PRESS RELEASE
March 2006

Trustees have a duty to monitor, manage and administer their schemes and with regulation becoming more rigorous their responsibilities are becoming more onerous. It is therefore surprising that the take up of insurance that safeguards their liabilities is extremely low, under 15% of schemes having trustee protection especially given that it can cost less than insuring an average house and two cars.

Prior to looking at the relative benefits of trustee insurance, it is important to understand why current participation is negligible. Broadly, there are four reasons; firstly that trustees are unaware that it exists; secondly that they don't think they need it having assessed the risks; thirdly that their professional advisers have recommended against it and lastly and of greatest concern is that it has been dismissed through a lack of understanding. My personal view is that we the insurers are to blame as we have failed to raise awareness and furthermore failed to increase comprehension.

The basic premise for buying most types of insurance is that it's either a legal requirement or the purchaser or adviser has assessed the risk and determined that it is sufficiently high to warrant protection.

Fundamentally, herein lies the problem, the industry has been reticent or unable to quantify the risks that trustees face. Furthermore, the framework within which trustees operate is full of ambiguity and shades of grey. Consider the driver that dents his car, or the factory owner that fails to ensure the safety guards are in place, both know that they can make a claim when the worst happens, such clarity has been absent in trustee insurance.

The Pensions Act 2004 was intended to simplify the operation of occupational pension schemes, at the same time increasing member protection. However, in reality the act has substantially increased the potential liabilities of pension trustees, company directors and officers. Good governance is now the yardstick, but what is good governance, what is appropriate understanding and how much training should you have?

Quantifying trustee risks

There are many risks that a trustee needs to address and all will depend on the status of the scheme. The highest risks can be posed by schemes already in wind up with the lowest risks often being a well-funded scheme where the employer takes an active role.

Quantifying the risks is not just about the pension scheme; trustees should also look at the employer and its financial position and its attitude towards and support of the pension scheme.

What does it cost to insure a scheme?

It is impossible to say exactly what a scheme will cost as it is dependent on many factors. Annual premiums start at around £1,500 for a small scheme of up to £5m with a large scheme of up to £100m with cover of £5m plus will typically cost less than £15,000.

Schemes in run off obviously cost significantly more to insure, however even a sizeable scheme with say £25m fund value at scheme closure with membership of 1000 may only cost £60,000 for a 6-year run-off policy and a further £40,000 for an overlooked beneficiary policy which never expires. Weighted up against the potential liabilities many trustees consider this a small price to pay.

Key areas for consideration

Funding is of great concern to many trustees, some trustees will have a scheme well above the MFR (prior to the new actuarial regime), many however will have schemes that are less well funded. For those in the latter camp the first checks are why the scheme is under funded, it may be a sign of a poorly run scheme or equally a scheme that has suffered at the hands of the stock market. Nether less trustees need to ensure that they are doing everything in their power in order to rectify the problem. If not they could end up being liable should a pensioner receiving less benefits make a claim.

Insurance cannot protect against poor funding but a poorly funded scheme need not pose a greater insurance risk than a well-funded scheme. Likewise schemes being wound up, whilst not widely accepted by many insurers can be perfectly safe and secure but just not viable for the employer to keep open. None the less they do have the same risks that an open scheme poses.

The European Pensions Directive has also had a bearing upon the investment of assets within the Pensions Act 2004, and requires an investment function to be performed in relation to the "prudent person rule". This will apply to both trustees and fund managers. The Pensions Act builds upon the framework set out in the Directive and replaces the existing prescriptive MFR with a scheme-specific approach.

Highest incidents of claims

Poor administration is the largest single reason for claims as pensions schemes are complex and the scope for errors is significant if the administrators are not 100% on the ball. Unlike most investments few people actively watch what is going on a day-to-day basis so errors can often go unnoticed for a significant period of time. Insurance covers claims-made from the time that it is taken out, however the risk assessment needed to analyse the current schemes administration can be used to look at past actions and identify areas of concern, which although probably never insured are best identified sooner rather than later as the influence of compound inflation can turn a relative molehill into the proverbial mountain over a period of years.

Typical claims:

• A scheme member retires and discovers that his/her pension has been mis-calculated and under-funded. The insurance would cover the loss.
• Trustees make a loan to the company, which then gets into financial difficulty, the trustees were deemed as making the wrong decision, the insurance covers the loss.
• A complaint was made to the regulator, the trustees win but have to cover the costs, the insurance covers these costs.

Scope of trustee liability

The new legislation imposes a duty upon trustees and directors of trustee companies to be conversant with their own scheme documents and to have "knowledge and understanding" of funding and investment principles. In addition, trustees and trustee directors must also have knowledge and understanding of the law relating to pensions and trusts. However, this should not be confused with being an expert, trustees should have an understanding, knowledge and awareness of the scheme such that they can question the employed advisers.

One of the clearest ways for trustees to demonstrate that they are acting appropriately is to always question, and document, any action that they do not understand or think inappropriate. If in doubt about what an adviser is saying get them to put it in writing such that if their actions are negligent you can claim against their professional indemnity cover.

Safety nets

The best safety net is a self imposed one. Practising good corporate governance, taking time to understand the scheme and keeping the paid advisers on their toes will protect you from the majority of claims.

The second tier is protection through clauses within the trust deed and rules exonerating trustees from liability, and in many instances the scheme or the sponsoring employer company may give an indemnity. However, such 'get out of jail' free cards are increasing ineffective and rarely 100 per cent watertight and worthless against regulatory claims. The worst possible scenario in this instance is the trustees find themselves liable and have to call on the assets of the scheme to bail them out, ergo, everyone loses out.

Insurance is the third level of protection and in common with all insurance the extent of cover and price can vary markedly within the market so sound advice is always shop around. Insurance has the advantage in that in the event of a liability it is a third party that coughs up rather than the scheme.

In common with all insurance you are protecting against the unexpected so it is worth making sure that the policy is comprehensive. Two important areas to include cover against regulatory fines, which given the April changes could be more prevalent as our new regulator bares its teeth. The second area is cover against direct fraudulent acts by trustees. Although this is rare it does happen and with all fraud it can be particularly difficult for even the most diligent of trustees to detect.

In summary

The best protection is always diligence and common sense, however as events beyond trustees reasonable control do happen it is worth considering insurance, especially given the relative inexpense.

Ends

For further information contact:

Jamie Ricketts, Assistant Underwriter, E&O Professionals: 020 7220 0023
Vaughan Andrewartha, Votive Communications: 020 7402 2448
Email: enquiries@eoprof.co.uk
Web: www.eoprof.co.uk