Traditionally, the directors and senior management of companies have played some part in the running of the company’s pension scheme, including acting either as individual trustees or as directors of a corporate trustee of that scheme. For many years, conflicts of interest which arose by virtue of an individual holding management and trustee positions simultaneously have commonly been dealt with on an ad hoc basis with the individual metaphorically putting on the appropriate hat at the appropriate time. In this briefing, the term “trustee” refers to both individual trustees and those persons who are directors of corporate trustees.

Since the coming into force of the Pensions Act 2004 (the 2004 Act) and the Pensions Regulator encouraging pension scheme trustees to act “more like bankers”, conflicts of interest have become more of an issue than ever before. Coupled with the codification of company directors’ duties in the Companies Act 2006 (the 2006 Act) and the greater scrutiny to which the decisions of directors and trustees have become subjected by shareholders and pension scheme members, conflicts of interest are now more of a source of concern.

Trustee duties

The duties of a pension scheme trustee are myriad and could constitute the subject of an entire briefing note by themselves. Whereas many of these duties are imposed by trust law (for example, the duty to exercise reasonable skill and care) or have evolved through case law (for example, the overriding duty to act in the best interests of the scheme’s beneficiaries), many more are now set out in pensions legislation and the codes of practice and other guidance issued by the Pensions Regulator. Each pension scheme’s governing documentation also imposes specific duties on its trustees.

The introduction of the scheme specific funding requirement under the 2004 Act for final salary pension schemes has led to greater discussion and evaluation of a company’s ability to meet its obligations towards its pension scheme. Similarly, the moral hazard provisions of the 2004 Act (which seek to prevent employers abandoning their final salary pension schemes) and the associated clearance procedure by the Pensions Regulator have resulted in trustees paying greater attention to corporate transactions and any associated implications for the pension scheme. Consequently, trustees often find themselves negotiating with employer companies to protect the interests of pension scheme members in these situations.

A trustee’s duties also include a duty to disclose information to his or her fellow trustees where that information relates to decisions which the trustees make. This duty applies in respect of all information known to an individual trustee, regardless of the source of the information or any confidential nature that it might have. This in itself can cause practical difficulties.

Company director duties

The 2006 Act is codifying directors’ duties for the first time. Of particular relevance to directors who are also pension scheme trustees are sections 172 and 175. The 2006 Act is coming into force in stages, with section 172 coming into force on 1 October 2007 and section 175 coming into force on 1 October 2008.

Section 172 of the 2006 Act sets out the duty of a director to promote the success of the company for the benefit of its shareholders and lists some of the matters which the director must consider in carrying out this duty. (It is worth noting that, in the case of a company which is a trustee of a pension scheme, this duty is modified by section 172(2) to reflect the company’s duties as a trustee, which apply regardless of the ownership of the trustee company.)

Section 175(1) of the 2006 Act requires a director to avoid situations in which he or she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests. However, this requirement will not apply if the conflict of interest arises “in relation to a transaction or arrangement with the company”. In addition, the duty will not be infringed if a particular matter has been authorised by the board of directors or if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.

Consequences of conflicts

A trustee or director who has a conflict of interest may breach his or her duties in one capacity whilst acting in accordance with his or her duties under the other capacity. Sanctions for breach of duty include personal liability for any losses caused by the breach. There is also a risk of fines and, in extreme circumstances, imprisonment where statutory duties have been breached. It is also possible that a court may set aside any decision which is made by a conflicted individual. In addition to the sanctions which can be imposed against an individual for breach of duty, such a breach could damage the credibility of decisions reached with any input from a conflicted individual.

Potential area for conflict: funding

One of the most obvious areas for conflict is the funding of an underfunded pension scheme by a company. A sponsoring company may be minded to pay off the deficit over a longer period of time to allow retention of cash within the company to assist with its development and growth. However, the pension scheme trustees might prefer the deficit to be eliminated over a shorter period to ensure the security of members’ benefits. Similarly, the company may express a preference for the pension scheme’s assets to be invested in higher risk instruments which have the potential for greater returns, thus reducing its liabilities to the scheme without the need for further contributions. However, the trustees may opt for lower risk instruments with lower potential returns to ensure benefit security.

Such scenarios would place a company director who is also a trustee in a difficult position. On the one hand, the 2006 Act states that he or she must act to promote the success of the company, whilst, on the other hand, he or she is under a fiduciary duty to act in the best interests of the pension scheme’s members.

Potential area for conflict: corporate transactions

It is also possible for conflicts of interest to arise in the context of corporate transactions, including mergers and acquisitions, the granting of charges and returns of capital. The moral hazard provisions of the 2004 Act have given the Pensions Regulator significant powers to take action where an attempt is made to divert funds away from a company where those funds might otherwise have become payable to its pension scheme and there is an intention to put them beyond the trustees’ reach. Although there is a clearance procedure for transactions to provide comfort to companies that have no such intention, the clearance application form requires a declaration as to whether the pension scheme’s trustees support the application. It is partly because of this that trustees now pay a great deal of attention to the implications of the transaction for the pension scheme.

Given that it is preferable for a clearance application to be supported by the trustees, a company is often willing to reach some form of compromise with the trustees whereby additional security is put in place for the scheme. Whilst such a compromise may be mutually beneficial to the company and the pension scheme, it may involve a reduced return for the company’s shareholders. If so, a company director who is also a trustee may be faced with having to decide whether to prefer the interests of the pension scheme over those of the company’s shareholders or vice versa. For this reason, company finance directors often consider themselves conflicted out of acting as pension scheme trustees.

Potential areas for conflict: confidentiality and disclosure

In the context of funding and corporate transactions as well as the day-to-day administration of a pension scheme, it is possible that a company director who is a trustee will have knowledge of issues which his or her fellow trustees do not have. Indeed, an advantage of the inclusion of company directors and senior management on the trustee board is the experience and improved communication between the two bodies which their appointment brings. Nonetheless, although this knowledge might prove invaluable to the trustees’ decision-making process, the director’s duties towards the company may prevent the disclosure of this information (for example, because of confidentiality). However, the director’s company duties would be in conflict with his or her trustee duty to disclose all relevant information to the other trustees.

Other potential areas for conflict

Further conflicts may also occur in the exercise of powers under the pension scheme’s governing provisions (for example, the exercise by the trustees of a unilateral power to amend the governing provisions where the company would not have agreed to such an amendment).

Please note that this briefing is by no means exhaustive of the types of conflict of interest which might arise.

Addressing conflicts from a trustee perspective

The Pensions Regulator’s guidance for trustees states that it is important for trustees to recognise a conflict of interest and take steps to deal with it. Consequently, any trustee who has a potential conflict of interest should declare it as soon as possible in order that appropriate steps can be taken. Such steps could involve establishing sub-committees of trustees to discuss specific matters and other methods of isolating the conflicted trustee from the discussion and decision-making process relating to the relevant topics. These include abstention from voting or non-attendance by the trustee concerned at meetings where these issues are discussed. However, care should be taken not to invalidate any trustee decisions by failing to comply with the pension scheme’s provisions in respect of delegation and quorum.

Another method of improving the position of a conflicted trustee body is to appoint an independent trustee. Certain trustee powers could be delegated (subject to the pension scheme’s governing provisions) to the independent trustee in relation to specific matters. In a similar vein, the trustees should also obtain legal and actuarial advice independently of the company.

The ultimate solution to a conflict of interest could be the resignation of the individual from his or her position as trustee or company director. However, this solution should generally not be used unless it is impossible to manage the conflict any other way. As noted above, the knowledge and experience that a company director can bring to a trustee board is often invaluable.

Trustees may find it useful to document their procedure for dealing with conflicts of interest and disclosure. This ensures that a particular procedure is followed and serves as a useful source of reference for trustees should a future conflict arise. In addition, and regardless of any other action taken to manage a conflict, trustees may wish to consider inserting a provision into their scheme’s governing documentation which states that any trustee decision cannot be invalidated by reason of a conflict of interest. Although this would not guarantee protection to a conflicted trustee, it would add certainty to any decisions that are made.

If an individual is in doubt as to what course of action should be taken, he or she should seek independent legal advice.

Addressing conflicts from the perspective of an employer and the 2006 Act

It may be possible for a company director to avoid breaching his or her duty to avoid conflicts of interest under section 175(1) of the 2006 Act by reliance on the exception at section 175(3) that this duty does not apply to a conflict of interest which arises “in relation to a transaction or arrangement with the company”. Some commentators have argued that this exception might be wide enough to exempt conflicts arising in respect of funding and corporate transactional issues, but, in our view, this puts a very wide interpretation on such words, which we believe are intended to cover personal arrangements between the director and the company. It is, however, arguable.

In any event, being seen by the company’s shareholders and the scheme’s members to have properly addressed a conflict of interest is often as important as complying with the law. As such, it may be more appropriate for a company director to show that the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or for his or her fellow directors to authorise the matter as permitted by section 175(4). If an individual director wishes to rely on a general authorisation to carry out trustee duties, this should be obtained prior to the coming into force of section 175 on 1 October 2008. However, it is worth noting that in the case of a public company, its articles must include a provision enabling the unconflicted directors to authorise any conflict of interest. Consequently, the company’s articles may need to be amended before 1 October 2008 to permit this. In the case of a private company, the unconflicted directors will be able to authorise any conflict of interest unless the company’s articles prohibit this.

A conflict of interest may also be avoided by the relevant director abstaining from certain decisions or absenting himself or herself from certain discussions regarding the pension scheme.

If the company is concerned that confidential information might be disclosed by a director to his or her fellow trustees, it should consider putting in place a confidentiality agreement. This would establish the areas of information which are pertinent to the trustees and the extent to which this information may be disclosed. The potential for conflicts of interest to arise would be reduced and the trustees would be under an obligation to keep the specified information confidential. Furthermore, the provision of this information to the trustees may enable them to better understand the company’s situation and improve communication between the parties.


There are many ways to address the conflicts of interest which arise in respect of company directorships and trusteeships. The advent of recent legislation has made it all the more important that such conflicts should be dealt with and not ignored. In order to prevent any perception that a conflict has arisen, both company and trustee boards should develop a policy which sets out a course of action to be taken upon becoming aware of any potential conflict, so that it can be addressed as quickly and efficiently as possible.