PLSA Investment Conference 2016: The question of what powers trustees have – if any – when things go wrong on the investment provider side received some surprising answers at the PLSA Investment Conference held in Edinburgh this week.
Adverse investment outcomes can affect any pension scheme, but schemes that do their homework can prepare for some of those less-than-perfect investment scenarios by being aware of their legal status and having some tricks up their sleeves when it comes to contracts.
Bargaining power
Rahul Manvatkar, managing associate in law firm Linklaters’ investment management group, showed an example of where a scheme’s private equity manager had underperformed.
Understanding what bargaining power you have is key
Rahul Manvatkar, Linklaters
He asked delegates to vote on what action they would take in such a situation. Of those who voted, 95.5 per cent said they would request a meeting with the manager, with the rest saying they would speak to their lawyers.
Manvatkar advised delegates that in a situation of poor performance, they should consider using removal clauses in the investment management agreement as bargaining tools before actually terminating the contract.
“Understanding what bargaining power you have is key,” he said. “Think about the commercial objectives.”
Schemes could, for example, negotiate reduced fees by pointing to their power to cancel the agreement, he said.
Understand your legal status
Some potential bad outcomes are specific to defined contribution schemes. Philip Goss, pensions lawyer at Linklaters, focused on a bad outcome scenario involving a third-party fund provider for DC platform policies.
He asked delegates what they thought the trustees’ options for recovery are if a third-party reinsurer, used by the insurer the scheme has its policies with, becomes insolvent.
Of the delegates who voted, 36.8 per cent said they thought they would have a claim against the insurer, with 10.5 per cent saying they would be an unsecured creditor of the reinsurer; 15.8 per cent said that they would have protection from the Financial Services Compensation Scheme.
‘None of the above’ was the last option, chosen by another 36.8 per cent of the delegates, which was revealed to be the correct answer.
Goss said that while in older policies schemes might still have a claim against the insurer, a trend over recent years has been for insurers to include a clause in their contracts stating the insurer is not liable where a reinsurer fails.
“That sounds quite alarming but… despite that it can still be reasonable to invest in one of these policies,” Goss said.
However, he urged trustees to do their due diligence and noted: “You can get the insurer to monitor the reinsurer… And you can do your due diligence on the reinsurer as well as the insurer”.
Richard Butcher, managing director at professional trustee company PTL and chair of the PLSA DC Council, pointed out that an insurer has to disclose risks to the policyholders.
“If they tell you you’re exposed to that risk they’re not liable, but if they fail they may be,” he said, but this will depend on contract terms according to Goss.
