The independent trustee and conflicts of interest
An independent trustee, by definition, is free from any potential conflict of interest. Why? The word independent is the give away, not surprisingly – independent of other members of the trustee board through a family connection, for example, or working in some other capacity for the pension scheme’s sponsoring employer, or being connected directly or indirectly with a member of the pension scheme itself. Conflict of interest is pernicious and can readily undermine the good governance of any pension scheme. Conflict of interest can be subtle and very hard to spot. It can also be blatantly obvious, as a recent case highlighted all too clearly.
Not to go into it too deeply, the case in question involved the investment of much of a pension scheme’s assets into property. One of the trustees had a direct financial interest in two properties acquired by the pension scheme. Although it was claimed the conflict was declared, with the trustee ‘stepping out the room’ at the time other trustees took the decision to purchase, the Pensions Regulator was not convinced.
It was clear, said the Regulator after the conclusion of a lengthy investigation, that prior to that stage and right up to the point of purchase the conflicted trustee was actively involved in all decisions involving the property. As a result of the investigation, three trustees were banned for life from becoming trustees after admitting breaching regulations. A salutary lesson for all if one were needed. Thankfully, such cases are the exception rather than the rule.
The Pensions Regulator makes great play with regard to conflicts of interest, hammering home the need for trustees to always be on their guard and to have in place measures to effectively deal with them if they are discovered. In its guidance to trustees, the Regulator emphasizes the need of pension schemes to be “underpinned by a robust governance framework”. It was vital decisions were not affected or tainted by conflicts of interest so that valid decisions were made, and perceived to be made, in the best interests of the pension scheme’s members.
The Regulator continues, “It is trust law which imposes on trustees a duty to exercise their powers in the best interests of the beneficiaries. While it may be inevitable that conflicts of interest sometimes emerge, the important point is that they should be properly identified, monitored and managed. The failure to deal properly with a conflict of interest could result in a trustee’s actions being set aside and/or personal liability for the trustees.”
Trustees who are also employed by the sponsoring employer might bring additional benefits not easily replaced, the Regulator concedes, contributing to the operational effectiveness of the pension scheme. But it also needed to be recognised that such trustees might face conflicts of interest by virtue of their employment. There was also a need for trustees to decide the correct mix of trustees for their scheme, taking into account the scheme’s governing documents. If it could be afforded, this might mean the appointment of an independent trustee who almost by definition will ordinarily have no conflicts of interest yet will still bring knowledge and expertise to the scheme.