MPR offers Pension Wind Up Liability Insurance to trustees responsible for the winding up of employee pension and benefit plans.
As more trustees and employers consider buying-out their pension scheme’s liabilities, the question of whether the trustees retain any residual risk is an important one. Pension Wind Up Liability Insurance can provide peace of mind that, if something does go wrong, there is a product crafted specifically to accommodate the consequences.
Why do your clients need Pension Wind Up Liability Insurance?
- Trustees play a central role in the running of pension schemes and the obligations placed upon them by pensions law and other legislation can be onerous.
- The responsibility to ensure members are traced lies with the trustees.
- A statutory indemnity might be available but this is not certain and it might need a court to decide if a trustee ought to be excused for any breach of trust.
- Exoneration provisions or sponsoring employer indemnities may exist but they may not endure and cannot be guaranteed. These provisions will also not apply to claims by third parties or in respect of investment management, which is where much of the duty of a trustee lies. Moreover, to get to the stage where any of this can be established may involve significant time and expense.
What does the policy cover?
- The purpose of the policy is to insure pension scheme trustees and corporate trustees (if applicable) for wrongful acts, errors or omissions in respect of the winding up of a pension scheme.
- The policy will cover loss resulting from covered claims alleging wrongful acts, error or omission, misstatement, neglect, breach of duty, breach of trust and maladministration, some of which might include:
- disputes about the maintaining of membership data and records;
- incorrect quotations;
- unresolved equalisation issues;
- delays in transfer and payments of benefit assets;
- misapplication of scheme rules;
- failure to review investments;
- failure to pay benefits in the correct order of priorities on wind up;
- failure to identify beneficiaries of the scheme.
What limits are available?
Up to £10 million for the policy period (up to 15 years).
What does an underwriter like to see?
- Financially sound organisations with adequately funded schemes.
- Long standing relationships with professional advisers.
- In-house administrators.
Is there anything an underwriter wouldn’t insure?
- Schemes that are in assessment for the Pension Protection Fund, or employers that are in an insolvency procedure, are unlikely to be insurable.
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
Important questions and considerations
- Exoneration and indemnity
- Courts have confirmed that exoneration clauses can survive the winding-up of a scheme. If it does survive, the courts have made it clear that, regardless of the express wording of the exoneration clause, they will not interpret such clauses as allowing trustees to act in bad faith or recklessly. Furthermore, an indemnity from the assets of the scheme might not be of assistance once the winding-up of the scheme has been completed because few assets may remain.
Although the position is not entirely clear, there are strong grounds for arguing that an indemnity from an employer would survive the expiration of the trusts of the scheme on its winding-up. The trustees may therefore seek a specific indemnity from the employer as part of the winding-up process in the deed of termination and wind up resolution. Either way, there is no certainty how long any indemnity will last or how good it might be. Acquisitions, insolvencies and other unforeseen events may interfere over the long term and Wind Up Liability Insurance can provide certainty.
- Who to sue?
- In an ongoing scheme, or one which has ceased future accrual, this is more obvious and the trustees may avoid liability. In a wind up situation, if there is a claim or allegation that a mistake was made, or that a beneficiary was overlooked, there is often nowhere to go other than the trustees.
- When to sue?
- The statutory limit within which a claim can be brought is 12 years. This is a long time to have rely on other mechanisms to step in if a claim materialises. Policy periods under wind up insurance can match the limitation for claims under trust.
- Statutory discharge and certainty
- On wind up, trustees may seek to obtain a statutory discharge from liability. If the correct procedural steps are taken, there is no obvious reason why trustees should not be able to obtain this, although the extent to which it would protect trustees is not at all clear.
There can be tensions between trustees taking pragmatic and proportionate decisions and the desire to protect themselves from future legal challenge. Some protection exists in theory, but it is often the responsibility of the trustees to persuade a court that they acted honestly and reasonably and ought to be relieved of liability. This journey can be uncertain and costly and could be one of the reasons The Pensions Regulator suggests that: “Trustees may also wish to consider taking out individual indemnity insurance.”
What can go wrong?
The pension wind up liability landscape is not littered with loss examples in the way that other financial lines classes are. However, cases do exist to show the extent of the risk:
32 people were transferred into a scheme from a plan operated by another group employer. When the scheme was wound up, these members were overlooked and did not receive their benefits. Once the oversight came to light, a claim was made on the pension wind up insurance, which included cover for overlooked beneficiaries. The insurance covered the benefits due to 19 of those overlooked beneficiaries for whom provision had to be made. The final settlement amount was over £1million.
This case made the importance of accurate and up to date records crystal clear if trustees seek to rely on the protection afforded by section 27 of The Trustee Act 1925 (protection of trustees from claims from unknown claimants who may appear after a scheme has been wound up). Where a beneficiary is known to have existed, but has been overlooked, then section 27 cannot offer protection.
Proven breach of trust cases against trustees are rare. However, in common with all other liability lines, allegations have to be defended. There is no doubt that insurance can play a vital role in providing the certainty that is required during the winding up of a pension scheme and, in many situations, insurance is likely to be the trustees’ best means of protection.