustees are obliged or able to negotiate with the scheme employer. As trustee powers increase, so do members’ expectations on what the trustees can achieve in negotiations with employers.

Consequently, trustees are increasingly aware of their powers and their obligations to members. Their initial negotiating stance is therefore often extremely cautious. As a result, many find it difficult to negotiate effectively as they are unwilling to move from their initial position for fear of attack by members whenever they concede any position in a negotiation. However, such a position is usually impractical and trustees can also be attacked by members for failing to reach an agreement.

The Pension Regulator’s attitude to trustees who fail to negotiate meaningfully is not in practice as supportive as it might seem from some of its guidance. The regulator generally wishes to promote dialogue between trustees and employers and will not necessarily be sympathetic to, or supportive of, trustees who fail to engage in the negotiation process. In certain circumstances regulator support for the trustees is vital, particularly where the employer is seeking regulator clearance or when negotiating on scheme funding, where the regulator may impose its own terms.

While it is arguable that the employer’s interests have been overrepresented in the past (whether by their representatives on the trustee board or inertia on the part of the trustees), trustees still need to take account of the position of the employer in their negotiations, not least because employer difficulties may result in members losing their jobs – a strong argument if many members are still in employment.

The courts also considered the employer as a beneficiary in Edge v Pensions Ombudsman (1999) because of the right to a return of surplus, giving the trustees fiduciary obligations to the employer. Arguments have also been raised that, in ignoring an employer’s interests, trustees are acting outside the terms of the trust, resulting in a fraud on their trustee powers.

Conflicts of interest
Senior executives of the pension scheme employer have traditionally comprised the majority of the trustee board. The trustees have benefited from the operational and financial acumen of the executives and the employer has benefited from a first-hand understanding of the concerns of trustees.

Conflicts of interest have always been an issue in pension schemes, but the changing status of trustees in negotiation has emphasised this problem. As in any other commercial negotiation, individuals trying to advise both sides are in an almost impossible position. In the context of a pension scheme, the conflicts of interest arise both in relation to the flow of information and actual decision-making.

Provision of information
If, by virtue of their position within the employer, a trustee becomes aware of matters that would interest the trustees of the pension scheme, their duties as a trustee require them to disclose that information to their fellow trustees. Senior executives are likely, however, to have entered into contractual commitments to keep such information confidential. Trustees who are also senior executives are likely, therefore, to find themselves in a position where disclosing that information to fellow trustees will breach their duties of confidentiality to their employer, but on the other hand failing to do so will breach their fiduciary obligations to members of the pension scheme.

The Pensions Regulator has also provided guidance on the duties and obligations of trustees. The regulator’s view is clearly influenced by the general view that the employer should provide all material information to trustees for the trustees to fulfil their duties. Consequently, the expectation is that, not only should potentially conflicted trustees provide the relevant information to their fellow trustees, but that the employer should also provide any relevant information directly.

The regulator acknowledges that leakage of sensitive information to outside parties may be undesirable, but takes the view that such information flow is feasible if appropriate confidentiality arrangements are entered into between the employer and the trustees. The regulator appears happy to agree that trustees who refuse unreasonably to sign confidentiality agreements should not complain about the lack of information provided by the employer. Trustees are regularly required to sign confidentiality agreements in order to ensure that their role is clearly delineated and to ensure the flow of information, but such agreements do not obviate the fiduciary obligations of the trustee.

If the employer considers it unnecessary or undesirable for certain information to be provided to the trustees, the only way in which the provision of information can be avoided is by ensuring that the employees with access to such information are not trustees and are not, therefore, in a position where they may feel duty-bound to pass on that information.

Trustees’ actions
Where trustees are obliged to take certain actions (for example to reach agreement with the employer on contribution rates to the pension scheme), senior executives who are trustees will find themselves in an impossibly conflicted situation, because it is extremely difficult for them to distinguish their interests as a trustee from those as an executive of the employer, or even to prove that there is a distinction if a complaint were made in relation to the actions taken. While they can be sympathetic to the arguments put forward by the employer, trustees must act in the light of their fiduciary obligations to members of the pension scheme.

The difficulties where trustees are also directors of the employer will become more acute once Section 175 of the Companies Act 2006 comes into force, whic is expected to be on 1 October 2008. This section places an express obligation on the director of a company to “avoid a situation in which he has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the company”. The logical conclusion is that the director concerned will have to avoid acting as a trustee where a potential conflict of interest could arise, and an executive who is a director of a trustee company would be obliged to stop acting in one of those two capacities.

The position of trustees has changed radically. Trustees who may in the past have been quite passive are having to take a more active and engaged role in negotiations with the employer and develop a greater understanding and awareness of the duties and obligations to the pension scheme. As negotiations become more complex, trustees are well advised to remember that they do have obligations to the scheme employer and that trustees in conflicted positions may be unable to continue.

John Papadakis is a partner and Rosalind Connor an associate at Jones Day