- 55% of schemes do not have appropriate processes in place to deal with conflicts of interest
- Lack of conflict management comes despite the Pensions Regulator publishing regulatory guidance two years ago
- Schemes need to address conflicts of interest urgently
The majority of trustee boards on small pension schemes do not have appropriate measures in place to deal with potential conflicts of interest, warns Wedlake Bell, the City law firm. This is despite the Pensions Regulator upping the pressure on schemes by recommending they put in place processes two years ago this month.
According to the Pensions Regulator's Annual Report and Accounts for 2009-10, 55% of trustee boards on small pension schemes do not believe that they have "appropriate processes in place" to manage conflicts of interest.
Wedlake Bell says that the Regulator published guidance on managing conflicts of interest back in October 2008, exactly two years ago, as part of a drive to eradicate the dangers posed to pension schemes when such conflicts arise.
Justin McGilloway, Solicitor in the Pensions team at Wedlake Bell explains that conflicts of interest often arise when a trustee on a company pension scheme is also employed by the company, meaning they have a vested interest in the company's overall financial performance.
For example, a Finance Director who is also a pension scheme trustee might feel it is in the company's interest to reduce pension contributions, or to make overly optimistic forecasts of the fund's future performance, even though those might not be beneficial to the interests of the pension scheme and its members.
Justin McGilloway comments: "This is a worryingly large percentage of schemes that admit they do not have provisions for dealing with these conflicts, which can potentially be very damaging."
"The fact that more than half of small pension schemes still fail to have these procedures in place is also a blow for the Pensions Regulator, who has been working in earnest for some time to eradicate this problem."
"Strong governance of pension schemes is good for trustees and shareholders alike as it reduces the likelihood of a funding timebomb blowing up in the future."
Justin McGilloway adds: "This really isn't a big ask. A review of conflicts of interest and the costs of putting in the appropriate checks and balances are not huge. Avoiding this really is a false economy."
"With these provisions in place, pension schemes have a clear guide to work to as and when conflicts of interest arise so that they can be managed and dealt with as painlessly as possible."
"Without it, the trustee causing the conflict may have to resign or could be sacked. As well as the disruption this may cause to the success of the scheme, nothing will have been done to make sure it doesn't happen again with someone else."
"In a worst case scenario a conflict may be so great that the Regulator has to step in to formally appoint an independent trustee."
Problem worse with smaller schemes
The lack of conflict management procedures is significantly worse in smaller pension schemes and Wedlake Bell explains that a lack of proper advice to these schemes could explain the statistics.
Comments Justin McGilloway: "Pension schemes that are taking specialist advice should be getting a loud, clear message that having a conflict of interest policy in place is vital."
"There are evidently a lot of schemes out there who have either not received this message, or haven't taken heed of it. They need to address conflict management as a matter of urgency."