MPR offers Pension Liability Insurance to those responsible for establishing, maintaining and managing employee pension and benefit plans.
Pension liability insurance can provide peace of mind that, if something does go wrong, there is a product crafted specifically to accommodate the consequences. The insurance provides protection to all kinds of organisations against the risks arising out of what has always been a complex area.
Why do your clients need Pension Liability Insurance?
- Trustees play a vital role in the running of pension schemes and, although many are volunteers, they are required to act in a professional manner. The responsibilities placed upon them by pensions law and other legislation are onerous, and can be personal.
- Exoneration will usually be allowed under the terms of a scheme, but the scheme will still be short of the funds which were used to stand behind that obligation to exonerate. These costs do not evaporate and must be displaced somewhere, typically to the fund or the employer.
- Pensions have always been complicated and the law surrounding them has been constantly evolving for many years. Navigating the changes and making sure knowledge and scheme arrangements are up to date is a constant challenge. The purchase of a properly drafted insurance policy can be a cost-effective means of protecting members benefits, individual trustees, the sponsoring employer, pension managers and internal administrators from losses resulting from claims.
What does the policy cover?
- The purpose of the policy is to insure pension schemes and other benefit plans, trustees thereof, corporate trustees, companies, directors, officers and employees for wrongful acts, errors or omissions in respect of the operation of benefit plans and representation costs in benefit plan-related investigations of them by regulators.
- The policy will cover loss resulting from covered claims against covered parties alleging wrongful acts, error or omission, misstatement, neglect, breach of duty, breach of trust and maladministration.
What limits are available?
Up to £10 million for any one claim.
What does an underwriter like to see?
- Financially sound organisations with consistent and experienced management.
- Adequately funded schemes.
- Long standing relationships with professional advisers.
- In-house administrators.
Is there anything an underwriter wouldn’t insure?
- Schemes that have experienced a high turnover of advisers may suggest an underlying issue in need of further investigation.
- Schemes that are in assessment for the Pension Protection Fund, or employers that are in an insolvency procedure are unlikely to to be insurable.
- Underwriters will exercise caution around aspects such as changing investment strategies and persistent late payment of contributions.
Why choose MPR?
- Deep experience over many years in all the products we underwrite
- Simple and clearly stated policy language with the removal of ambiguity
- A straightforward, broker focussed, technical and service based proposition
- Strong financial rating
- Broad definition of insured including corporate trustees, employers, constructive trustees, directors and officers of employers
- Confining the benefit of insurance to trustees only would limit the value of the cover. An exoneration or indemnity may be given by the scheme or the sponsoring employer company and this will certainly help to deflect liability from the trustees in some cases. However, in other scenarios the claim may be made against another party involved in the operation of the scheme. Additionally, the deflected liability of the trustee has to land somewhere. Having a broader definition of who is insured helps to accommodate claims against trustees that succeed, those that are indemnified where the costs are directed elsewhere and those claim that are not made against trustees in the first place.
- Flexible language to cope with ongoing changes
- Very few things stand still for long, and pensions are no exception. A benefit of pension liability insurance is that it can accommodate many of the changes that take place automatically. Even if a scheme winds up, there will nonetheless be cover with respect to that scheme for wrongful acts prior to and after, and (as concerns investigations) conduct prior to and after, the start of winding-up.
- Service Provider Pursuit Costs
- Sophistication of pension liability insurance has increased over recent years. Exclusions have been removed and extensions developed to make the product more attractive. Service Provider Pursuit Costs are an example of this. Where evidence exists that mistakes have been made by advisers to a scheme, the possibility now exists to fund a negligence claim by a call on this extension under the policy.
- Previous policy cover option
- Moving pension liability was once considered a bad idea because of the concern around continuity and quality of cover. Lack of clarity from insurers didn’t help either – many policies were called ‘Pension Trustee Liability’, which would potentially limit the value of the cover. These days it’s much easier to move, not least because of continuing product developments. To further remove room for doubt, allowing an optional ‘look back’ provision in a policy permits a previous policy to be used to interpret a claim made on a superseding form. It is a far from perfect science, but it can provide some comfort where it might be required.
What can go wrong?
Trustees of a fund issued a pre-action protocol letter to two retired trustees alleging that they made defective investment decisions when they moved the fund assets from one insurer to another. Although the retired trustees had taken advice from pension consultants at the time, it was nonetheless alleged that what they had done constituted a breach of their contractual, tortious and fiduciary obligations to the pension scheme and beneficiaries. The funds performed disastrously and almost £3,000,000 was wiped off the value of the assets.
Whether or not an exoneration provision exists, trustees are unable to hold themselves harmless for negligence which involves a breach of duty to take care or exercise skill in the performance of investment functions, an area where much of a trustee’s duty lies. In any event, because of the administration of the employer, and the diminution in assets of the fund, any potential exoneration had no underlying assets to back it up.
The fact that advice had been taken provided little protection. A finding in recent Pension Regulator research highlighted that smaller schemes were less able to challenge advice and, had that happened in this case, the outcome might have been different. The evolution of pension liability policies has led to the removal of ‘insured versus insured’ exclusions, so this claim was within the scope of the policy.
The Pensions Regulator asked a sponsoring employer to provide a report on the backlog of contributions since auto-enrolment. The Regulator also asked for an explanation confirming how the backlog came about and what remedial plans were in place. The sponsoring employer engaged the scheme lawyers to avoid any possible sanctions being imposed.
Understandably, pension liability insurance will have terms which prevent the payment of contributions that the sponsoring employer is obliged to make. Notwithstanding this, it is typical for defence costs associated with these kinds of claims to be paid.
A common feature of pension liability claims is the accuracy of data and regular data health checks are a strong loss prevention measure. Other issues which have given rise to problems and potential liabilities include:
- incorrect formulas used for calculating benefits;
- interpretation of trust deeds;
- misapplication of scheme rules;
- early retirement and ill-health disputes;
- accounting irregularities;
- choices of investment funds in defined contribution schemes;
- administration errors;
- misrepresentations by trustees; and
- discrepancies between scheme documentation and administration practice.
A pension scheme member complained that he had been treated as an incorrect class of member for tax purposes. The member was of the view that the sponsoring employer had made a promise to him that he would be part of this specific class that was more beneficial to him, given his years of service. The member took the matter to The Pensions Advisory Service, who agreed with the trustees that no evidence existed to support the member’s assertions.
As in many other walks of life, allegations need to be defended and professional advice can be expensive. The costs in this case, whilst not excessive at £25,000, would have to be borne by the fund because of the operation of the exoneration clause. So, whilst the trustee was shielded from any personal costs, the scheme, and ultimately the employer, would have had to make that amount whole if insurance was not in place.