For company directors who are also trustees or members of an occupational pension scheme, this can be a particularly tricky issue as inevitably multiple interests can influence their decision making.
Examples of where this might become an issue include:
- The director-trustee who knows their company is in financial difficulties where their duty to sustain the business will directly conflict with their duty as a trustee to gather in or potentially demand employer pension contributions under the pension scheme rules.
- The director-trustee who possesses sensitive business information that they know adversely affects the strength of the employer’s ability or willingness to continue paying contributions under the scheme rules at existing levels.
- The director-trustee who knows the employer is proposing to sell a significant asset and distribute the proceeds as dividends or that a resolution is being passed to wind up the pension scheme in the circumstances where there is a large funding deficit in the pension scheme.
Under common law, where a trustee / director-trustee is found to have breached their duties and there is a shortfall in the assets of the pension fund, they may be held liable to make good that shortfall. Similarly, where the trustee has profited from the trust, they will be liable to account for that profit to the trust, unless there is an appropriately worded exoneration of indemnity clause in the trust deed itself.
Where, owing to a conflict or potential conflict, a director-trustee is found to have breached any of their duties, such trustee will be liable on summary conviction to a fine of up to €5,000, imprisonment for up to one year or both; and on indictment, to a fine of up to €25,000, imprisonment for up to two years or both.
The key to conflict management rests in removing any doubt as to the bona fides of the directortrustee in the making of their decisions concerning the scheme and its members, including where permissible under the scheme rules or memorandum and articles of association as appropriate:
- Continuing to act with the consent of all relevant parties but ensuring that they give precedence to trustee duties when acting as a trustee; or
- The conflicted director absenting him/herself from the particular decision making process in question.
- Using a sub-committee of directors (excluding the conflicted director) to take a particular decision; or
- Appointing a professional trustee to the pension scheme to help ameliorate the conflicts issue. This decision has considerable advantages but also disadvantages that should be explored.
- The individual resigning as director if they feel they cannot manage the conflict in any other way.
The risk in failing to manage conflicts is that decisions made where there is a potential conflict may be open to challenge by disgruntled beneficiaries in the future, even in circumstances where the beneficiaries have not suffered any prejudice.
Further, where the beneficiary has suffered a loss, the conflicted trustee could be held personally liable for such loss.
Conflicted director-trustees should be diligent in documenting every aspect of their decisionmaking so that they can demonstrate that their decisions were unaffected by any other conflict or motivation to accommodate employer requests. Crucially, trustees must remember that in the event of any conflict, their duties as trustees must prevail.