Being a pension trustee has never been easy, but recent changes in legislation and market environment have increased the burden beyond belief. These developments, such as the change of regulator from OPRA to the Pensions Regulator in April last year, the impending A-Day, and the closure and winding up of final salary schemes by the likes of Arcadia Group, the Co-op and Rentokil, mean that pension trustees are operating in unknown territory.
For example, whereas OPRA tended to deal with problems as they arose, the Pensions Regulator will be proactively collecting detailed feedback from all UK schemes above a certain size. The Regulator can investigate schemes and issue fines for faults which could be detrimental to the members.
New rules and regulations are also changing the way that pensions will be managed in the future. For example, Trustees now have to demonstrate their competence, which places huge strain on them, most having a full-time job in addition to their trustee role.
In this new environment it can be alarmingly easy to make very costly mistakes. It is therefore surprising that there is so little awareness of the three primary insurance covers available: trustee liability cover, run-off cover and overlooked beneficiary cover, and that just 15% of pension schemes purchase Professional Trustee Liability Insurance.
Trustee liability insurance provides indemnity cover for trustees of ongoing pension schemes as well as the pension scheme itself and the sponsoring employer. The cover indemnifies any 'Wrongful Act' committed by the trustee(s), covering a broad range of actions, among them: such as breach of duty, neglect, error, maladministration and misstatement, and covers regulatory fines.
Claims are typically for trustees failing to convince the Sponsoring Employer to rectify a scheme deficit through increased contributions, not selecting the most prudent companies to work on behalf of the scheme, or amending scheme rules without informing members, leaving them with fewer benefits.
Trustee liability cover greatly reduces risk for members. In addition, any claim (including defence costs) without cover would have to be paid by the Sponsoring Employer, and could negatively affect the Scheme and the whole workforce.
The cost of insurance varies, but annual premiums start around £1,200 for £1m cover for a small, £2m fund. Cover for a large fund of £100m costs approximately £15,000 for the same level of indemnity.
Potential liabilities for trustees and their schemes actually increase when they close, for various reasons:
- All members closely scrutinise their benefit statements increasing the likelihood of a member spotting an error and making a claim.
- By law trustees have to advertise in the London Gazette and local newspaper(s) when a scheme is to be wound-up, increasing the chance of claims from missing members. Claims made once all funds are distributed fall on the sponsoring employer.
- New trustees are appointed at wind-up, and are likely to flush out any past errors which could lead to claims.
Trustees of closing schemes should consider run-off and overlooked beneficiary insurance to meet these risks.
Run-off cover lasts for a period of six, ten or twelve years and has no excess. Indicative premiums are:
- £12,000 for a small scheme (£1m fund value) with a £1m limit and 6 year duration
- £75,000 for a larger scheme with a £1m limit and 6 year duration
Open-ended cover has no expiry date and again has no excess. Indicative premiums are:
- £11,000 for a small scheme (50 members) with a £1m limit
- £70,000 for a larger scheme (2,000 members) with a £1m limit
Given the current regulatory and market environment, there has never been a more important time for trustees to purchase insurance for their scheme. Without such cover trustees and their schemes risk being stung with claims and fines which are detrimental to trustees and members alike.
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