Any Other Business: In February 2002, the US secretary of defence Donald Rumsfeld gave his now-famous response to a question about the lack of evidence linking the Iraqi government to the supply of weapons of mass destruction.
“There are things we know we know,” he said. “We also know there are known unknowns; that is to say we know there are some things we do not know.
"But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”
Latent liabilities
Last September, Gleeds Retirement Benefit Scheme came unstuck due to an unknown unknown.
Scheme deeds did not meet statutory requirements, which ultimately meant a whole raft of changes – including the introduction of employee contributions, the establishment of a defined contribution scheme and closure of the defined benefit scheme – were invalidated.
'Latent liabilities', as they are sometimes known, can be difficult to find and costly to fix, so what can schemes do to minimise their risks?
Anne-Marie Winton, partner at law firm Nabarro, said: “What tends to happen is that you often don’t know that you have a problem until you change lawyer, scheme administrator or actuary."
Winton added a fresh pair of eyes often noticed inconsistencies between how scheme documents outlined processes should work versus what has happened in practice.
She said trustees should carefully consider the best course of action when faced with a potential problem.
“It doesn’t mean you have to rush off to court, but ignoring it is unlikely to be an option,” she said.
Scheme documents such as actuarial valuations and statements of investment principles can be helpful in identifying latent liabilities, as they include explanations in layman’s terms of how the scheme calculates its benefits and invests.
It doesn’t mean you have to rush off to court, but ignoring it is unlikely to be an option
Anne-Marie Winton, Nabarro
Winton said examining these can help trustees ascertain quickly whether their processes match those described.
“Deeds are the main culprits, but signals can be found in other documents as well.”
Roger Mattingly, managing director of professional trustee company Pan Trustees, said issues often arise around the processes used for equalisation in the 1990s.
“Equalisation was the massive one, in particular if changes should have been done by deed and were done by trustee resolution,” he said.
He added that some human error is inevitable and a lot will be harmless.
“If you were to audit every single scheme the chances are you would find mistakes that need rectification.”
Richard Butcher, managing director at professional trustee company PTL, said the main way to prevent latent liabilities was to exercise proper governance of the scheme over time, but he said there were other things that could be done.
"Run-off insurance will protect you against some aspects of a latent liability," he said, but noted some residual risk may remain.
Butcher added section 27 of the Trustee Act 1925 permits a scheme being wound up to issue notices asking members to come forward if they have a claim, and giving the trustees statutory protection if they fail to do so.
However, he added a simple data-cleansing exercise may be the best solution.
"Most of the liability comes from missing members or getting their benefit calculation wrong," he said.
