Conflicts of interest

Guidance

This guidance aims to provide educational support for trustees and employers for addressing conflicts of interest. You can read a summary version or the full guidance

Issued: October 2008

You can download the summary version of the conflicts of interest guidance (PDF, 254kb, 8 pages) (the summary is not a substitute for the full conflicts of interest guidance published here).

The summary guidance sets out the key principles for addressing conflicts effectively and some questions trustees should be asking themselves.

Conflicts of interest at a glance

1. The management of conflicts of interest is key to good scheme governance. While The Pensions Regulator recognises that many schemes have robust procedures, evidence suggests that there are aspects of conflicts management where further attention is required.

2. This guidance aims to provide educational support, particularly to smaller schemes, with a view to both sharing good practice and raising standards, in line with one of the regulator’s statutory objectives ^[1].

3. This guidance acknowledges that there are certain aspects of the law relating to conflicts of interest which are unclear. This guidance concentrates on the governance aspects of conflicts management. It is not a substitute for taking legal advice.

4. A conflict of interest may arise when a fiduciary (which includes a trustee) is required to take a decision where:

1. the fiduciary is obliged to act in the best interests of his beneficiary; 
   and
2. at the same time he has or may have either

1. a separate personal interest or
2. another fiduciary duty owed to a different beneficiary in relation to that decision, giving rise to a possible conflict with his first fiduciary duty ^[2], which needs to be properly addressed.

Such a conflict can inhibit open discussions or result in decisions, actions or inactions that are not in the best interests of beneficiaries. This, in turn, may result in the trustees acting improperly, lead to a perception that the trustees have acted improperly, and may invalidate a decision or transaction.

5. Conflicts of interest may be classified as either real conflicts or potential conflicts ^[3].

6. Broadly, when considering conflicts of interest, this should be done in three stages:

1. identification - for any conflicts management procedure to be successful it must include a process for identifying conflicts;
2. monitoring; and
3. managing.

It is the third stage which is particularly difficult. The law relating to conflicts of interests is complex and comes from a variety of sources including common law (case law), the rules of equity and trust law, and pensions and general legislation. When trustees consider how best to manage a conflict, the role of the legal adviser is important.

7. The regulator recognises that it can be beneficial to appoint senior staff from the sponsoring employer as trustees, particularly in terms of knowledge, expertise and experience. However, conflicts are inherently likely to arise before and after appointing such individuals as trustees. It is therefore vital that those conflicts are appropriately identified, monitored and managed.

8. Throughout this guidance reference to ‘employer’ may include members of the employer group and other parties with a financial interest in the scheme.

9. Clearly the way in which conflicts are managed will be case specific and may reflect the nature or scale of the conflict. This may include the use of a number of measures (provided such measures are permitted by the scheme’s legal framework). Some conflicts of interest may be so acute or pervasive that it would be better to avoid them entirely, for example, the acutely conflicted trustee could resign. In such circumstances they could be replaced, as appropriate, by the appointment of an independent trustee.

10. There are potential risks with any approach. When seeking to manage a non-trivial conflict of interest, and where the conflict could have the potential to be detrimental to the conduct or decisions of the trustees, the regulator would expect trustees to seriously consider obtaining independent advice from a lawyer when considering any option ^[4].Trustees should therefore assess the nature of the conflict being managed and the risk or threat to decision-making ^[5].

11. Trustees also need to ensure that adviser conflicts, which may affect the independence of advice, are identified and appropriately managed.

12. There should be a culture of openness: disclosure of conflicts should be embraced, not ignored. We expect all conflicts of interest to be resolved sensibly. Where a conflict comes to the attention of the regulator and the regulator considers that it is not being managed appropriately, we will take appropriate action. In some circumstances this might include the replacement of a trustee(s) and/or the appointment of an independent trustee.

Footnotes for this section

• [1] Section 5(1)(d) Pensions Act 2004 – ‘to promote, and to improve the understanding of, the good administration of work-based pension schemes.’
• [2] Such conflicts of interest may affect not only trustees but also directors, agents, professional advisers and others.
• [3] Unless otherwise stated, references to ‘conflicts of interest’ include real and/or potential conflicts.
• [4] All examples in this guidance are for illustrative purposes only and do not negate the trustees’ duty to seek independent legal advice where appropriate. All conflicts scenarios are scheme specific and fact dependent and should be discussed with a legal adviser.
• [5] The regulator would also expect trustees to seriously consider seeking legal advice if they are in any doubt whether or not a conflict is non-trivial or whether or not it could have the potential to be detrimental to the conduct or decisions taken by the trustees.

About the guidance

13. This guidance is relevant for all trustees of occupational pension schemes and employers (and may be of interest to scheme advisers).  It does not address conflicts which may arise in contract-based arrangements, as these may differ considerably. 

14. Conflicts of interest are a serious concern for the regulator.  They arise in the trustee governance model because many trustees have a stake in the scheme or its sponsoring employer.  If not managed effectively, decisions may be taken that put the interests of the beneficiaries at risk, or subsequently prove to be invalid.  Our aim is to help trustees identify and manage conflicts and avoid such consequences.

15. This guidance supplements information provided in our e-learning programme and the Trustee, Knowledge and Understanding (TKU) framework (code of practice 07, and the scope of knowledge and understanding documents ^[6]).

16. For those schemes that already have processes in place, this guidance will be a useful tool to assess the adequacy of existing arrangements. For example it may help trustees to:

• address any gaps that are identified; and
• understand what the regulator’s expectations are in respect of sound conflict management arrangements.

17. In this guidance we summarise the key principles of sound conflict management arrangements.  Trustees should gauge the extent to which they have, at a high level, addressed the key principles in establishing sound conflict management arrangements.  The remainder of the guidance illustrates some methods used by trustees when dealing with conflicts of interest and includes some case examples.  However, we are not endorsing the legality of any particular approach, which must take into account the circumstances in which the conflict of interest has arisen.  When determining the most appropriate approach, trustees must consider the scheme specific and fact dependent nature of their particular situation.  This may require independent legal advice.

18. While the principles may be applicable to most schemes, we understand that there cannot be a ‘one size fits all’ approach - smaller schemes may need to take a proportionate approach when seeking to apply the principles in practice.  However, we would still expect smaller schemes to have formalised procedures for managing all conflicts.

19. For defined contribution (DC) schemes, there may be less scope for conflicts of interest when compared with defined benefit (DB) arrangements, and even less scope for conflicts which are DC specific.  However, the requirement to manage conflicts still remains and the five principles have equal prominence, whatever the type of scheme.  Throughout the guidance reference is made to both DB and DC together with case examples.  That said, trustees of DC schemes will wish to pay particular attention to Principle 4 – Managing adviser conflicts, as this is likely to be an area where conflicts may well arise. 

20. Conflicts management is an ongoing process.  Trustees should review their arrangements regularly to ensure they are still adequate, particularly when circumstances change.

Footnotes for this section

• [6] See the Trustee toolkit tutorial 'Conflicts of interest' in the module 'The trustee's role' for further information.

The trustees' role

21. A well-run scheme will be underpinned by a robust governance framework. It is vital that decisions are not affected or tainted by conflicts of interest so that valid decisions are made, and are perceived to be made, in the beneficiaries’ best interests. 

22. 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.

23. Trustees who are directors of the employer will also need to consider requirements of the Companies Act 2006^[7] (see appendix E) relating to the avoidance of conflicts of interest.

24. Appointing senior staff of the employer as trustees can bring additional benefits which may not be easily replaced. They may make substantial contributions to the operational effectiveness of the scheme. However, it needs to be recognised that such trustees may face conflicts of interest by virtue of their employment. 

25. Trustees who are trade union representatives may be subject to conflicts of interest which are specific to their role. This is due to the fact that the trade union representative role is focused on active members of the pension scheme, who are only one class of beneficiary. 

26. Trustees should be aware that there are circumstances, for example a requirement to report a breach of law^[8], which override their other duties as trustees.

27. Trustees will need to decide the correct mix of trustees for their scheme. This will need to take into account the scheme’s governing documents. This may include, where resources permit, the appointment of an independent trustee. Independent trustees will (almost by definition) ordinarily have no conflicts of interest yet will still bring knowledge and expertise to the scheme.

Other guidance to consider

The Institute of Chartered Accountants in England and Wales has produced a help sheet^[9] on managing conflicts. This describes circumstances in which employees may be afforded protection under employment rights legislation if they are penalised for carrying out duties as a trustee and/or for reporting matters to the regulator, contrary to the employer’s instructions. It states that a report, which does not disclose information subject to legal professional privilege, under section 70 of the Pensions Act is likely to be a protected disclosure. Employees suffering detriment or dismissal as a result of making such a report may seek protection under the Employment Rights Act 1996 (ERA).

Footnotes for this section

• [7] The Companies Act 2006 Section 175
• [8] In accordance with section 70 of the Pensions Act 2004
• [9] The Institute of Chartered Accountants in England and Wales (ICAEW) Acting as a trustee for the pension fund of your employer: guidance to manage conflict (PDF) issued January 2007 (revised June 2007)

Principles of sound conflict management arrangements - a summary

Below is a summary of the key principles which include good practice techniques that help underpin sound conflict management and governance. Trustees can use this table as a quick reference for some of the issues they should consider when mitigating the risks associated with conflicts.  

Table 1 - Summary of key principles

Principle 1: Understanding the importance of conflicts of interest
Trustees should:
1.1	be aware of their fiduciary obligations to beneficiaries,  the requirement to exercise independent judgement and to be perceived to be doing so;
1.2	have a clear understanding of the circumstances in which they may find themselves in a position of conflict of interest;
1.3	communicate the legal requirements and duties imposed on trustees and discuss the scheme’s conflicts of interest policy with persons nominated to be a trustee, or upon the appointment of such persons.
Trustees must:
1.4	recognise that there are legal complexities in the area of conflicts of interest and should seek legal advice as necessary (see Principle 3.3).
Principle 2: Identifying conflicts of interest
Trustees should:
2.1	identify and consider any conflicts that may arise in the future and notify the other trustees as soon as practically possible;
2.2	identify and consider any conflicts that have arisen and notify the other trustees as soon as practically possible;
2.3	be appointed under procedures that require them to disclose any conflicts of interest;
2.4	confirm that they are not aware of any further conflicts that have not been disclosed to the other trustees;
2.5	maintain an up-to-date register of each trustee’s interests, for example financial interests and other appointments;
2.6	have a means of recording conflicts that have arisen or are likely to arise, for example by using a conflicts register.
Principle 3: Evaluation, management or avoidance of conflicts
Trustees should:
3.1	implement procedures for evaluating and managing conflicts that have been identified in a way that ensures that decisions are not compromised by the conflicted trustee(s);
3.2	clearly detail, in the minutes of the meeting, conflicts which may arise during a decision-making process and record the action taken to manage the conflict;
3.3	seriously consider seeking independent legal advice where a non-trivial conflict of interest is identified and where such a conflict could have the potential to be detrimental to the conduct or decisions taken by the trustees, in order to help decide the best approach to manage or avoid it[10] ;
3.4	be aware that some conflicts due to their acute or pervasive nature cannot be managed; they may determine that resignation and appointment of an independent trustee is the only option;
3.5	understand that the regulator cannot give guidance appropriate for every scheme as this depends on the nature of the conflict and the scheme’s trust documentation (this is why reference to seeking independent legal advice is emphasised throughout this guidance).
Principle 4: Managing adviser conflicts[11]
Trustees should:
4.1	actively manage their relations with advisers to ensure that advisers are able to provide independent advice;
4.2	require their advisers to declare any conflicts that may arise in respect of their engagement on a timely basis;
4.3	consider in advance whether conflicts make it undesirable for a particular adviser to be appointed or continue to act for them, in circumstances where a conflict with the sponsoring employer may arise;
4.4	evaluate the nature of the conflict, where a conflict has been declared, and determine an appropriate course of action;
4.5	where applicable, understand the reporting lines and conflicts their in-house pensions manager and secretariat may have.
Principle 5: Conflicts of interest policy
Trustees should:
5.1	agree and document their policy (or procedures) for identifying, monitoring and managing all conflicts of interest;
5.2	ensure that their conflicts management policies (or procedures) are kept under regular review;
5.3	understand their conflicts policy, with training provided as required.

Footnotes for this section

• [10] The regulator would also expect trustees to seriously consider seeking legal advice if they are in any doubt whether or not a conflict is non-trivial or whether or not it could have the potential to be detrimental to the conduct or decisions taken by the trustees.
• [11] Many professional advisers are already under an obligation to follow strict ethical guidelines relating to conflicts of interest as issued by their professional body’s code of conduct.

Principle 1: Understanding the importance of conflicts of interest

Trustees should:
1.1	be aware of their fiduciary obligations to beneficiaries, the requirement to exercise independent judgement and to be perceived to be doing so;
1.2	have a clear understanding of the circumstances in which they may find themselves in a position of conflict of interest;
1.3	communicate the legal requirements and duties imposed on trustees and discuss the scheme’s conflicts of interest policy with persons nominated to be a trustee, or upon the appointment of such persons.
Trustees must:
1.4	recognise that there are legal complexities in the area of conflicts of interest and should seek legal advice as necessary (see Principle 3.3).

28. Trustees have a legal obligation to act in the best interests of the scheme beneficiaries ^[12].  The ‘rule’ that prohibits conflicts of interest exists because of the possibility that, if a conflict arises, it may lead to a breach of this duty to act in the best interests of the scheme beneficiaries, or otherwise result in a trustee failing to properly consider a decision.  The ‘rule’ against conflicts is therefore a preventative measure, designed to remove the risk of improper conduct.  For this reason, a decision taken by a person with a conflict may be invalidated (or restrained) without any proof that a trustee has been (or will be) swayed by improper or irrelevant considerations as a result of the conflict ^[13].  Equally, the existence of a conflict will not invalidate a decision provided that steps have been taken to properly manage the conflict such that there is no realistic possibility of the conflict having operated so as to cause the trustees to have acted for an improper purpose ^[14]. 

29. A trustee must be a fit and proper person ^[15] and also must have a knowledge and understanding of the law relating to pension schemes generally.  As explained in the regulator’s code of practice 07: Trustee knowledge and understanding, this includes being able to identify the range of situations which may give rise to conflicts and how to manage those conflicts ^[16]. 

30. Specifically, trustees should have an understanding of: 

• their fiduciary duties, including the distinction between duties, powers and responsibilities;
• their obligation to take into account the needs of all beneficiaries;
• the concept of duty of care and the standard to which it should be exercised;
• the requirement to act impartially ^[17];
• the meaning of acting responsibly and prudently;
• their duty not to profit from the trust; and 
• their duty to see that sums owed are paid.

Have you considered the role of the chair in identifying and managing conflicts?

31. The chair of the trustees should play a pivotal role in the effective operation of the scheme and is key in establishing robust conflict management procedures.  The chair should ensure that:

• the trustees are appropriately informed of their duties and responsibilities in relation to conflicts of interest;
• the trustees are aware of the importance of declaring any conflicts to fellow trustees; and 
• any conflicts declared are documented and monitored so that there is ample opportunity to consider the management or avoidance of a conflict. 

32. In some schemes, senior employees of the sponsoring employer have been appointed as the chair.  Where this is the case, trustees will need to think very carefully about the processes they need to manage or avoid any conflicts that involve the chair.

33. By contrast, appointing an independent trustee as chair avoids such problems.  An independent chair is ideally positioned to supervise conflict management and avoidance procedures.

Types of conflicts

Have you debated and agreed the types of conflict that may arise in your specific circumstances?

34. Conflicts are likely to be of two main types:-

• conflicts between the personal interest of a trustee, director or staff member and his duty to the beneficiaries of the pension scheme (the possibility of personal financial gain, for example); and 
• conflicts between the duty owed by the trustee, director or staff member to the beneficiaries of the scheme and his fiduciary duty owed to other persons (for example, as a director of an employer company or as a trustee of another trust).

35. Some examples of situations where an individual may find themselves in a position which could constitute a conflict of interest include:

• Role related examples (where the responsibilities of a trustee diverge): 
  
  • a trustee is a significant shareholder in the sponsoring employer (particularly common for smaller companies) and as a result of his trusteeship is able to exercise a degree of influence over decision-making.  
  • a trustee is a director or senior employee of the sponsoring employer.
  • an individual is a trustee of more than one scheme with the same sponsoring employer.
  • a trustee is also a director of a service provider to the scheme.
  • a trustee is also employed by a potential service provider to the scheme.
  • a trustee is also a trade union representative or employee representative.
• Situation specific examples (where other duties may influence an outcome):
  • the sponsoring employer of a DC scheme pays for administration but is seeking to reduce costs;  this aim may diverge from  the trustees’ objective to improve standards of administration (possibly at a higher price).
  • the pensions administration service is performed in-house, and the pensions manager is responsible for providing services to one or more schemes, as well as advising the employer on confidential pensions related matters.
  • investment decisions where an individual trustee may have shares or other financial interests in companies in which the trustees may wish to invest.
  • funding decisions which are unduly or inappropriately influenced by a trustee who also holds a senior role within the employer – may become more relevant when the employer operates performance related bonuses or incentives.
  • trustee involvement in corporate transactions involving the sponsoring employer, where the interests of the scheme as a creditor may diverge from the benefits accruing to other parties to the transaction.
  • a  trustee who also holds a role within the employer is privy to sensitive information relating to the employer, which could have an impact or potential impact on the scheme. 
  • a decision to wind up/close the scheme to future accrual. 
  • where conversion terms for member options are under discussion, particularly those for commutation of pension at retirement; while trustees are likely to be motivated to ensure broad cost neutrality within the scheme, the employer may prefer and encourage conversion terms that lead to lower expected costs. 
  • trustees approaching retirement may be motivated by favourable options to improve benefits at a personal level as opposed to considering the wider implications. 

36. The case example below considers in a little more detail a situation specific conflict of interest relating to a DC scheme.

Case example - 1

The trustees of a DC scheme were very conscious of the need to communicate regularly with members, particularly in relation to investment choices and decision-making.  However, it was apparent that additional member engagement would result in extra costs for the employer.  After a number of discussions the trustees decided that they should proceed with their agreed communications strategy and discuss the proposal with the scheme sponsor.  They further decided that one trustee, who held a role in the finance team of the employer, should withdraw from these discussions to avoid any perception that they had influenced the changes (if any) the trustees may decide to make, following discussions with the employer.

Conflicts purportedly ‘authorised’ by the scheme

37. The only conflict that is clearly authorised is that of a member of the scheme by virtue of his or her membership^[18].  Further information relating to this is included in Appendix E.

38. However, occasionally the governing documentation of schemes, including the articles of association of a corporate trustee, contains provisions which purport to authorise, or permit, conflicts of interest on the part of trustees or trustee directors.  Sometimes these provisions do not require any steps to be taken to deal with the conflict other (perhaps) than that the conflict is disclosed.  The regulator does not regard it as safe, still less does it consider it to be best practice, to treat such provisions as obviating the need for proper conflict management procedures in all situations.

Newly appointed trustees – training

Do your newly appointed trustee colleagues receive induction training on their roles and responsibilities? 

39. Upon appointment trustees should receive induction training ^[19] covering a number of important areas, including conflicts of interest.

40. Trustees should be made aware of, and ensure they understand, the scheme’s policy on identifying, monitoring and managing conflicts (see Principle 5.3).  They need to be alert to the possibilities of conflicts arising and continually review this possibility on a regular basis.

Footnotes for this section

• [12] Primarily scheme members although in some cases trustees may also have to consider the interests of other persons such as the sponsoring employer, eg in a winding up when there is a surplus.
• [13] Bray v Ford [1896] AC 44 at 51-2
• [14] Public Trustee v Cooper [2001] WTLR 901 at 932H-936H
• [15] Or they can be removed under section 3 of the Pensions Act 1995 (as amended by section 33 of the Pensions Act 2004)
• [16] For newly-appointed lay trustees and lay directors of corporate trustees these particular requirements for knowledge and understanding and to be conversant with scheme documents will not apply for a period of 6 months from the date of appointment as trustees to a scheme - (The Occupational Pension Schemes (Trustees’ Knowledge and Understanding) Regulations 2006).
• [17] This is a complex matter – see Edge v Pensions Ombudsman (1999) RLR 215
• [18] Section 39 of the Pensions Act 1995 provides that the rules of law on conflicts of interest shall not apply to a trustee, who is also a member of a pension scheme, exercising the powers vested in him in any manner, merely because their exercise in that manner benefits, or may benefit him as a member of the scheme; but that statutory provision does not offer protection in any other situations where conflicts of interest arise.
• [19] Code of Practice 07 recommends new trustees undertake a programme of training immediately on appointment (s44) including conflicts of interest, as referred to in the scope guidance.

Principle 2: Identifying conflicts of interest

Trustees should:
2.1	identify and consider any conflicts that may arise in the future and notify the other trustees as soon as practically possible;
2.2	identify and consider any conflicts that have arisen and notify the other trustees as soon as practically possible;
2.3	be appointed under procedures that require them to disclose any conflicts of interest;
2.4	confirm that they are not aware of any further conflicts that have not been disclosed to the other trustees
2.5	maintain an up-to-date register of each trustee’s interests, for example financial interests and other appointments;
2.6	have a means of recording conflicts that have arisen or are likely to arise, for example, by using a conflicts register.

41. Introducing a process for identifying conflicts is pivotal to the management process. Trustees who take the time to identify any conflicts of interest are better placed to manage conflict situations that arise.  In some instances conflicts are inherent, for example in relation to the funding of a final salary scheme where trustee and employer interests may diverge ^[20]. 

42. Conflicts that have materialised are considered to be actual or real conflicts. At this stage, the trustee must manage the conflict by determining what further action, if any, is required. Some of the options available are discussed further under Principle 3. The point at which potential conflicts become actual or real will vary.  This needs to be factored into the management process.

43. Trustees should also be aware of any perceived conflicts. Such conflicts may exist when, although a trustee's decision or activity is quite proper, it may appear to others (for example scheme members) to have been influenced, or to be open to influence, by other persons or responsibilities held by the trustee. 

Declaring interests

Do you require new trustees to declare any interests and potential conflicts? 

44. Before conflicts can be identified, all trustees must be aware of other interests or obligations owed by individual trustees to another party which may conflict.  This could include shares in the sponsoring employer(s) and other appointments.

Do you have a process to identify any new conflicts?

45. There should be a process requiring trustees to declare conflicts upon appointment and thereafter.  This is considered further below:

• Upon appointment – new trustees should be required to complete a declaration disclosing any conflicts or interests.  This can be as simple as requiring the trustee to declare that he is not aware of any conflicts of interest which may adversely affect his suitability for the position, other than those interests which have been expressly disclosed (see Appendix C for an example).  This enables the trustees to be aware of any conflicts and monitor any potential conflicts that may materialise in the future.
• Regular monitoring of status of trustees – to be effective, the declaration of interests needs to be updated at least annually and also when any changes to circumstances occur.  Trustees should consider including conflicts as a standard agenda item in each meeting, requiring trustees to declare circumstances that could give rise to a conflict.

46. In addition to trustees making declarations, it is also good practice for the scope of declarations to include advisers and pensions managers (especially if in-house). This is considered further in Principle 4. 

47. There should be a culture of openness around the disclosure of conflicts of interest. The identifying, reporting and managing of conflicts should be embraced, not ignored. 

Do the minutes of meetings record when conflicts are either disclosed or identified and the action taken to address the conflict?

48. Declarations should always be recorded in the minutes of a meeting, documenting actions taken. These should clearly record all decisions that have been made and the key factors that have been considered in reaching a decision. Where a register is also maintained the trustee should cross-refer the minutes to the record in the register.

Recognising potential conflict situations

Do you have a means, eg a register, to record any interests or conflicts that are declared?

49. There are numerous tools that trustees can use to ensure that conflicts are identified, including:

• Maintaining a register of conflicts – a register of conflicts is a simple and effective method of monitoring conflicts, whether actual, potential, or perceived.  It is good practice for trustees to maintain a register to record any conflicts that have been disclosed and to assist with the monitoring process (see Appendix B for an example). Trustees would also document, in the register, the action taken to manage the conflict.  
• Documenting in minutes of meetings – some trustees simply record conflicts in the minutes of meetings.  Including conflicts of interest as an opening agenda item at each meeting provides an opportunity for trustees to declare potential interests. These can be recorded in the minutes of the meeting, with action being taken as necessary.
• Thinking ahead – advance planning is very important - trustees should take time to consider what key decisions may be made during, say, the year ahead, and determine whether there are any conflicts likely to arise. Generally, trustees who plan in advance have sufficient opportunity to put measures in place to ensure that there is minimal disruption.  

Have you considered the key decisions to be made in the future and whether there may be any conflicts that are likely to arise?

Case example – 2

Thinking ahead – administration 

In this particular case, following a succession of complaints from members, the trustees of a DC scheme agreed to undertake a review of scheme administration in the next six months. While planning this review, the trustees decided to delegate activities to an administration sub-committee. Following their review the sub-committee identified a number of errors and problems with the administrator’s internal controls. They reported their findings back to the other trustees and the employer.  The sub-committee was subsequently asked to identify a suitable replacement administrator.  

At the planning stage, the chair was aware that the results of any change, while improving the quality of record-keeping, would result in additional costs which the employer would be reluctant to pay. Therefore, before nominating members of this sub-committee, the trustees identified in advance those trustees whose views may be biased or influenced as a result of their employment with the employer. 

50. Recording conflicts can help demonstrate that trustees are taking the necessary steps to discharge their fiduciary duty to act independently. It should be remembered that simply declaring a conflict, while necessary, will not alone be a sufficient way to deal with it – it is only the first stage of the process. Where a non-trivial conflict is identified, and where the conflict could have the potential to be detrimental to the conduct or decisions of the trustees, mitigating action must be taken.  

51. The case example below provides a useful example of how the trustees’ actions and decisions could be open to question as a result of an identified conflict which has not been suitably addressed.

Case example – 3

The importance of identifying conflicts of interest – funding negotiations

This case was opened following submission to the regulator of a scheme’s recovery plan which included optimistic funding assumptions. Funding discussions and negotiations with the employer were led by a trustee who was also the finance director (FD) of the employer (a company with a poor credit rating and weak covenant). Regulatory staff met with the trustees to verify the basis for determining the assumptions. The trustees explained that they had commissioned an independent covenant assessment, and gave the regulator a copy. However, it was apparent that the scope of the report was limited and only considered the affordability of payments to the scheme. It gave no assurance of the company’s future trading prospects (going concern) or the strength of the covenant and therefore provided a limited source of information to help the trustees choose appropriate actuarial assumptions.

Leading up to and during the discussions, the conflicted trustee/FD had declared a non-trivial conflict of interest and had withdrawn from the decision-making process. He was, however, present during the discussions and had advised the trustees that the employer covenant had  many positive attributes which the independent report had failed to address. These unsubstantiated remarks influenced the choice of assumptions. After discussions with the regulator, the trustees reconsidered the way they had managed the conflict of interest and re-examined their choice of assumptions. The conflicted FD/trustee was excluded from the new discussions and, after consultation with the employer, the trustees submitted a revised recovery plan.

This example provides some important messages in relation to conflicts management. While a conflict had been identified, nothing was done to manage the potential impact. The decision-making process was influenced by a conflicted trustee; the trustees were unable to defend its proposed course of action.

Footnotes for this section

• [20] In accordance with the Pensions Act 2004 and supporting code of practice trustees are expected to consider closely matters such as the strength of the employer’s covenant, ensure that prudent assumptions are set as a basis for future funding and agree contributions.

Principle 3: Evaluation, management or avoidance of conflicts

Trustees should:
3.1	implement procedures for evaluating and managing conflicts that have been identified in a way that ensures that decisions are not compromised by the conflicted trustee(s);
3.2	clearly detail, in the minutes of the meeting, conflicts which may arise during a decision-making process and record the action taken to manage the conflict;
3.3	seriously consider seeking independent legal advice where a non-trivial conflict of interest is identified and where such a conflict could have the potential to be detrimental to the conduct or decisions taken by the trustees, in order to help decide the best approach to manage or avoid it [21];
3.4	be aware that some conflicts, due to their acute or pervasive nature, cannot be managed; they may determine that resignation and appointment of an independent trustee is the only option;
3.5	understand that the regulator cannot give guidance appropriate for every scheme as this depends on the nature of the conflict and the scheme’s trust documentation (this is why reference to seeking independent legal advice is emphasised throughout this guidance)

Evaluating a conflict

Do you have an agreed policy on how to decide whether or not a conflict should be managed?

52. When a conflict has been identified, trustees should have a process for assessing its impact and deciding whether an active form of management is needed. Clearly this will depend on the severity of the conflict. Trustees will therefore need to consider, among other things, the impact a conflict may have on the validity of decision-making, the impact on scheme beneficiaries and whether legal advice is required.  

53. Questions trustees should be asking themselves include:

• could they defend their decisions on the basis that, because steps were taken to manage the conflict, there was no realistic risk of the conflict resulting in a decision being influenced by improper or irrelevant considerations?
• would the conflict prevent them from demonstrating that they are operating independently of other organisations and that they are taking appropriate steps to manage conflicts?

54. The following decision tree may assist trustees to determine whether a conflict should be actively managed.  It presumes that the trustees are in the process of making a decision and they have identified a conflict of interest.   

Figure 1 - Determining whether to actively manage a conflict of interest

Transcript of flowchart: Figure 1: Determining whether to actively manage a conflict of interest (PDF)

Seeking independent legal advice

55. Where a conflict is non-trivial, and where such a conflict could have the potential to be detrimental to the conduct or decisions taken by the trustees, the regulator would expect trustees to:

1. seriously consider seeking independent legal advice to ascertain the best way to manage or avoid it;
2. act on this advice.

As stated earlier, this guidance aims to provide practical assistance in relation to the governance of conflicts of interest.  It is not intended to be a substitute to obtaining scheme specific legal advice.

56. Independent legal advice should assist trustees to:

• identify where their decisions are being (or could be) perceived to be coloured by conflicts;
• find ways of managing a conflict; 
• determine whether a conflict could lead to a decision becoming invalidated at a later date.  

57. Advice may also need to be obtained from other independent advisers (for example an accountant) to help manage a conflict.  

58. The example below highlights the importance of seeking legal advice and acting on that advice when the consequences of a non-trivial conflict of interest could be detrimental to a beneficiary.  In this case two principal shareholders (Mr A and Mr B) of an owner-managed business were also directors of companies 1 and 2 and trustees of the multi-employer pension scheme.  

Case example - 4

Transcript of flowchart: Case example 4 (PDF)

Companies 1 and 2 contributed to a DB arrangement. As part of a business expansion programme, the directors of company 1 sought to raise debt using assets of company 1 as security. The projected period for the investment payback was predicted in year 5. Throughout this period and beyond, the company was committed to paying both its share of the deficit as well as servicing the new debt, which was ultimately financed by company 2. 

In terms of funding, company 1 was unable to withdraw from participation as it was unable meet its share of the section 75 debt. Company 2 was also unable to provide a credible guarantee to facilitate a cessation event.  However, the directors continued with their proposal to restructure the group, despite the fact that this would result in a deterioration of both employers’ covenants. 

As trustees, their responsibilities extended to ensuring that a decision not to challenge the restructuring exercise was made with the beneficiaries’ best interests in mind. This required the trustees to scrutinise independently the proposals and assess the transaction in terms of a possible dilution in the employer covenants and future trading prospects. As the trustees were also directors, their ability to exercise independent judgement had been compromised due to the conflict between their duty to the beneficiaries and their interests in the company as directors and shareholders.   

Because the conflict was untenable, the trustees requested advice from the scheme’s legal advisers. As a result, and acting on that advice, the trustees appointed an independent trustee with exclusive voting powers leading up to and during the period of the transaction, to avoid the risk that decisions of the trustees would be influenced by the non-trivial conflicts of the two trustees. Should such a conflict remain unresolved, the regulator would consider intervening.

59. While each of the principles of sound conflict management will apply to schemes of all sizes, smaller schemes may find that some of the principles require a degree of tailoring. Trustees should determine the most appropriate course of action for their scheme.    

Options for managing or avoiding conflicts of interest

Does your policy outline the options available to manage conflicts?

60. The need to manage a conflict of interest does not simply mean that an individual would not be able to act, or be appointed, as a trustee where a conflict exists. It does not provide that a trustee can never be conflicted but rather, that all conflicts be adequately managed.    

61.The options identified to manage the conflict appropriately will need to take into account the particular circumstances of the conflict and the actual risks the conflict poses, as well as the legal rules governing the scheme. Legal views vary on the effectiveness and validity of different options and the attendant risks. It is possible that one or more of the following options, or indeed other options, may need to be considered, with the help of a legal adviser if appropriate.

62. In some cases conflicts may be so acute or pervasive that they should be avoided entirely, by not appointing a person so conflicted, or even by the resignation of an existing trustee. This may be preferable to having to make arrangements designed to prevent the person in question from influencing decisions of the trustees (or even to prevent the person from gaining knowledge of the other trustees’ plans or negotiating position).  By way of example only, such conflicts might arise:

1. where the trustees of a scheme in deficit have to assess either over a short or extended period whether to  demand a substantial contribution from an employer in financial difficulties or to exercise a power to put a scheme into wind-up, triggering a similar demand under section 75 of the Pensions Act 1995.
2. where the principal activity of the employer, or those who own or control the employer, is that of ‘management’ or the provision of investment advice to pension schemes, or they are otherwise seeking to profit from the growth in the assets of the scheme.  

63. Trustees commonly use a combination of the following measures, which are in no particular order, and it should be noted that other options may be available.  

64. Where conflicts of interest come to the attention of the regulator, we may intervene in circumstances where we believe conflicts are not being managed effectively.

Withdrawal from discussions and the decision-making process

65. Many trustees use sub-committees to manage conflicts, and responsibilities are delegated accordingly (see below). In the absence of a formal power of delegation of responsibilities to a sub-committee, and for smaller schemes who may not have available resources, trustees may wish to consider whether a similar outcome could be achieved by a conflicted trustee withdrawing from discussions and the decision-making process. Trustees should, however, be mindful of any quorum requirements. The trust deed and rules may require unanimous decisions.  If necessary, the withdrawing trustee should first share information that is relevant to the decision before further discussion takes place between the remaining trustees. 

66. Withdrawal from the discussions and decision-making process would help to ensure that decisions are made without being influenced, or being perceived to be influenced, by a conflicted trustee who may have an interest in the outcome which may not necessarily be in the best interests of the scheme beneficiaries. 

Case example – 5

The regulator’s scheme specific funding team was approached jointly by the trustees and employer of a small DB scheme. The employer had a number of concerns following the publication of the regulator’s statement on funding, and wished to discuss the impact on what they considered to be a fragile employer covenant. Following discussions, and in the light of the circumstances, it was evident that the managing director, who was also the chair of the trustees, was subject to a non-trivial conflict of interest.

The trustees and employer were about to start negotiations around the ongoing funding of the employer. The scheme was dominated by trustees who held roles within the employer, which further constrained the position of the conflicted chair. In the circumstances, it would be difficult for the trustees to demonstrate and defend robustly any accusations that they had not acted in the best interests of beneficiaries.

As a result, the conflicted director/trustee, having taken independent legal advice, withdrew his involvement in the decision-making process as well as his attendance at meetings until such time that the funding issues had been addressed. This was supported by the independent trustee, who had been a trustee of the scheme for a number of years, and who was able to negotiate the exclusion of the conflicted trustee on an entirely amicable basis. In these particular circumstances, the trustees and their lawyers considered this to be the most appropriate course of action, bearing in mind that the conflicted person had, in the past, provided the trustees with a level of scheme knowledge which would not have been available had his initial appointment not been approved. 

67. Some trustees allow the conflicted trustee to remain in the meeting rather than withdrawing. Trustees should consider whether the presence of a conflicted trustee could undermine discussions etc, or in some cases invalidate a decision.  A trustee who simply abstains may still unduly influence an outcome (see case example – 3).  

Establishing a sub-committee

68. Many schemes (particularly larger schemes) delegate certain tasks to an executive sub-committee, for example administration, scheme funding etc.  

69. One advantage of a sub-committee is that decisions may be delegated to an independent group whose views will not be compromised by another conflicted trustee. Trustees are required to act prudently when choosing members of a sub-committee. The tenure of a sub-committee may vary, depending on the activity delegated.  

70. Trustees should seriously consider seeking legal advice if considering this option as there are many scheme specific and legal factors to be considered, including whether delegation is possible or desirable and the extent to which this will bind the other trustees.  

Appointing an independent trustee

71. Just as the Combined Code on Corporate Governance^[22] recognises the importance of having an independent non-executive director on the board to ensure the right checks and balances are in place, an independent trustee (IT) or equivalent for trustees can play a valuable role in the governance process.  

72. An IT, professional or otherwise, should be able to help ensure that trustees’ decisions are not prejudiced by a conflict of interest. 

73. The appointment of a professional IT may not be an option for all schemes. Smaller schemes may not have sufficient financial resource nor may it be practical to appoint an IT on an ongoing basis. However, the duration of an appointment could, for example, be limited solely to the duration of the particular decision-making process.

74. The decision to appoint an IT may also be influenced by the severity of the conflict to be managed. The appointment of an IT may not, itself, be a solution for managing the conflict of interest. It may need to be combined with a number of other activities, for example the resignation of a conflicted trustee. 

Resignation/non-appointment of trustees

75. In the majority of cases, conflicts can be managed effectively, possibly using options discussed in this guidance, and resignation may not be deemed necessary (but see below).

76. Consideration should always be given as to whether it is appropriate to appoint a trustee who is likely to face a conflict of interest while performing his role as trustee. This is particularly so where the conflict is so acute or pervasive in nature that it would be better avoided than managed once the trustee is in place.

77. Furthermore, where an existing trustee faces a conflict of interest which is particularly acute or pervasive, resignation may be the most appropriate option, in order to remove any possible suspicion that the conflict has influenced the outcome of one or more decisions, even if this results in the loss of expertise and knowledge.

78. In cases where resignation is deemed appropriate, careful consideration needs to be given to the identity of any replacement trustee and the conflicts that they may face.  

Managing the role of an employee

79. While this paper focuses on the risk of conflicts from a trustee’s perspective, trustees should also consider the implications and solutions for managing a conflict in their position as employees.

80. Where a trustee is also an employee of a sponsoring employer, it may be possible for the employer to manage the risk of conflicts arising.  For example, the employer could exclude that individual from employer negotiations and decision-making.  The regulator’s view is that this may not be a viable option for senior employees.    

Confidentiality agreement and disclosure of information

How do you deal with conflicts of a confidential nature (ie those where disclosure may not always be an available remedy)?

81. Acute conflicts can arise where a trustee is privy to information relevant to the scheme that conflicts with his duty to share information with fellow trustees because of a duty of confidentiality to the employer, for instance  in relation to a planned corporate transaction or proposals to close the scheme etc. And note, the disclosure of confidential information does not simply represent a risk for trustees who also hold a role within the employer. It may also be relevant to trustees who are trade union members or negotiators.

82. Trustees in this situation should seriously consider seeking independent legal advice.  For example, it is not clear whether excluding a trustee from decision-making as a result of a sub-committee would necessarily excuse that trustee from the duty to share information, or whether the trust deed can absolve the trustee from sharing information in specific circumstances. 

83. Other approaches could include the employer waiving confidentiality, on the basis that all trustees have signed a confidentiality agreement. A confidentiality agreement signed by the trustees cannot abrogate the trustees’ duties - the trustees cannot maintain confidentiality if to do so would be a breach of trust or contrary to pensions legislation.  

84. A confidentiality agreement may facilitate the sharing of confidential and sensitive information with the trustees without the worry that it will become public. It will also provide additional comfort to employers in relation to disclosing confidential information to trustees. Such agreements require that the trustees agree not to share with third parties the information they receive in order to discharge their obligations and duties as trustees.  If the employer does not feel able to agree to this, there may be little alternative but for the trustee in question to resign, to avoid being left in a position of acute conflict.

85. It is important to add that confidentiality agreements do not necessarily deal with the conflict itself. They only allow disclosure of the relevant information.  There may still be a need to manage the conflict.

86. Legislation^[23] imposes a duty on the employer and its auditor or actuary to provide trustees, on request, such information as the trustees or their professional advisers reasonably require for the performance of their duties. This legislation also requires the employer to make the trustees aware, within one month of its occurrence, of any event that could be reasonably considered to be of material significance to the trustees or their professional advisers in the exercise of their functions.  For example, this would include events which result in a corporate transaction or any event which impacts on the benefits of scheme beneficiaries.

Application to the courts   

87. In some cases, if one or more trustees have serious conflicts which cannot be satisfactorily managed or avoided using the methods suggested above (or if there is no agreement on how to manage or avoid the conflict), the trustees can to apply to the courts for approval of a decision, or to surrender their discretion to the courts^[24]. Applications may be expensive and may take some time, but a decision made by or with the approval of the courts can be relied upon in subsequent proceedings.  

Other matters - remuneration

88. Generally, as a matter of trust law, a trustee is not entitled to remuneration from the trust fund for acting as a trustee, unless this is permitted by the trust deed or rules, a statutory provision^[25]. The historical reason for the general rule was that, but for the rule, the trustee could be faced with a conflict between his personal interest and his duty to the beneficiaries.  

89. Where there is an election to remunerate its trustees, there should be a formal transparent policy and procedure in place for determining remuneration for individual trustees. This should include disclosure to other trustees and members of the scheme. 

90. Where the trustees decide to exercise an available power to remunerate one or more of the trustees, there should be a formal, transparent policy. It may be the case that the sponsoring employer(s) would be willing to fund the remuneration of trustees directly. This would be a matter of negotiation between the trustees and the sponsoring employers, but trustees must seek to manage any perceptions that such a transaction could unduly influence the decisions of the trustees.

Other matters - disclosure of related parties

91. Scheme trustees have a general duty to act in good faith in relation to their dealings with the scheme and its assets.  However, from time to time, trustees may lawfully undertake transactions with related parties. The application of Financial Reporting Standard (FRS) 8 – Related Party Disclosures aims to ensure that financial statements, including those for pension schemes, contain the disclosures necessary to draw attention to the possibility that the reported financial position and results may have been affected by the existence of related parties and by material transactions with them. By complying with this standard, trustees ensure transparency through financial reporting.

Footnotes for this section

• [21] The regulator would also expect trustees to seriously consider seeking legal advice if they are in any doubt whether or not a conflict is non-trivial or whether or not it could have the potential to be detrimental to the conduct or decisions taken by the trustees.
• [22] Financial Reporting Council’s Combined Code on Corporate Governance, June 2006, June 2008
• [23] Regulation 6(1) of the Occupational Pension Schemes (Scheme Administration) Regulations 1996
• [24] see eg Public Trustee v Cooper [2001] WTLR 901
• [25] See eg section 29 of the Trustee Act 2000

Principle 4: Managing adviser conflicts

Trustees should:
4.1	actively manage their relations with advisers to ensure that advisers are able to provide independent advice;
4.2	require their advisers to declare any conflicts that may arise in respect of their engagement on a timely basis;
4.3	consider in advance whether conflicts make it undesirable for a particular adviser to be appointed or continue to act for them, in circumstances where a conflict with the sponsoring employer may arise;
4.4	evaluate the nature of the conflict, where a conflict has been declared, and determine an appropriate course of action;
4.5	where applicable, understand the reporting lines and conflicts their in-house pensions manager and secretariat may have.

92. Trustees need to ensure that adviser conflicts are managed.

93. Trustees often require specialist knowledge or support, for example fund management, and seek professional advice.  Trustees should be confident that such advice is independent and any potential or actual conflicts are disclosed by the adviser on a timely basis to the trustees.

94. There are two main types of adviser conflicts that may arise:

1. an adviser may have a conflict of interest if he or she (or the same firm) is also advising the employer or, in certain circumstances, acting for another scheme or employer with whom the trustees are engaged eg an actuary, auditor or lawyer; and/or
2. advice provided by the adviser is biased due to financial or non-financial benefits derived by the adviser, or the adviser’s firm.   

Does your conflict of interest policy or other procedures detail your procedures for ensuring adviser conflicts are identified and managed? 

95. The risk to the trustees in both situations is that the adviser does not provide, or is not seen to provide, independent advice.  Accordingly, the trustees’ arrangements for conflicts management should also contain measures to mitigate this risk.  These measures could be outlined in the trustees’ conflicts policy or in other documented procedures, such as those relating to the appointment of an adviser, and should be subject to ongoing review. 

96. Where there is likely to be a conflict of interest in giving advice, for example where there is a commercial association between the adviser and the employer, trustees should consider carefully whether it is appropriate to appoint the adviser in the first place. It may also be necessary to consider carefully whether they should take steps to remove an adviser who has already been appointed. Trustees should ask themselves what are the advantages for members in retaining a conflicted adviser if (as may well be the case) they could instruct alternative advisers with similar expertise who would not be conflicted.

Disclosure of conflicts

97. Some advisers are ethically bound by their own professional body’s code of conduct and are therefore obliged to disclose conflicts ^[26].  Such an obligation exists for activities that are regulated by the Financial Services Authority (succeeded by the the Prudential Regulation Authority and the Financial Conduct Authority on 1 April 2013). Many professions have similar requirements in place with particular emphasis to independence and objectivity.  

98. Trustees should recognise that there are circumstances where their adviser may not be regulated or required to comply with a professional code of conduct, for example pensions consultants or investment consultants providing advice to the trustees. Trustees should expect these advisers to adopt similar processes and procedures to conflicts management and disclosure as would any other regulated adviser without having to be prompted - the onus for disclosing conflicts should not simply fall upon trustees.  

99. Trustees should be mindful that disclosure of a conflict will not itself manage it. Nor should it exempt an adviser from the requirement to maintain and operate effective organisational and administrative conflicts arrangements.  

Does the letter of appointment to the adviser require disclosure of any conflicts that arise?

100. Many organisations currently include a conflict statement within their terms of engagement.  For example, guidance issued to the audit profession includes example paragraphs and recommends that auditors notify the trustees immediately upon becoming aware of the existence of any conflict of interest in relation to their client.  Trustees should require all advisers to include an explicit requirement to inform trustees if they become conflicted in any way.

Managing adviser conflicts

101. Trustees should, as part of the selection process, ascertain whether the adviser has any existing conflicts or sees any potential for conflicts to arise. Trustees should make enquiries into the adviser’s own procedures for managing conflicts. 

Do you, as part of the selection of an adviser, make enquiries into the adviser’s conflict management procedures?

102. In selecting an adviser the trustees should enquire into and be satisfied about an adviser’s conflict management arrangements.  For example, trustees may seek confirmation on the following:

• does the adviser provide services to any other party related to the scheme?
• does the adviser have any other commercial association with another party related to the scheme, such as the employer?
• how does the adviser deal with conflicts arising from associations which, in some way, may prevent the trustees from receiving objective advice? 
• is the adviser required to comply with a professional code that requires him or his firm to disclose any conflicts of interest (both actual and apparent) to his client?  Will this be documented in the terms of engagement?
• where the adviser is not required to comply with a professional code or standards of practice, the trustees should ask their advisers, as a matter of good practice, whether they have processes in place to identify any conflicts both prior to, and during, the engagement;
• what procedures (for example ‘Chinese walls’) has the adviser put in place to prevent confidential information obtained from the scheme or advice given to the scheme being disclosed to other parties, in particular to the employer or the employer’s competitors?  

103. When advisers are actively advising their clients in relation to activities which may result in the appointment of a new service provider, trustees should ensure that they are aware of any underlying relationships.  For example, when offering bundled services to clients an adviser may have a number of commercial relationships/interests which may influence the nature of his advice.  In the next (consultant-related) scenario we give an indication of how the above prompt list could be applied in practice.

Case example – 6

A pension scheme appointed XYZ consultancy to advise on fund manager selection.  XYZ proposed to the trustees that they consider its manager-of-investment managers service whereby XYZ picks the best of breed managers in particular asset classes.  These offerings can then be mixed and matched depending on the client’s investment objective and asset allocation requirements.  These fund management services are typically contracted in a bundled form with clients.  

In this case the trustees asked the consultant whether the basis of engagement of managers was purely performance related or whether other considerations were relevant, such as the managers’ willingness to pay a fee to be included on their platform.  The trustees also asked why they were only being offered the consultant’s multi-manager offering and not others.

Sharing advisers with the sponsoring employer

104. Trustees need to pay particular attention to the management of conflicts when using the same adviser as the sponsoring employer.  Depending upon the type of adviser, there will be situations where such a practice would be unacceptable.   

105. Trustees need to be aware of any circumstances in which their adviser will provide services to the employer and consider carefully whether they are content for this situation to continue or whether they should take steps to address the conflict.  The steps that are appropriate will depend upon the type of adviser and advice.     

106. One approach adopted by actuarial consultancies is the ‘Y Model’ in which a single part of the firm provides calculations (for example  accounting numbers) which can be used both by the trustees and the employer, but where different individuals within the firm give advice on how this information should be interpreted and used to make decisions.  Such a model has the potential of reducing overall costs for the employer while ensuring that advice provided to the trustees is not conflicted.  There will be circumstances when this model may not be an effective means of managing a conflict.  Trustees and their advisers need to assess the validity of this model. 

107. There is also a difference between 'advice' and 'information services'.  However, this distinction is capable of becoming blurred where the information is implicitly based on an expression of opinion, for example in relation to the state of funding of a scheme.

Intra-adviser relationships (commercial interests)

108. It is not uncommon for advisers to refer the service or products of related parties to their clients, for which there may be some form of financial or non-financial consideration.  While there may be benefits to the trustees as a result of this referral, it is crucial that trustees are fully aware of the interests that may arise as a result of this arrangement – trustees should be aware of the distinction between when they are being given independent advice and when they are being offered a service or product from a party related to their adviser.  As a matter of good practice, trustees should evaluate the nature of the interest and whether the independence of any advice received is compromised.

109. Where the trustees are of the view that any advice given under this arrangement may be compromised, the trustees should consider further measures to manage the conflict.  This may include dialogue with other service providers, putting the referred service out to tender, undertaking a comparison of the referred products to other suitable market options and generally considering other alternatives before the referred party is appointed, or product is selected.

110. A common example of a conflict which may arise as a result of financial or non-financial bias is where consultants have a number of roles that they may fulfil, for example asset liability modelling, strategic asset allocation advice, risk modelling and fund manager selection and monitoring.  This is commonly referred to as implemented consulting^[27].

111. Although these arrangement offers the benefit of an ‘all in one’ service, there is a risk that scheme beneficiaries may be disadvantaged.  Specifically, the trustees’ duty to act in the best interests of the beneficiaries could be compromised if the trustees unwittingly accepted, without independent review of the selection process, an implemented consultant’s recommendation for the retention or engagement of a fund manager or product manager related to that consultant.  One way to manage such an interest may be to limit implemented consultant recommendations to unrelated parties.

112. Alternatively, trustees could ensure that disclosure of related party engagements is required in their agreement with the implemented consultant, and the manner in which conflicts are managed could be part of the independent review of the selection process.

113. While any person who carries on a regulated activity^[28] in the UK must be authorised by the Financial Services Authority (succeeded by the the Prudential Regulation Authority and the Financial Conduct Authority on 1 April 2013), or be exempt, advisory services offered by investment consultants to institutional clients may not be regulated activities.  Examples include strategic asset allocation advice and fund manager selection, where the latter involves selecting a firm as opposed to an investment product.

Case example – 7

Pension scheme (ABC) employs XYZ as scheme actuary. XYZ is responsible for the scheme actuarial valuation and advises on the liability profile of the fund. XYZ also has an investment consultancy business offering services such as asset liability modelling and fund manager selection and monitoring. It also offers a range of investment services including manager-of-investment manager (or multi-manager) and liability-driven investment products.  These latter services are commercial rather than fiduciary. XYZ uses its position as scheme actuary to offer its other services to ABC, either as a bundled service or as separate services.

As a matter of good practice, trustees should put the contract for additional services out to competitive tender and should consider whether they are contracted for separately or in a bundled service. Trustees should consider whether investment consultants are best placed to offer these advisory services or whether there are other advisers better placed, for example, in the case of strategic asset allocation advice, trustees may also consider investment managers.

The role of the scheme secretary and pensions manager

114. The principles outlined in this guidance apply to scheme secretaries and pensions managers (particularly when in-house administration is provided by the employer).

115. In-house administration can facilitate effective communication between the trustees, employer and advisers and encourage partnership working.  

116. However, services provided in-house can lead to situations which result in conflicts of interest.  Trustees need to be mindful of the fact that the pensions manager will have a number of reporting lines and may be acting for a number of parties whose interests may diverge.  Trustees should therefore be aware of these relationships.

117. Regardless of the basis used for administration services, trustees need to be comfortable that processes are in place to manage conflicts.  Likewise, pensions managers need to demonstrate that they have the necessary skills to manage conflicts in the event that they may arise. 

Footnotes for this section

• [26] Note that Regulation 5 (2) (b) of The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1715) places specific requirements on advisers defined as Professional Advisers to disclose conflicts of interest.
• [27] ‘Implemented consulting’ is an extension of traditional asset-consulting services where investment advice and fund manager selection services are combined into an integrated service.  Effectively, this allows a trustee of a pension scheme to delegate the role of selecting investment managers to the asset consultant.
• [28] A regulated activity includes managing investments, assisting in the administration and performance of a contract of insurance, establishing etc collective investment schemes and personal pension schemes, advising on investments (section 19 Financial Services and Markets Act 2000).

Principle 5: Conflicts of interest policy

Trustees should:
5.1	agree and document their policy (or procedures) for identifying, monitoring and managing all conflicts of interest;
5.2	re-ensure that their conflicts management policies (or procedures) are kept under regular review;
5.3	understand their conflicts policy, with training provided as required.

Conflicts of interest policy 

Do you have a documented conflicts of interest policy

118. Trustees who have a thorough understanding of their duties and responsibilities are best placed to recognise conflicts that may arise.  The conflicts policy should provide examples of the types of conflicts that may arise for that scheme.  This will help inform trustees of the circumstances or events which may cause a conflict of interest to arise.  Where conflicts are identified, trustees are better placed to implement appropriate measures to monitor, manage or avoid them.  

119. It is good practice to put in place a documented policy on conflicts of interest which includes the procedures adopted by the trustees to enable conflicts to be identified and managed. The policy should be a clear and concise working document and should be formulated and approved by all trustees. Commonly, the policy will address the management of conflicts affecting others with a fiduciary responsibility, including the scheme secretary and pensions manager.

120. Trustees may wish to make the policy accessible to scheme members.

121. The pension scheme’s governing documentation may include some provisions relating to the management of conflicts.  These documents may, therefore, be the starting point for the formulation of the policy but they should not be regarded as the end point (see paragraphs 37 to 38).  As referred to in Principle 1.4 there are a variety of legal sources around the legal aspects of conflict of interest – trustees may wish their legal advisers to review and advise on the policy. 

Are you familiar with the policy?

122. A policy will also help trustees comply with the legislative requirement to have sound ‘internal control’ mechanisms in place^[29] to ensure that the scheme is administered and managed adequately, and  in accordance with the scheme’s trust deed and rules and the legislation. 

123. The trustees’ risk management framework should incorporate specific procedures to manage conflicts of interest as part of ensuring that the decision-making process is independent and unfettered. There are two further benefits of documenting the trustees’ policy:

• the process for documenting governance policies and procedures provides an opportunity for trustees to analyse issues relevant to their scheme;  it helps ensure that all issues have been addressed by the development and implementation of appropriate policies and procedures, including amendments to scheme rules if appropriate.
• transparency - it can enable the trustees to demonstrate to beneficiaries that they have taken necessary steps to ensure that conflicts are properly managed.

124. The policy should be tailored to reflect the operations of the trustees. Because the management structure of a larger scheme is likely to be more complex, it is probable that the policy may need more detail than that of a smaller scheme. However, the need for a documented policy applies to all schemes.

125. The sort of policy details that could be covered include:

• the trustees’ fiduciary obligation in respect of acting independently and in the beneficiaries’ best interests;
• the processes for identifying conflicts including a description of the types of conflict (actual and potential) that may arise;
• the options available for the trustee in managing conflicts; 
• the processes in place to avoid conflicts;
• monitoring compliance with and review of the policy itself; and
• the person nominated to review the policy.  

126. We have included an example of a conflicts policy in Appendix D.    

Monitoring compliance with the policy

Does the policy have a process for monitoring compliance?

127. For a policy to be effective it should be accompanied by compliance monitoring. The policy should refer to procedures for identifying instances of non-compliance with conflicts management arrangements. There should be procedures disclosing how non-compliance is dealt with, for example how it is recorded and reported to the other trustees.

Review of the policy

Does your policy have a process for its review?

128. It is good practice to review the policy periodically, to ensure that it is still fit for purpose. This review process could be linked to the scheme’s risk review cycle ^[30], but trustees should also review the policy if there is a relevant change in circumstances.  Internal controls, including those relating to conflicts, should be reviewed at least on an annual basis, or sooner if relevant changes occur, for example a change in control of the employer.

Footnotes for this section

• [29] Section 249A Pensions Act 2004 and supported by the regulator’s code of practice no. 9 Internal controls and guidance.
• [30] See The Pensions Regulator’s code of practice no. 09 – internal controls.

Appendix A - Other references

The Pensions Regulator

• The regulator’s e-learning programme: Trustee toolkit

• Code of practice 01 – Reporting breaches of the law

• Code of practice 02 – Notifiable events

• Code of practice 03 – Funding defined benefits

• Trustee knowledge and understanding scope documents:
  Revised scope guidance: DB schemes with associated DC arrangements (PDF)
  Revised scope guidance: DC schemes (PDF)
  Revised scope guidance: Small (12-99 members) fully insured DC schemes (PDF)

• Code of practice 09 – Internal controls

• Clearance guidance 

Other sources

• The Institute of Chartered Accountants in England and Wales (ICAEW):
  Acting as a trustee for the pension fund of your employer

• Charity Commission:
  https://www.gov.uk/government/organisations/charity-commission

• Office of the Scottish Charity Regulator:
  www.oscr.org.uk

• Solicitors’ Conduct Rules:
  www.sra.org.uk
  www.rules.sra.org.uk

• Investment Management Association:
  www.investmentuk.org

Appendix B - Register of conflicts of interest

Conflicts of interest register template PDF 142KB , 6 pages

Published: July 2018

Appendix C - Declaring interests

Appendix C - Declaring interests PDF 90KB

Appendix D - Example of a conflicts policy/procedure document

Appendix D - Example of a conflicts policy/procedure document PDF 170KB

Appendix E - Technical references

While this guidance does not seek to provide definitive legal advice and simply focuses on the governance aspects of conflicts of interest, the references below provide some technical information. 

Conflicts purportedly ‘authorised’ by the scheme

The only conflict that is clearly authorised is that of a member of the scheme by virtue of his or her membership. Section 39 of the Pensions Act 1995 provides:

‘No rule of law that a trustee may not exercise the powers vested in him so as to give rise to a conflict between his personal interest and his duties to the beneficiaries shall apply to a trustee of a trust scheme, who is also a member of the scheme, exercising the powers vested in him in any manner, merely because their exercise in that manner benefits, or may benefit, him as a member of the scheme’.

Beyond section 39 it is sometimes unclear whether provisions in the governing documentation of a scheme, which purport to authorise conflicts, can simply be taken at face value. On general principles of construction, for a conflict to be authorised by such provisions the conflict would have to be of a type which would have been in the contemplation of the draftsman of the provision in question. A general authority in a trust deed and rules to act, notwithstanding a conflict, may therefore be construed as applying only to conflicts of a type which arise out of the normal relationship between trustees, employers and members of a pension scheme. Furthermore, a provision in the articles of association of a corporate trustee may authorise conflicts only as regards the shareholders of the trustee (who are bound by the articles) and may not preclude the members of the pension scheme complaining of a conflict if it arises.

Finally, it should be noted that provisions like section 39, which prevent the equitable rules on conflicts of interest operating merely as a result of the existence of a specific conflict identified in that provision, do not permit a trustee to act if the conflict would actually cause a trustee to be swayed by improper or irrelevant considerations (for example where the conflict would result in a trustee acting other than in the best interests of the beneficiaries).

The Companies Act 2006

Trustees who are also directors of the employer will also need to consider requirements of section 175 of the Companies Act 2006 and the obligation on directors of a company to avoid a situation in which they have, or can have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company where such a situation arises.   

It is beyond the scope of this guidance to consider this legislation in detail and trustees should discuss this with their legal adviser. Suffice it to say that the requirements of section 175 will be relevant to directors of corporate trustees, and those requirements will raise many similar legal issues to those already existing under the general law on conflicts of interest affecting persons acting as fiduciaries.

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