Conflicts: at last the Regulator speaks

United Kingdom

Potential conflicts for pension scheme trustees have become an increasingly important issue in recent years as trustees and companies have had to consider and negotiate funding plans, guarantees and, in many cases, arrangements for clearance of corporate transactions. Today, after a perhaps longer wait than had been anticipated, the Pensions Regulator has issued its proposed guidance to trustees on the subject for consultation.

The Regulator's overall approach

The guidance is based around five "high level" principles which the Regulator believes need to be borne in mind at all times:

  • understanding the importance of conflicts of interest
  • having a conflicts of interest policy
  • identifying conflicts of interest
  • the evaluation, management or avoidance of conflicts; and
  • managing conflicts with advisers.

The guidance is clearly designed to link in with, and refers to, other governance requirements for schemes (such as trustee knowledge and understanding, and the need to have adequate internal control mechanisms). It makes clear that the issue of conflicts is "scheme-specific" in the sense that any conflicts policy "should be tailored to reflect the operations of the trustee board". The guidance is not only lengthy (at 125 paragraphs) but also wide-ranging: for example, there is a passage on remuneration of trustees, and the need for it to be formal and transparent.

A few key themes

One discernible theme is the role of lawyers - the Regulator says that where any actual conflict of interest is identified, it expects trustees to seek legal advice, and that legal review of any conflicts policy is "essential". Another theme is the potential role of the professional independent trustee in neutralising risks of conflict, particularly as chair of the trustee board.

Trustees will wish to carefully digest the Regulator's views on the most serious conflicts, those which it defines as being of "an acute or pervasive nature". In particular, the guidance refers to the possibility that where trustees are assessing whether or not to demand a substantial employer contribution from a weak employer, or whether to trigger wind-up, conflicted individuals may even have to resign.

Both trustees and advisers will also be interested in the section of the guidance about trustees and the sponsoring employer sharing advisers. However, those seeking a Regulator view on the Companies Act 2006 changes dealing with conflicts of interest of directors will be disappointed: the Regulator emphasises that the 2006 Act is beyond the scope of the guidance.

Documenting compliance

In addition to the main guidance, the document contains appendices with examples of documents that trustees should consider adapting for their own schemes. These include a formal conflicts policy, a sample "declaration of interest" by a trustee and a template for a conflicts register.

What now?

The deadline for responses to the consultation is 30 May 2008. In the meantime, although the guidance is expressed as “draft”, schemes and their advisers should take the next available opportunity to review the guidance in its current form, and consider checking their existing conflicts policies against it.

For the full guidance, please click here.

Please contact your regular CMS Cameron McKenna contact should you require further advice.