If you can’t avoid conflict, manage it

Jul 10 2008 by Peter McCusker, The Journal

Nick Smith, an associate in the Newcastle office of international law firm Eversheds LLP considers how pension scheme trustees should manage conflicts of interest.

WHAT is a “conflict of interest”?

In relation to pension scheme trustees conflicts of interest arise:

where the trustee’s personal interest conflicts with their duty to the beneficiaries of the scheme – this may apply, for example, to a trustee who is also a member of the scheme; or

where the trustee owes a duty to a third party, which conflicts with their duties to the scheme beneficiaries – the classic example is the company director who is also a pension trustee.

What is the problem with a trustee taking part in a decision with which they have a conflict of interest?

At best, the existence of a conflict may cause others to call into question the legitimacy of the decision. At worst, it could adversely influence decisions.

In addition, there are various legal consequences which may arise from a conflicted trustee taking part in a decision, including:

the Pensions Regulator may intervene and remove the conflicted trustee;

if a member challenges the decision in Court, the decision could be set aside; and

members and other beneficiaries may be entitled to claim compensation from the trustees for any loss caused by the breach of duty.

What has the Pensions Regulator said about trustee conflicts of interest?

In February of this year the Pensions Regulator issued draft guidance for trustees on managing conflicts of interest.

In the draft guidance the Regulator states that “conflicts of interest are a serious concern” on the basis that if they are not “effectively managed decisions may be taken that put the interests of some or all beneficiaries at risk, or subsequently prove to be invalid”.

The Regulator’s main concern is that potential and actual conflicts should be identified, recorded and appropriately managed. The Regulator recommends that all schemes put in place a written conflicts policy, that they keep a register of potential and actual conflicts which may arise and that they record how these conflicts have been managed.

How should conflicts be managed?

The way in which a conflict should be managed will depend upon the particular circumstances in each case. However, some solutions which should be considered include:

the conflicted trustees not taking part in the relevant decision making process;

the appointment of an independent trustee.

What immediate action do pension scheme trustees need to take?

In response to the Regulator’s draft guidance trustees ought to:

put in place a written conflicts policy in respect of their scheme; and

ensure that they and their fellow trustees receive training on how to identify and manage conflicts of interest.