The Pensions Regulator has finalised its conflicts of interest guidance for schemes other than contract-based arrangements. This guidance has been eagerly awaited, particularly in the light of the Companies Act provisions that came into effect on 1 October 2008.
The guidance identifies three stages (identification, monitoring and managing) and five high-level principles: (1) understanding the importance of conflicts (2) identifying conflicts (3) evaluating, managing and avoiding conflicts (4) managing adviser conflicts and (5) having a conflicts policy. Trustees are expected to seriously consider obtaining independent legal advice for non-trivial conflicts and they must regularly review their arrangements. The Regulator says that it wants a 'culture of openness' in which disclosure of conflicts is embraced.
Do we have to take any action?
The Regulator expressly recognises that one size does not fit all - conflicts will have to be managed on a case-by-case basis - so there is no single answer to the question: how should trustees react to the new guidance? However, trustees should be aware that the Regulator intends to intervene where it considers a conflict is not being managed appropriately. Possible steps that the Regulator might take include replacing a trustee or appointing an independent trustee.
For those schemes which already have a conflicts policy in place it would make sense to compare their policy against the guidance to see whether the scheme's arrangements are in line with the Regulator's expectations. Schemes without a conflicts policy should address this as soon as possible.
The guidance supplements the information in the Regulator's online toolkit. It should be drawn to the attention of any trustees who have completed the toolkit training (along with a general reminder that trustee knowledge and understanding is an ongoing obligation). For new trustees and others who are not yet well enough trained, this is a high-priority area for further reading and/or training.
The guidance recognises that it can be beneficial to have senior staff from the sponsoring employer appointed as trustees, but also says that managing conflicts in relation to those individuals is vital because "conflicts are inherently likely to arise". Similarly, the guidance says that trustees must pay particular attention to managing conflicts where they use the same adviser as the sponsoring employer. The Regulator says that there will be situations where doing so would be "unacceptable" but does not give examples of when this would be the case.
The guidance emphasises that the chair of trustees must think about how to deal with conflicts. Many schemes have good conflict policies in place. This is a time for chairs to review their policy (or to ask for a review of their policy) against the new guidance, to update their thinking (if they need to) and/or to complete and action reviews that are underway, but have been held up pending the publication of the guidance. The principles set out in the guidance contain a series of questions which schemes should be asking themselves. Again, there should be general trustee awareness raising and training, especially on any improvements or changes in scheme practice which result from this review. It is worth noting that the Regulator wants trustee boards chaired by a senior employee of the sponsoring employer to give careful thought to any conflicts process involving the chair.
Some schemes and employers have been delaying their Companies Act compliance process until this guidance was issued. It seems that delay was probably unnecessary but, in any case, Companies Act compliance reviews now need to be completed and actioned (see below).
How does the guidance interact with the Companies Act 2006 provisions on conflicts?
On 1 October 2008 , the Companies Act 2006 introduced a requirement for company directors to avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company (unless the situation cannot reasonably be regarded as likely to give rise to a conflict of interest). The scope of this wording is broad. Trustee companies, plus sponsors with directors who are also trustees, are affected by this. The action generated by the Companies Act includes an assessment of what the company's articles of association say and possibly arranging for shareholder approval to enable the other directors on the board to authorise a director to remain in office despite actual or potential conflicts.
However, any authorisation in line with Companies Act is only the start. The trustee directors will still need to ensure that they have arrangements in place to identify and appropriately manage conflicts of interest which arise. This is where the Pensions Regulator's guidance is of direct relevance. What are the broad messages delivered in the guidance? Taking each of the five high-level principles:
- Understanding the importance of conflicts - Trustees should understand their fiduciary obligations and the circumstances in which they may find themselves in a conflicted position. They must seek legal advice as necessary. The Regulator identifies the chair as key in establishing robust conflict management procedures. In view of this, the guidance says that trustee boards chaired by a senior employee of the sponsoring employer will need to think very carefully about any process for managing or avoiding conflicts that involves the chair.
- Identifying conflicts - Potential and actual conflicts should be identified and notified to the other trustees as soon as practically possible. There should be disclosure procedures, a maintained register of interests and a means of recording conflicts. Trustees are encouraged to think ahead, to establish whether any conflicts are likely to arise over the next, say, 12 months.
- Evaluating, managing and avoiding conflicts – There should be procedures for evaluating and managing conflicts (so that decisions are not compromised by the conflicted trustee). Minutes of meetings should be used to record conflicts arising during the decision-making process and action to manage the conflict should be recorded too. Independent legal advice should be seriously considered for non-trivial conflicts and where the conflict has potential to be detrimental to the trustees' conduct or decisions. The guidance identifies various options for dealing with conflicts but goes on to say that where a conflict is of an acute or pervasive nature it may be that the only way to deal with it is by the trustee's resignation and the appointment of an independent trustee. The Regulator acknowledges that confidentiality agreements may have a role to play in facilitating the sharing of confidential and sensitive information.
- Managing adviser conflicts - Advisers should be told that they must declare any conflicts and the trustees should evaluate an appropriate course of action. Professional advisers (including, among others, legal advisers, auditors and actuaries) are already required (under the Pensions Act 1995) to disclose any conflict as soon as they become aware of it to the trustees appointing them. The reporting lines and conflicts of any in-house pensions manager and secretariat also need to be understood.
- Having a conflicts policy – The trustees should agree and document a policy for identifying, monitoring and managing conflicts, which is reviewed regularly. Under the internal controls guidance, controls including those relating to conflicts should be reviewed at least once a year. To help trustees to understand the policy, training should be provided as required.