From the blog: The thing about black swans is that until you encounter one, you ignore the possibility that they exist – but in hindsight it’s all too obvious that they do.
How would your scheme assets be protected in the event of loss by a custodian, for example?
Trustees normally have several layers of protection from liability, but that’s not the whole story.
Here are three black swans that trustees should be aware of:
DC assets – what about the holes in the safety net?
The Financial Services Compensation Scheme exists to compensate clients of failed or failing authorised financial services firms.
The criteria for compensation are complex, and members’ eligibility for FSCS protection depends entirely on which provider or entity fails – in the example below, there is only compensation for failure of the primary platform provider.
Even then, it's not certain that the FSCS will put the same value on a claim as the trustees or a member. The FSCS isn’t the full story on security of scheme assets – trustees need other layers of contractual and structural protections to make sure the gaps are filled.
Structural protections are only valuable if they are operated correctly
One of the structural protections trustees rely on is that scheme assets which are held by FCA-regulated UK fund managers are subject to segregation rules, providing protection if the fund manager becomes insolvent. But are the segregation rules being operated properly?
The FCA recently fined two Aviva entities £8.25m for breaking these rules: inadequate controls over outsourced client money arrangements led to failures which, in the worst case scenario, could have put £74.4m of client money at risk through undersegregation.
How would your scheme assets be protected in this situation, or in the event of loss by a custodian?
Insurance may not cover all risks
Trustees normally have several layers of protection from liability, but again, that’s not the whole story.
If a black swan event results in a fine or civil penalty, trustees will normally look to the employer indemnity and/or backup insurance provided by the employer. But will that insurance do the job?
For example, data protection fines will increase dramatically from May 2018. Is your liability cap high enough to cope?
What about cyber risk? TalkTalk was recently fined £400,000 for its failure to mitigate cyber security risks, but that looks trivial compared to clean-up and repair costs. Check your policy – are cyber risks covered or carved out?
Life isn’t risk-free, and nor is trusteeship – however, good governance means safeguarding not only against the unexpected happening, but also against the consequences when it does.
Stephen Richards is senior associate at law firm Allen & Overy
