The Pensions Regulator issued its guidance on 1 October 2008 on conflicts of interest. Employers and trustees will now need to consider what action is necessary in light of this guidance. The Regulator has substantially rewritten the draft it circulated for consultation in February 2008 and has clearly listened to the concerns expressed by respondents.
The conflicts guidance is structured as follows:
- understanding the importance of conflicts of interest;
- identifying conflicts of interest;
- evaluation, management or avoidance of conflicts;
- managing adviser conflicts; and
- conflicts of interest policy.
The main messages in the conflicts guidance are set out below.
- The conflicts guidance is intended to provide ‘educational support ‘
The Regulator explains that the conflicts guidance ‘aims to provide educational support, particularly to smaller schemes, with a view to both sharing good practice and raising standards’ (paragraph 2). The guidance may well be updated in due course by the Regulator as practice in this area develops.
The Regulator emphasises throughout the conflicts guidance that it is not a substitute for pension schemes seeking legal advice (where appropriate) both in relation to (setting, monitoring and reviewing) their conflicts policies and procedures and in the event that a conflict arises (see, for example, paragraph 3).
- Trustees should avoid the perception of conflicts, as well as actual conflicts
In addition to ‘actual’ or ‘real’ conflicts, the conflicts guidance suggests that trustees should be alert to decisions and actions which could be perceived as having been influenced/open to influence by a trustee’s conflict (paragraphs 42 and 43).
- Managing conflicts
Disclosure of a conflict is not enough. The Guidance suggests that trustees should consider the consequences and how to manage them. The existence of a conflict does not necessarily require action by the trustees. The Regulator recognises this in paragraph 52 of the conflicts guidance where it explains:
‘When a conflict has been identified, trustees should have a process for assessing its impact and deciding whether an active form of management is needed.’
Factors on which this decision could be based include the impact the conflict may have on (a) the validity of the decision-making, and (b) the scheme beneficiaries (paragraph 52). If the trustees decide that active management is not necessary, they should be able to demonstrate that the position was fully considered (and, where appropriate, legal advice was sought) and the decision should be recorded.
In its guidance, the Regulator refers to the following non-exhaustive list of potential methods which could be used to manage conflicts:
- withdrawal by the trustee from ?? discussions and the
- decision-making process; and/or
- establishment of a sub-committee; and/or
- appointment of an independent trustee; and/or
- resignation/non-appointment of the trustee; and/or
- management by the employer of the risk of a conflict arising; and/or
- application to the courts.
- Confidential information
The Regulator states that ‘acute conflicts’ can arise in relation to confidential information because there is legal uncertainty over whether a trustee’s duty of disclosure to the pension scheme takes priority over their duty of confidentiality to a third party (paragraphs 81 and 82).
However, the Regulator questions whether this conflict issue ceases if the trustee is excluded from the decision-making process or if the trust deed absolves the trustee from sharing the information (paragraph 82).
We think it is prudent to seek to negate any disclosure duty by including an express provision in the scheme governing documents. However, the trustee board may not agree to such an amendment.
In any event, given that a trustee may be in breach of their fiduciary duty to their employer or in breach of other obligations (for example, where the trustee is a trade union member or negotiator), the prudent course is not to disclose the confidential information without first obtaining fact specific legal advice.
Disclosure of information to fellow trustees may not breach a trustee’s confidentiality duty to their employer if that employer has a wide obligation to disclose information to the trustees under a confidentiality agreement.
Whether or not there is an obligation on a trustee who has a conflict to share confidential information, or whether there is an express contractual commitment to do so, trustees who are employees or officers of the sponsoring employer should be aware that the Regulator may seriously consider imposing a fine for failure to disclose to the trustees the occurrence of any event relating to the employer which there is reasonable cause to believe will be of material significance in the exercise by the trustees or their professional advisers of any of their functions1. It appears that the Regulator considers that taking key steps in a process which ultimately leads to the signing or completion of a corporate transaction such as a refinancing can constitute an event. In other words, the event is not just the ultimate signing or completion of the transaction. (See paragraph 86.)
- The ongoing process
A theme throughout the conflicts guidance it that pension schemes should have a ‘culture’ of managing conflicts of interest and conflicts should not be dealt with on an ad hoc, standalone basis.
To encourage this the Regulator advocates, for example:
- trustees regularly reviewing their conflicts management policies (or procedures) (paragraph 128);
- a conflicts policy being set up with procedures for monitoring compliance with its terms (paragraph 125); and
- trustees considering including conflicts as a standing item at each trustee meeting (paragraphs 45 and 49).
We suspect that the Regulator may ask trustees for a copy of their conflicts policy (eg if there is a clearance application).
- Governing documentation/Companies Act 2006
Conflicts duties (and disclosure duties) may be modified by the documents governing the pension scheme (usually the trust deed and rules and, for a corporate trustee or employer, their constitutional documents – memorandum and articles of association).
The Guidance acknowledges this, but cautions against relying on them in unenvisaged situations. For company directors the new conflict provisions in the Companies Act 2006 (also coming into force on 1 October 2008) need to be considered.
Employers and trustees should review the conflicts provisions in their governing documents.