The working relationship between trustees and sponsoring employers of defined benefit pension schemes has changed beyond all recognition in recent years. Trustees are now seeking to analyse commercially sensitive financial information relating to the sponsoring employer and in return many trustees are being asked to sign confidentiality agreements. In this E-Bulletin, we consider the increasing use of confidentiality agreements from the perspective of both the sponsoring employer and the trustees.

Issues which have led to confidentiality agreements being used:

  • Trustees are expected to have far more awareness of the financial status of their scheme's sponsoring employer and to enter into negotiations with the employer regarding management of a scheme's liabilities. The Regulator has made it clear that for schemes in deficit, the scheme is a creditor of the employer and trustees are expected to behave like unsecured creditors.
  • Trustees are also expected to monitor the sponsoring employer's financial covenant on an ongoing basis and specifically for negotiation on scheme funding. Trustees should also ask to be kept informed of proposed corporate transactions that may impact on the scheme.
  • Trustees may require to employ the services of specialist accountants to examine an employer's finances in detail and report back to the trustees.

Whilst it is clear that trustees should treat all information received from the employer as confidential, entering a confidentiality agreement may be in the interests of both parties.

Trustees' perspective

Responsibility to safeguard members' best interests is a key duty of trustees. Members are undoubtedly best served by trustees who have as much access to financial and commercial information on the sponsoring employer as possible, particularly to information not in the public domain. A sponsoring employer is undoubtedly more likely to co-operate with trustees who have entered into a confidentiality agreement, providing the trustees with a fuller picture of the sponsoring employer's financial affairs. Well informed trustees are inevitably going to be more effective in protecting members' interests and will be in a stronger negotiating position when it comes to discussions with the employer on scheme funding, etc.

If trustees are asked to sign a confidentiality agreement, it will also focus their minds on conflicts of interest within the trustee body. If there is a member of the trustee body who is already privy to all the financial information on the sponsoring employer (e.g. where the Finance Director of the sponsoring employer also happens to be a trustee of the scheme), the trustees will need to carefully examine whether the potentially conflicted individual can continue in both roles. In this situation, it may be possible for the conflict to be managed but it is important to have an open discussion.

If trustees are asked to sign a confidentiality agreement, it is important that they seek legal advice to ensure certain safeguards are in place. For example, it may seem obvious but trustees must ensure that they are able to disclose any confidential information received by them to their advisers, where relevant. Trustees should also be careful to seek advice on the terms of the agreement, particularly if they are being asked to give any indemnities to the employer.

If a confidentiality agreement is not on the table, trustees should also be aware of the 1996 Scheme Administration Regulations, which require the employer to disclose certain information reasonably required by the trustees for the performance of their duties.

Sponsoring employer's perspective

There are benefits to the employer in sharing information where it enables trustees to take fully informed decisions. Any sponsoring employer being asked to divulge commercially sensitive information to trustees should try to ensure that the information remains confidential. The obvious way to achieve this is to ask trustees to sign a confidentiality agreement. Any sponsoring employer considering using confidentiality agreements is likely to require specialist legal advice as to content, but considerations will include what should happen if the trustees or their advisers change, what should happen to the data after disclosure (i.e. should it be retained by the trustees or destroyed) and protections should be built into the agreement to cover the scenario of a trustee breaching confidentiality, possibly by including indemnities within the agreement.

Given both trustees and employers can benefit from information flow, confidentiality agreements should be welcomed in appropriate circumstances.