Conflicts of Interest Guidance

The Regulator has recently published guidance on conflicts of interest, affirming the Regulator's position that management of conflicts of interest is key to good scheme governance. The guidance is essential reading, particularly for all trustees (for whom management of conflicts of interest is a "hot topic" given the financial pressures being faced by many schemes and sponsoring employers). The Regulator acknowledges that whilst, inevitably, some conflicts of interest will emerge in certain schemes, it is important that such conflicts are properly identified, monitored and managed.

The Regulator comments that if trustees fail to deal properly with a conflict of interest that has arisen, this could result in trustees' actions being set aside and/or result in personal liability for the trustees. It does acknowledge, however, that appointing senior staff of the employer as trustees can be beneficial for the scheme due to the substantial contribution these individuals can make but that trustees in this position may be conflicted due to their role with the employer.

The Regulator expects conflicts to be disclosed and managed on a case-by-case basis, with the benefit of legal advice where appropriate.

A set of five key principles of conflict management are also included in the guidance:

1. understanding the importance of conflicts of interest;
2. identifying conflicts of interest; 
3. evaluation, management or avoidance of conflicts;
4. managing adviser conflicts; and
5. conflicts of interest policy (i.e. schemes should agree and document their policy (or procedures) for identifying, monitoring and managing conflicts of interest and keep these under regular review).

If your scheme requires assistance in implementing the principles of the conflict of interest guidance or perhaps you are concerned as to whether your current conflict management processes are stringent enough, please discuss this with your usual Shepherd and Wedderburn Pensions Group contact who will be happy to provide advice.

DWP consultation on employer debt legislation

The DWP has launched an informal consultation process on reform of the employer debt legislation (i.e. Pensions Act 1995 section 75 debts) but only as it applies to multi-employer schemes. The consultation paper has been issued to a limited number of key stakeholders and is not a formal public consultation at this stage. The DWP intends to consult more widely and formally at a later date, possibly in February 2009.

By way of background, the DWP has become aware that there is dissatisfaction within industry that company reorganisations intended to streamline or enhance the profitability of a company can trigger an unwanted or unnecessary liability to pay the employer debt (which since September 2005 has been calculated at full buy-out level). The DWP is working with industry to seek a solution to the current situation and states that the main principle is that a debt should not be triggered following a company reorganisation if that reorganisation did not bring detriment to the pension scheme or its members (i.e. there was a strong employer covenant in the first place and there has not been a weakening of the employer covenant or increased risk of entry to the Pension Protection Fund (PPF) on account of the restructuring). The DWP's paper sets out four potential options for the future, referred to briefly below:

1. allow scheme apportionment as the default;
2. a de minimis threshold to be set whereby the outstanding debt would be expressed as a proportion of total scheme liabilities below which a corporate transaction would not trigger an employer debt;
3. reducing (smaller) employers' debt from the full buy-out level to either the scheme funding level or the level of PPF protected rights; or
4. do nothing!

We will keep you updated on any further developments, although any reform in this area may come too late to help companies looking to restructure now to cope with the current financial crisis.

ICAS Guidance

You may be interested to note that the Institute of Chartered Accountants of Scotland (ICAS) has produced Guidance entitled "Pension Trustees – Getting the balance right in evaluating the employer covenant" which can be found at the following website:

http://www.icas.org.uk/

24 November 2008

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