Leonardo’s defined contribution scheme is creating a company to shield trustees from personal liability as the freedoms have introduced new risks for DC trustees.
Schemes and employers that have not already done so are creating trustee companies for a number of reasons. In October last year, tech giant HP created a trustee company for its defined benefit trustees, citing administrative ease, protection but also greater scrutiny of the trustee board.
There could easily be 20/20 hindsight and you could get nailed, so a limited company makes a lot of sense
Andrew Cheseldine, Capital Cranfield
In DC, the protection element seems to be a crucial driver of such moves, which many attribute to the greater risks the freedom and choice reforms have introduced.
The trustee board of FuturePlanner, the Italian defence company’s DC scheme, is currently made up of five people acting as individual trustees, the scheme said.
However, “for the future, plans are in place to create a company – Leonardo FuturePlanner (Trustee) Limited – to act as the trustee”, the scheme told members.
It said the reason for the change was to provide greater protection for those individuals who act as trustees.
“They give a huge amount of time and effort to this voluntary role and it is important that they are not exposed to personal liability,” where they have not acted in a dishonest or fraudulent way, the scheme said.
Head of pensions Mike Nixon said the change is being made to keep up with market best practice.
The company's two DB schemes both already have corporate trustee structures in place, said Nixon. As FuturePlanner has grown, "we just think it’s right taking the next step of best practice governance and giving trustees the same protection that they have in DB".
The company has not yet been created as the scheme is still waiting for the two member-nominated trustees on its board to be elected.
The scheme recently started giving members the option of taking their full pots as cash, but Nixon said this was a separate issue.
Lack of case law creates uncertainty
Andrew Cheseldine, client director at professional trustee company Capital Cranfield, is not surprised DC schemes set up companies to limit individual trustees’ liability.
“I was at a meeting where a lawyer was talking to trustees, and the lawyer said, ‘Well, I wouldn’t want to be trustee of a DC scheme unless it was via a company’,” Cheseldine said. “Why would you expose yourself to that level of liability if you didn’t have to?”
Freedom and choice has made the issue more acute, as the existence of options brings in a greater risk for member outcomes and greater regret risk.
He also cited the money purchase annual allowance, the lifetime allowance and the tapered annual allowance as potential minefields for trustees.
Because there is currently a lack of precedent cases where trustees have been challenged in relation to the freedoms, trustees err on the side of caution.
“We have very little case law, and therefore there could easily be 20/20 hindsight and you could get nailed, so a limited company makes a lot of sense,” he said.
Problems can best be avoided by getting advice, he added: “Get the lawyers involved.”
‘The whole industry is nervous about freedom and choice’
Jane Higgins, a partner in law firm Allen & Overy, said the creation of trustee companies was now market practice, not just because of the protection it affords trustees but also because it makes certain administrative tasks, such as signing documents, easier.
She said setting up a trustee company is relatively easy, and even more so if the scheme has a secretary who, for example, takes care of filing to Companies House.
Higgins agreed freedom and choice has introduced an extra layer of uncertainty in terms of liability.
“The whole industry is nervous about freedom and choice, DB trustees as well,” she said.
Transfer and drawdown activity has accelerated without the industry being fully prepared.
“It’s all happening very quickly and there’s a lot of volume getting through and it hasn’t had time... for everyone to be confident that members take the right decision,” she said.
There are ways trustees can shield themselves from potential claims, however. Some buy insurance, while employers can provide protection through an indemnity.
Higgins said it was right that trustees are protected: “We have largely lay trustees... and it’s been beneficial to have trustees that ... understand the companies.”
HP sets up trustee company in simplification push
In May, The Hewlett Packard Limited Retirement Benefits Plan changed the structure of its trustee board to a trustee company, in a move to simplify processes while increasing scrutiny of trustee actions
She added: “If you didn’t have that protection, we wouldn’t have lay trustees and we would move to a different system of professional trustees. I think the current system... works quite well.”
Trustees could be more accountable
Not many schemes work without a trustee company in place nowadays, noted Muse Advisory director Barry Mack.
He also said DC comes with a greater risk for claims, as “individuals that disagree with the outcome can blame the trustees”.
The freedoms have had the result that trustees are more afraid, he added, because “there is a greater propensity for the default [option] not to be suitable”.
Therefore, trustees “need to take a lot of care in choosing the default fund and have a good audit trail as to why their default is the most suitable for the membership.”
Mack agreed with Higgins that trustees should not become more liable for outcomes.
“It’s perfectly okay for trustees that have acted honestly and reasonably not to be liable. But I think trustees should be held to account more often,” he said.
