PRESS RELEASE
November 2006

The role of a pensions trustee has always been challenging, but the pensions arena is evolving fast; pensions shortfalls, scheme specific funding, introduction of the Pensions Regulator and Pensions Act 2004 have not only contributed towards an ever more challenging environment, but have also placed a range of new burdens and responsibilities upon trustees.

This is coupled with changes in the socio economic environment as well. The demise of final salary schemes and scheme underfunding has been coupled with reduced state pensions, lower annuity rates and the pensions pot having to be spread over many more years as people live longer. Many consequently face lower incomes and standard of living in retirement than they had anticipated. Also, as a society we are becoming increasingly litigious, people are not afraid to take legal action if things go wrong; the responsibilities of the trustees have therefore never been greater.

However, we are concerned that many trustees fail to appreciate the extent of the risks faced. We find it genuinely surprising that only 15% of pension schemes currently purchase professional trustee liability insurance – insurance that covers both trustees and the sponsoring employer from claims arising from the scheme members.

So what are the risks to trustees? Trustees are at risk if they are deemed to have committed a 'wrongful act'. This encompasses an extensive range of actions, such as, a breach of duty, neglect, error, maladministration and misstatement.

Typically claims are made if;

• The trustee has failed to pressurise the sponsoring employer enough to rectify any scheme deficit through increased contributions – with the FTSE350 companies currently facing combined deficits of £49.5billion (source: Watson Wyatt, Pensions Deficit Index 31.10.06), this is clearly an issue of concern to many trustees.
• Not selecting the most prudent companies to work on behalf of the scheme, such as investment managers or auditors – with even the biggest brands in fund management suffering from bouts of poor performance and given the poor level of funding within most schemes at the moment, there is little room for error.
• Trustees amending the rules of the scheme, but not informing members of the change, leaving them with less benefits than they were expecting – communication is key, and yet it is often unintentionally neglected, leaving trustees exposed.

Many trustees make the error of believing that the closing of a scheme means a reduction of their liabilities, in fact, the opposite is true; closing a scheme actually increases liabilities rather than reduces them. There are a number of reasons for this:

• When a member is notified of the intention to close a scheme, they will closely scrutinise their benefit statements which increases the likelihood of them noticing an error and making a claim against the trustees and pension scheme.
• The Trustee Act 1925 rules that trustees must advertise when a scheme is to be wound up, which increases the chance of claims from missing members.
• New trustees are also appointed at wind up, which means that past errors may often come to light.

So how can trustees protect themselves against such claims and also against the legal cost of fighting these claims? The type of protection required will vary depending on both the nature of the scheme and the trustee's situation, and trustees should ensure that the cover purchased offers them adequate protection, as well as the sponsoring employer.

Trustee liability cover – provides indemnity cover for trustees of ongoing pensions schemes (also providing cover for the scheme itself and the sponsoring employer). With this, trustees are protected from the aforementioned 'wrongful acts' and may cover direct financial loss as a result of a dishonest act by a fellow trustee.

Run-off cover – this provides an indemnity to trustees of wound up pensions schemes and can run for up to twelve years in the future and backdated to the time when the scheme was established in order to provide complete peace of mind. With it, trustees are protected from acts of negligence committed in good faith.

Overlooked beneficiary cover – provides indemnity to trustees of wound up schemes for having unintentionally overlooked a scheme member. The cover has no expiry date and is usually for up to £1million, though higher levels of cover are available.

The costs of the insurance is dependent on many factors. For trustee liability insurance annual premiums start around £1,200 for £1m cover for a small scheme of £2m fund size. Cover for a larger fund of £100m costs around £15,000 for the same level of indemnity, though if required, cover of up to £10m is also available.

The cost of run-off and overlooked beneficiary insurance ranges from around £12,000 for a smaller scheme with a £1m limit and 6 years duration, to £75,000 for a larger scheme.

In short, trustees should always carefully consider the risks that they face in their role. These should be discussed with the sponsoring employer and the trustee has a right to ask for a reasonable amount of protection in return for the service they are providing.

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