The Pensions Regulator has published the final version of its guidance for trustees and employers on conflicts of interest. The draft version was issued for consultation in February 2008 (see our briefing of March 2008).
Whilst there are some changes of drafting to the five key principles and to the guidance generally, the overall message remains fundamentally the same as in the draft version. The main changes include the following.
- As a result of respondents' comments the guidance has been shortened, and some of the former repetition removed. A separate, abridged version of the guidance has also been issued, summarising the key principles and some of the questions trustees should be asking themselves. However, in its consultation report the Regulator states that it would expect all trustees who read the summary version to read it in conjunction with the main guidance, a view with which we agree.
- The Regulator's expectation that trustees should seriously consider obtaining independent legal advice when seeking to manage a non-trivial conflict of interest and act on this advice remains unchanged, but the number of references to this in the guidance has been reduced in response to comments made.
- A number of respondents were concerned that the draft guidance overemphasised the risks of having trustees who also hold senior positions within the employer, suggesting that this could result in trustee resignations. The guidance has been updated, and the consultation report notes: "it is not the regulator's view that such appointments are inappropriate, merely that the likelihood of a non-trivial conflict increases and thus such appointments need to be managed accordingly. Of course, in extreme cases, there will be circumstances when the nature of the conflict is so acute or pervasive that resignation (or avoidance) may be the only appropriate course of action".
- Concern was raised that the guidance was DB-specific, so there are now more references to DC schemes and DC case examples, but the Regulator emphasises that all the principles and much of the detailed guidance are relevant to both DB and DC schemes.
- Conflicts of interest policy: formerly Principle 2, this is now Principle 5, in response to comments that the conflicts policy should be the last step of the cycle, once other principles have been addressed. The policy should be regularly reviewed: the final guidance now states: "Internal controls, including those relating to conflicts, should be reviewed at least on an annual basis, or sooner if relevant changes occur, for example a change in control of the employer".
- Options for managing conflicts of interest: the Regulator confirms that neither the appointment of an independent trustee nor any other course of action is a panacea for conflicts management. A new additional option is conflict management at the 'employer end' (e.g. trustees who also hold positions within the employer withdrawing from employer negotiations which may impact on the pension scheme). The section on withdrawal from discussions and the decision-making process remains, but the statement in the draft guidance that a trustee should always withdraw from discussions about his own remuneration and neither vote on them nor be counted as part of the quorum has been replaced by a statement that "trustees must seek to manage any perceptions that such a transaction could unduly influence the decisions of the trustees".
- There are one or two small changes to the sample declaration of interests in Appendix C: the list of directorships should indicate whether there is any association with the scheme; and directors should indicate shareholdings in associated companies (as opposed to companies generally); and the sample conflicts policy in Appendix D includes a longer list of possible areas that could give rise to conflicts.
The Regulator intends to update the guidance in light of experiences from case work and trends identified in its annual governance tracker survey. It now hopes to see "a marked improvement in areas of conflicts management, for example it is acknowledged that the production of a conflicts policy plays an important role in communicating important messages to trustees, but still very few schemes have yet to put a formal policy in place".