Jason Coates: Good afternoon everybody. A very warm welcome to this latest Gowling webinar. Thank you for attending. This is the third webinar in our scheme sessions volume 1 series. Over the last two weeks we've heard from Louise Sivyer of TPR and Sarah Horan of ITS in our first webinar where we were looking at what's new in governance. Last week we were joined by Margaret Snowdon and we looked at the particular issues around the new transfer regulations as a specific theme of trustee governance, and this week, the third and final webinar, we will be looking at governance basics in the context of the new single code and in particular things like decision making, recording decisions and how trustees can keep themselves safe.
Just a brief overview of the format of the session. So we will be running from now until about 12:50pm to 1:00pm. I will be introducing our excellent speakers very shortly and then we will receive a presentation from them and we will have a bit of time for some questions and answers towards the end.
You will find on your Zoom panel towards the bottom there is a Q&A box so if you have any questions that you would like to ask please fill those in and send those through the Q&A box. We will endeavour to answer as many as we can but if there isn't time we will also leave your name there, we will come back to you separately after the webinar.
All of the webinars including today's will be recorded and therefore if you missed the previous two you will be able to catch up on those in your own time in the future and shortly after this third webinar we will be posting all of those recordings.
As always there is some feedback that we would be very grateful for at the end which will pop up at the end of the webinar. Always really helpful to have your feedback on how we are doing and the types of topics that you would like us to cover in the future. So that's all in terms of housekeeping.
As I say this third webinar is about governance basics, helping to keep trustees safe. Absolutely delighted to have two perfect speakers for the session. First of all we have Nicholas Hill joining us. Nicholas is a leading pension's barrister from Outer Temple Chambers. As well as pensions Nick specialises also in financial services and professional negligence cases but in the area of pensions, as you will see from what follows, Nick's a perfect person for us to have today. Nick has had a variety of experience, he has been instructed by TPR itself on proceedings, he sits on the litigation committee of the Association of Pension Lawyers and has appeared in very high profile cases such as the Lloyds case on GMP equalisation and the Arup case relating to indexation. So delighted to have Nick with us and Nick is joined by our very own Charlotte Scholes. Charlotte is a very experienced senior lawyer at Gowling. She is one of the leaders of our pensions dispute pillars and Charlotte's recently been involved also in some high profile cases which you will have read about, in particular, the Mitchells & Butlers high court case which looked at rectification and also Britvic. So two perfect people for our session today and therefore without further ado from me I shall hand over to I think Charlotte you are kicking off.
Charlotte Scholes: Thanks very much Jason. Right ok, well thanks very much for joining this back to basics session. As the title implies we will be looking at the basics of the governance and we will also be looking at today's governance regime through the lens of the draft single code and we will be talking about some of the areas flagged in the guide and what that means on a practical level. Although given timing constraints we will not be covering all of the code but we will just focus on these key topics.
We will split the talk into two parts. In the first part we will consider the journey to the current governance landscape and we will then move in the second part into practical tips for trustee meetings, meeting minutes and managing conflicts. As Jason has indicated there will be the opportunity to ask questions through the Q&A function.
So first things first. Before we start talking about governance, it perhaps makes sense to consider the trust, the body and the fundamental powers and duties that underpin its role. Now when we talk about the trustees' role, one of the easiest ways to describe it in my view is by breaking it down into the following three components; you have the duties, the trustees' powers and its roles and responsibilities. Now I've included quite a lot under the final category for simplification purposes but in my view these are the core parts that make up the wider trustee whole.
Now this is quite a busy slide but I've included it to try and make it as comprehensive as possible but you will be pleased to hear I am not going to read this out exhaustively as I am sure you will be very familiar with the contents. But the real point here is that trustees need to be really clear on what their powers are, what their duties are and all of the other roles and responsibilities expected of them. One of the fundamental pillars of good governance is having trustees who understand what is expected of them and are able to carry their duties and knowledge into effect. As Nick and I are going to explain in due course that includes knowing how to make trustee meetings as effective as possible, keeping a meticulous record of decisions and ensuring that conflicts are identified and managed properly.
Now where things go wrong and complaints go to the Pensions Ombudsman, it is often because there has been a breakdown in the trustees' duties being carried into effect or where there has been a fundamental misunderstanding about the nature of a trustee power. Now you will see on the slide I have actually emboldened one of the duties listed above, not necessarily because it is the most important but I just think in the context of governance it is one of the duties that one needs to bear in mind. In case you are wondering why I have included an asterisk up here, this is why, the draft single code refers to the governing body rather than the trustees and that is very much the language used in the draft single code, but the governing body is actually defined as more than the trustees as it encompasses trustees or managers of occupational pension schemes, or in public service pension schemes, the scheme manager and a pension board. In other words it's more of an umbrella term.
So what do we mean when we talk about governance? Well when you boil it all down we think it is about having a system and comply with the duties, powers, roles and responsibilities. If you start with good people, because none of this stuff is possible without good people, and of course you need the right structures. By that I mean who is doing what and when, who is in charge of what.
To be efficient and consistent and mitigate against risk we need good processors, and finally, as obvious as it may seem we need good understanding and that really can mean two things; you've got trustee understanding, which in itself if a good understanding of its own role and having sufficient trustee knowledge and understanding, and I will just pause for a second to explain trustee knowledge and understanding through the draft code. It means that the members of the governing body need to have a working knowledge of pensions and in my view this is no small undertaking. If you want to see the full list of what is expected of trustees, just take a look at the governing body section of new code and pages 24 to 27. But it doesn't just stop there. It also includes good understanding about the members own understanding of their rights and communicating that to them and the understanding of their benefits. Be that the investment options open to them or their ability to bring a complaint and those are just two very basic examples. Now if you get those things right, in our view, good governance is going to follow and I should say, as I think I have eluded to already, that this is a very meaty topic so we can't really expect to cover it all today, so we are going to just pick out some key themes.
So we are going to pick out meetings and decision making and trustee knowledge and understanding and managing conflicts. Of course if there is sufficient interest we will be very happy to cover other topics in a separate session. Before we drill down into those areas in detail though I am going to handover to Nick to talk about how we got to where we are now.
Nicholas Hill: Thank you very much Charlotte and I am delighted to join in with this seminar, I really enjoyed the first two Gowling sessions and it has been really interesting for me to think about good governance from my side of the legal fence because of course so often when I get involved in cases it is because something has gone wrong with governance and the mistake needs to be addressed in court. So thinking about the basics and how we might avoid that has been very, very helpful.
So where are we now on governance? Well of course we are all here today really because of IORP II and there was so much debate in the run up to IORP II coming into force the UK's extensive lobbying on insolvency too direct in one of the stringent funding requirements of that directive would make its way in to IORP II. That was the focus of the UK government. My perception at least is the UK government was less concerned of some of the governance issues but what IORP II does is place much more emphasis on governance than IORP I. The governance requirements as my second bullet point shows extends to ten articles outlining what comprises an effective system of governance. And of course many of those governance requirements are already legal obligations of some types of schemes in the UK and as a result the government believes, and still believes I think, that by making use of the proportionate approach available within IORP II can demonstrate transposition with, and I quote "minimal" impact to industry. That was the estate and ambition in 2019. And they are two governance requirements, again as I suspect we all know if we attended the first session are dealt with through a mixture of legislative and non-legislative transposition. The Governance Amendment Regulations came to force in January 2019 and they will be supported by the new Code of Practice, and I want to just pick out one little corner of the Governance Amendment Regulations and how they have amended the Pensions Act 2004 on my second slide. Now you may recall that Article 41 of IORP I have required national regulators to ensure that IORP had sound administrative and accounting procedures and adequate internal controls. The third and fourth words in the title to Section 249A on my slide. What Regulation 2 of the Governance Amendment Regulations did was amend Section 249 to require trustees or rather governing bodies of occupational pension schemes to establish and operate an effective system of governance including internal controls ESOG as its known and note here of course Section 1A that the system regardless must be proportionate to the size, nature, scale and perplexity of the activities of the occupational pension scheme. So that was the major change really from a legislative perspective brought about by the Governance Amendment Regulations and as we also know on our next slide it was combined with the regulators move for a single unified code. regulators took turn of their 15 current codes the other five to be addressed in due course, created 51 modules that fall into the new single code and I heard a fascinating speech by, I think it was Nick Gammon from TPR back in spring of last year, where he said that of the of the codes that have made it into the new single draft code they have found something like 53 or 54 pieces of guidance attached to them. So when I start thinking about the basics of good governance and how we get good governance right, it does strike me that the kind of spider web of regulatory material can at times feel really quite complex and overwhelming particular for lay trustees. And what I think the new code will do is make it easier to access, easier to understand and easier to act upon, and Jason kindly mentioned in his introduction that I do quite a lot of work in the financial services context including quite a lot of work for the FCA, in fact back in 2009 I spent almost six months drafting FCA handbook provisions as I am quite familiar with how that works and it may be that I have gone a little bit native with my FCA work but I think it works really well. I think the hyperlinks work really well, I think the time travel function works really well, I think it is really helpful regulatory scaffold for authorised persons in that space to work from.
Back to our journey in where we are now, what I do know just in passing is that the new code does include new material, my third bullet point here. New material on climate change, on cyber security, on remuneration policies and so on and so forth. So whilst it was bringing together of what already existed there is no doubt in my mind that there is a new emphasis on the requirements of good governance and the two big changes as this slide shows are the new ESOG and this is an extensive undertaking, must include processes and procedures to ensure compliance with 17 modules and it is not entirely straightforward because it is a mixture of pure ESOG and ESOG and legal obligations and the quotation I have on the third bullet point is from David Fairs one of the directors at TPR and I absolutely agree with him that a user friendly new code should make it easier and should help distinguish between legal duties and so on and so forth. But where I think the FCA handbook and indeed the PRA handbook is at the moment slightly easier to navigate is that of course if any of you have looked at it will see the FCA handbook has rules, so requirements that must be complied with in the form of the secondary legislation and guidance. It kind of telegraphs the best practice for authorised persons to work from and lots of the new code sets out requirements and then talks about best practice, but it perhaps isn't quite as clear in comparison to the FCA handbook. The other big change, again I need to speed up I am mindful of the time, is the new requirement for the Own risk assessment. And of course that's not the scheme's usual risk assessment process by another name, although it takes in account those risks, it's an assessment of how well the ESOG is working, how well potential risks are being managed. So in some respects there is a renewed focus on good governance, arguably I think a new emphasis on good governance. There are some new requirements, well there is certainly in my view some really helpful assistance from the regulator, that's where we are now and I'm going to pass back to Charlotte to start looking at some other specific good basic principles of governance in practice.
Charlotte: Right, well as we promised you here's the practical part. So I am just going to transition over to starting off with the most basic thing of all which is the meeting agenda. So how often should you be meeting? I am sure many of you will be doing this already, the answer is, the agenda should be circulated at least two weeks before the meeting and it is expected that in most cases the governing body would need to meet quarterly.
What should be on the agenda? Well I have listed out what should be covered and it's very helpfully set out in the draft guide. Again I won't go through this in detail but for the purposes of info and being comprehensive I have listed it all out. I have pulled out one point in particular which is any decisions made since the previous meeting because I think that this is actually quite an important point to record because it's one that can potentially get easily missed and I do think it's actually a bit of a risk management issue, so just a particular note to that.
Moving next on to meeting minutes themselves. This is a question that we get asked about quite a lot, what should go into meeting minutes and what should be left out. Now nothing in here is really rocket science and for many schemes you will be covering all of this already but it is worth noting that there are some additional expectations within the draft single code of practice, but again, one of the points I have emboldened here that's actually been in the guidance for a while is a very, very obvious point but the names of all in attendance. I am just wanting to flag it now because I think with the dawn of virtual meetings, including virtual trustee meetings, there is a real danger that this doesn't get perfectly recorded because particularly with Zoom calls or Teams calls it is possible for people to drop in and out and I think we need to be really clear on who attended the meeting, did they attend for the whole of the meeting or in part, and were all the key decision makers always there at the right point in time?
The next point I am going to cover in the following slide is what should meeting minutes not cover? This is a point that again comes up quite regularly in practice and it's a reminder to avoid the trap of inadvertently including legal advice in meeting minutes which then results in a waiver of privilege in the legal advice to the trustee and that will be because confidentiality in the advice had been lost when the minutes were disseminated to people other than the trustees. Now just being practical here, if legal advice has to be contained in minutes we suggest that you stick to the fact of the advice and attach a separate legal advice paper and avoid putting any detail about the content of the advice in the minutes. However, if for some reason it's desirable to include the content of the legal advice in the minutes our suggestion here would be that it's redacted before it is published on any member extranet or website or if it's sent onto any third parties. I would also suggest at this point that if any third parties are going to see the advice at the meeting which I know is often the case because there are often administrators and actuaries and investment consultants at meetings, then I think you really need to be seeking some kind of agreement, either in advance and in writing ideally, that they will keep the advice confidential and they won't disclose it to anyone else. I am aware that it is sometimes said that the requirement to keep the information confidential should be covered by the advisor's terms and conditions but I think best practice here and good governance will be to ensure that each and every time a piece of legal advice is shared with them that they agree it can be frankly in a trail of emails that they will agree to keep that advice confidential and they won't disclose it to any other parties.
So I have already revealed the next slide but I shall go back to it now. This is another point that sometimes comes up in practice which is, what's the general rule of fun when it comes for informal meetings as opposed to formal meetings? I think the answer is pretty obvious as we have already said that formal meetings should always be minuted and I would also say that even if an informal meeting takes place obviously notes should be kept of what is decided there, but it's just worth drawing to your attention the fact that there is a pragmatic approach being taken by TPO here and in a determination in August 2020 the Ombudsman found that it wasn't maladministration for trustees not to have kept minutes as the scheme only had two trustees and there were no formal meetings and therefore there was no meeting to minute in the first place. Now that's quite interesting in terms of what it shows you about TPO's approach, although I perhaps should give a slight health warning attached to that, that that was an exceptional case, but it at least gives you an idea of the approach TPO might be prepared to take in the case of a very small scheme where there are only two trustees.
Moving on to my next slide. I am going to hand back to Nick at this point to talk a little bit about our next topic which is, decision making and giving reasons.
Nicholas: Thank you very much Charlotte. So I start here we really thinking about discretionary decisions and the need to give reasons and I start perhaps inevitably with the legal landscape and then we are going to try to contrast that with some of the ombudsman decisions in due course.
I have got two cases on my first slide, the first one is Wilson v Law Debenture, it's a decision of Mr Justice Rattee back in 1994 and it's often sighted by trustees with no small measure of relief when they are thinking about the need to give reasons because there Mr Justice Rattee said that "In the absence of the evidence of impropriety the Court will not force pension scheme trustees to give reasons why they made a discretionary decision". Because what that means is that you need it as a disappointed beneficiary a prima facie breach and in the absence of bad faith that's obviously very difficult indeed. So that seems to set the marker down discretionary decisions are going to be quite hard to challenge and that is I think broadly consistent with a very well-known Court of Appeal case called Edge and the Pensions Ombudsman a leading Court of Appeal authority from 1999 and there the Court said, slightly different context not quite so focussed on discretionary decisions, but there the Court said that it would only interfere the trustees exercise of discretion and indeed are noted passing that the Ombudsman should only interfere with the trustees exercise of discretion if the trustee had disregarded relevant factors or considered irrelevant factors and that's a phrase that is so often jotted out in the pensions cases. I remember in the Lloyds and GMP trial someone, I forget it was the trustee or possibly the company asked the Judge in what factor should be taken into account by the trustee in making a particular decision and Mr Justice Morgan simply answered take into account the relevant of factors and don't take into account the irrelevant factors and with the greatest respect to obviously an eminent High Court Judge is deeply unhelpful, doesn't really help the trustees at all. But the other reason the Court of Appeal gave in Edge why trustees of court might interfere with the trustees discretion was if the trustees had committed any other procedural impropriety and that really is the heart of good governance that Charlotte's been talking about. If you get your procedures right from the off in terms of your governance processes it is much harder for it to be challenged.
The third reason given by the Court as to why they might interfere is if the trustees had taken a decision that no reasonable body of trustees properly advising themselves of all the relevant circumstances could have reasonably reached. So it's a very, very high threshold but I think respectfully it's the Court of Appeal and Mr Justice Rattee, it is not quite as clear cut as it might seem at first glance and on my next slide I include a case called Scott and National Trust. It's a fascinating read, it's actually an application for judicial review, all about a decision taken by the Council of the National Trust in 1997 to stop deer hunting on their land in Somerset. And it's the decision of Mr Justice Robert Walker, as he then was, Mr Justice Robert Walker would become of course Baron Walker of Gestingthorpe and the imminent Jurist in the Supreme Court ten or twelve years later, and what he said, he looked at the minutes of the meeting of the decision taken by the Council on 10 April, he said the minutes of the meeting which were no doubt drafted in considerable exceptional care record there was a long discussion by the Council but there are no details. This probably reflects a widely held idea that the trustee need not and therefore should not give reasons. So far so good, I am happy with that, it's consistent and Mr Justice Rattee sort of consists of what Court of Appeal say a year later. The Judge goes on, there is probably a lot of good sense in that, in the general run of cases but he says the true position is as explained by Lord Norman in the Dundee Hospital case and you will see from the quotation that in that case the appellants had argued that if reasons had been given and there was greater liberty for the Court to examine them and possibly to interfere and Lord Norman said in my opinion that is erroneous the principles in which the Courts must proceed are the same whether the reasons for the trustees decision are disclosed or not but of course it becomes easier to examine a decision if the reasons for it have been disclosed. So, of course, as is so often with judgement that can be read in various different ways. It certainly doesn't suggest that reasons are required but also it notes that it does not prevent the Court from looking at decisions when claimants require it to do so, so that begs the question I think from our back to basics good principles seminar. What best protects the trustee? Now that almost certainly depends on the issue that they are making a decision about, whether it affects individual members or cohort members for example. Practically speaking it always a challenge for trustees or other governing body to evidence reasons if they are required to do so if there is no helpful contemporaneous documentation, because the reasons may actually be cloaked and privilege and then they have to confront difficult issues about a potential waiver of privilege and I have seen this quite recently in fact where there was no evidence of any reasons at all which made it even more difficult to explain what we had done in pre-action correspondence. And of course if any time let alone significant time has passed reconstructing decisions is difficult and obviously highly undesirable so personally I am not convinced that I am not giving reasons necessarily best protects trustees. Moreover, and I am going to hand back to Charlotte here, the approach of the Ombudsman does seem to suggest that reasons may be coming more and more important.
Charlotte: Yes Nick that's absolutely right and as you have demonstrated there has been a bit of a shift in the case law over the years and obviously for the sake of gravity you will be pleased to hear we've kept the body of case law to a slim number but there are some more cases showing the gradual movement towards giving reasons but it's all very well hearing about what the Courts think but no disrespect Nick, what's more important is what the Ombudsman has to say because ultimately if members are going to bring complaints they are going to be going by and large to the Pensions Ombudsman rather than going to Court, so what has the Ombudsman had to say about this? Well I've pulled out a few examples here and I am going to speak about a couple of these cases. One case which I really have to mention in this context is Dr G, some of you may have heard about this case already, apologies because I am going to recap on the facts, but it's a pretty important case. The fact pattern is pretty simple. I will just go over it now. Dr G was the partner of Mr T and following Mr T's death A J Bell had to consider whether to award Dr G some discretionary death benefits. Dr G and Mr T had lived together and jointly owned their house albeit Dr G only owned 10% of it and it was Mr T's second marriage and under his will the majority of his assets were left to his children, and A J Bell decided that Dr G shouldn't receive any death benefits. Instead they decided that these should go to Mr T's children. Now the minutes of the meeting which A J Bell decided what to do did actually detail what factors they took into account, but this wasn't enough for the Pensions Ombudsman, he said that A J Bell had to explain why they reached their decision and moreover that explanation needed to be documented in the minutes and communicated to Dr G and as it had not been it was not possible for him as the Ombudsman to establish whether the discretion had been exercised appropriately or not. It was vital he said for sufficient reasons to be documented which conveyed an understanding of the factors which had been given weight and the factors which had been discounted and that was to enable the agreed parties, so in this case Dr G, to know whether there might be grounds to challenge the decision, and what he actually said was as quoted on the slide, that the reasons didn't really need to be lengthy but they should just be sufficient to basically allow the agreed party to know if they had any grounds to challenge the decision, and so in that case he ordered A J Bell to reconsider their decision and to document the rationale for it and then communicate that to Dr G, and as I have indicated this is not just a one off case, this is a 2018 case.
There have been other cases and another one of the cases referred to on this slide, the Mrs D Case, is also quite helpful at indicating TPO's likely approach and this particular case touches more on the investigations into the potential beneficiaries when a death benefit is payable pursuant to a discretion and it really just emphasises the fact that discretionary decisions need to be rigorously recorded, so this was another death benefits case where the decision making process was attacked as being procedurally unfair. Mr D died in May 2017 and at the time he was married to Mrs D but he had separated from her and he was now with Miss Y, and Mr D's expression of wish form was in favour of Mrs D but later wills indicated he wanted Miss Y to be provided for as well, and in this case the discretionary decision was taken in favour of paying all the benefits to Miss Y and in the minutes it was recorded as follows: Pay to partner as she has financial dependency and policy holder will shows he intended for her to benefit from his pension policy. Expression of wish form disregarded as it was for his former wife. Now Mrs D wasn't very happy about that and she complained that she had been nominated on the expression of wish form and she was also financially dependent and in that case TPO said that basically the decision making had been procedurally unfair and that was because it was partly unclear form the record of the decision what weight if any the decision makers had given to the extent of Mrs D's dependency. They had also made other mistakes that I am going to just for the sake of time not get into that but basically what TPO said was he required Phoenix Life to go back and take the decision again and record what it had done and the factors that it had regard to and they had discounted and he made it very clear that his role wasn't to substitute his decision in their place and in making the direction he did, he wasn't intending to express any opinion as to the appropriate distribution of that benefit.
So what do we take from these cases? What helpful tips can we give you? Well this is what I've tried to set out on the next slide. So some practical tips and I am aware of the time so I am going to be relatively light touch but hopefully these are helpful. Obviously consider the financial circumstances of all potential beneficiaries and explore the financial dependency. I may sound really, really obvious but I think you really need to ensure you test the evidence here and make sure that what's been provided really does show dependency because I'm not sure that it always does. You also need to make suitable enquiries but they don't need to be absolutely extensive, you don't have to go to the ends of the earth, they just need to be appropriate to the circumstances of the case. You also need to obviously keep a really detailed record of the investigations. What do I mean by this? Well what I mean is who was contacted and when, what information did they provide, what did they not provide and keep a record of the review of the evidence and record all the decisions that are made. As I've set out obviously recording the reasoning I am not going to go on about that, you get the message, but basically you should bear in mind the words of Dr G, that you should be giving sufficient reasons to enable the aggrieved party, so somebody who doesn't get awarded the benefit but has ultimately be considered in the general course of beneficiaries. You need to give them reasons as to why the award wasn't made in their favour. Now these decisions do raise interesting questions as to whether this approach will be adopted when it comes to all discretionary decisions. There isn't room to talk about that right now because I need to handover to Nick to talk about conflicts but may be that is a subject to revisit in due course.
Nicholas: Thank you very much Charlotte. I am also conscious of the time and I can see there are lots of questions coming in so I am keen to leave some time for questions, so I am going to try and take conflicts at a little bit of a whistle stop. I am going to talk about two kind of broad themes of conflicts.
The first one on this first slide is really to look at conflicts, why they exist, how they exist and why they are so difficult to deal with? Secondly I am going to make three observations that really intended to assist with managing conflicts because of course identifying conflicts and monitoring conflicts may not be that tricky, the tricky bit often is how you actually manage the conflict in due course. So first of all my whistle stop reminder of conflicts. I am just going to highlight the fact that there was a recent High Court case that grappled with conflicts and pension schemes in the form of Keymed and Hillman, a decision of 2019 and Mr Justice Marcus Smith. It is a fascinating case and in fact there is an excellent seminar I saw from Gowling in fact on this case which I would recommend to anyone in due course, but it's a case where the Court dismissed the claim by company against two of its former directors in which the company alleged the defendants had abused their positions as directors. The company's case was that the directors had acted against the company's interest by amongst other things setting up an executive pension scheme which they were the trustees, then using their powers as trustees to maximise their own benefit by, for example, I think dis-applying Inland Revenue limits, providing benefits for spouses and following a very conservative or might be said prudent and therefore very expensive investment and funding policy. It's a really interesting case where the Court has to grapple with conflict at a really quite obvious level and Mr Justice Marcus Smith said in paragraph 33: It is inherent in the nature of pension schemes that there is an enormous potential for conflict between the interests of the members of the scheme and the interests of the employer sponsoring the scheme. And the inherent nature of that conflict is so obvious of course, that there is statutory intervention for pension schemes in the form of Section 39 of the Pensions Act 1995, that it effectively excludes the rule on conflict from applying the exercise of powers by trustees mainly because they will benefit from the exercise of that power and the conflict stands from the general rule that trustees, like all fiduciaries, must not place themselves in positions or enter into transactions where there is or may be a conflict between their duties of fiduciary and their person interests or their other duties, and that's because of their obligation of loyalty on a fiduciary and there is a lovely line from an old case Costa Rica Railway where the Court explained that the basis to rule and not reality but rather a practical one, that being the fallibility of human nature and I was once able to placate an irate finance director when I told him he couldn't take part in a decision and because of a conflict by pointing out it was nothing to do with him, it was simply about the nature a fallibility of human nature. And my third introduction observation here is to note that I don't think conflicts have a hard edge, I think the reason why conflicts are so difficult is because they have to be very carefully considered in the particular circumstances with the particular individuals involved and the particular scheme and that does reflect case law. There is a case called Boardman and Phipps from 1966 where the Court said that the question around conflict is whether a reasonable person learning that the relevant factors and circumstances we think there was a real sensible possibility of conflict. Of course the word "sensible" there is doing an awful lot to illustrate how difficult conflicts can be to identify and manage.
My next slide recommends wholeheartedly the TPR approach to identifying, monitoring and managing conflict and this is from some of the guidance on the TPR website, you will see it there. It always seems to me that if we just always have this guidance in mind, three steps; identify, monitor and manage. Many of the problems with conflicts may be resolved. Looking a little bit more at identify. The best conflict management policy I have seen on trustee boards nearly always start with a preamble or recital that says that all members of the trustee board will be entirely open and transparent about conflicts, possible conflicts, any issue that anyone might perceive as giving rise to a conflict, and you start with that open and transparent approach and everything becomes much easier. So cursory reference conflicts as the start of a trustee meeting. It may be sufficient, depending on the size of the trustee board and who is involved and so on so forth but it may not. Then think about identification. When did you last discuss with any director of the company who is on the governing body when he last grappled with Section 175 of the 2006 Companies Act. What about a trade union representative who is on the trustees governing body? Might he or she be conflicted by virtue of his or her particular focus on, for example, trade union members or indeed simply active members as opposed to deferred members. And what about advisors, no doubt you have thought about conflicts when you appointed your advisors and no doubt there will be pressure your advisors to think about conflict going forwards, but when did you last check with your advisors about conflicts? So identification is important, and the second step on my next slide is about monitoring those issues and I say rather grandly and probably you might say quite unhelpfully that we should aim to perfect processes because with conflicts and conflict management you need to do the basics really, really well. You need to understand TPR's requirements, TPR's guidance, you need to implement, you need a very clear and full conflicts register that's up to date, you need to make sure all interests are declared, you need to think about how you grapple with different types of conflict, why you describe some of them as material or trivial or non-trivial and as Charlotte's already mentioned in the context of decision making, you need to use the minutes. When you have identified a conflict it's no good just to say the trustees discussed conflict and were satisfied, that isn't sufficient given the potential consequences i.e. the trustees may be found to have been in breach of trust, if a decision is taken in breach of the conflict rule.
Thirdly and finally before we open up for questions I wanted to talk a little bit about managing conflicts because that's where I think TPR guidance, perhaps inevitably, a little bit less helpful because of course it's very hard, there is no one size fits all. I identify four possible solutions to what I call the management challenge. When you have a conflicted trustee director, one option, my first bullet point, is that that trustee director resigns and is replaced on no doubt a particular issue. They are replaced by new directors not involved in company decision making on that issue, and of course you would have to make sure that your replacement trustee board complied with any minimum number requirements and indeed an MNT or MND requirements, and the only problem with resign and replace is that you lose the benefit of whoever the conflicted director is and their knowledge on other non-conflicted scheme matters but it's clean and unarguably effective unless of course the decision making process has already been infected by that conflict.
The second bullet point identified is the possibility of abstentions that the conflicted trustee board directors abstain themselves from meetings at which the issue in question is being discussed and abstain from voting on the matter. Now that must of course be permitted by the scheme rules or the trustees articles of association so that the decisions can be taken by majority votes and you must make sure you satisfy any core requirement but it's a possibility. I flag up in passing and not for discussion now a fascinating report on TPR under Section 89 of the Pensions Act 2004 about the Hugh Mackay Retirement Benefits Scheme. It's a case that I've had to speak about several times because the trustee in question there was prohibited was a Mr Hill with two daughters who was horribly conflicted and sold commercial property to the trustees in breach of various duties to profit himself. Well I am not the same Mr Hill and my daughters are 6 and 4 and don't own commercial property but nonetheless what the Section 89 report tells us there is that in that case an acute conflict simply leaving the room during meetings as Mr Hill had claimed he had done was no way near sufficient. He was acting on both sides of the transaction and negotiating with himself. So abstentions, abstaining, it's an option but it may not be sufficient.
The third option on the list and the one I strongly prefer is delegation where the conflicted director steps aside and the matter is delegated to a sub-committee. All conflicted persons must be excluded from that sub-committee and indeed from the trustees' decision making on any negotiation but they can continue to participate in other trustee and scheme matters. It's a kind of formal version of abstention which in my view works much more effectively. It's much better for managing kind of perceptions of conflicts, perceptions of the decision making process and indeed it's much better for creating a paper trail to show what the trustee has done to manage that conflict. The other benefit of course is that it doesn't trigger the MNT or MND implications, you have no concerns about quorum and the trustee board retains the benefit of the particularly conflicted directors experience and knowledge on other scheme matters.
Then my fourth and final point before I handover to Jason is entirely self-interested and which is where I say that you should remember the possibility of an application to Court. The Court has an inherent jurisdiction to pre-emptively authorise a trustee to take action who would otherwise be in breach of the rule against conflict. That might be better described as pre-emptively declaring that a particular transaction as authorised is fair and reasonable and that it cannot be set aside. Fair and reasonable is the language of some of the older case law and within the Courts authorisation I should identify the ultimate last resort which is that the trustees can seek to surrender their discretion to Court in the sense of Public Trustee and Cooper 2001 case. The Court are very, very reluctant to accept that surrender of discretion but it is an option open when you are thinking about how to manage conflict.
And with that whistle stop thoughts on managing conflicts I am going to pass back to Jason and am very keen for Jason and Charlotte to answer any difficult questions that you may have for them.
Charlotte: You are so kind Nick.
Jason: Thanks Nick and thanks Charlotte for a great presentation. Pensions Ombudsman stuff is always interesting and I always find when I've got Mr G and Mr T I can't get away from thinking about Sasha Baron Cohen or showing my age the A Team but we've got lots of really good questions, so let's get cracking into those if we can then. So Charlotte perhaps I could just start with you. We've had a question that is sort of around the duty to give reasons point for a death benefit case where the number of beneficiaries have been considered, are we saying trustees have to go as far as writing to each potential beneficiary to explain whether they got something or they didn't get something.
Charlotte: Well I think the answer is, this is all a matter of calculated risk, and obviously what I have outlined in terms of TPO starts to giving reasons just sets out TPO's likely approach in the serk so it's going to be a matter of judgement for every set of trustees but I would say councillor perfection is that yes they should be writing to beneficiaries, they shouldn't be waiting for the beneficiaries to query it. I think if they have got, they have asked various individuals to submit information, for example, showing evidence of financial dependency or showing why they might be in the running to get some of the award of the death benefit then yes I think they should be giving them reasons.
Jason: Thanks. Nick anything to add?
Nicholas: No, not really. I think it's an interesting question, I suppose I was wondering about that's a case where of course you know who you are dealing with. There does seem to be a new interest in the Court's jurisdiction what's called a Re Benjamin Order which is where trustees are grappling with decisions about distribution of assets and they are concerned that they have not for whatever reason identified all of the potential beneficiaries and concerned about a claim for breach of trust in due course. And there is what's called a Re Benjamin Order, I think you make it under Part 64 of the CPR where you go to Court and say this is what we are planning to do and this is why and you get the blessing of the Court for that particular distribution. It's a different point but there is this new I think awareness of the complexities of modern pension schemes and needing to protect the trustees as they take really quite difficult decisions when quite often no right answer.
Jason: Thanks. I guess it's also the issue with the potential beneficiary cases, you have to be particularly careful not to be sort of revealing things about other people.
Nicholas: A careful balance to be met I think as you have explained before.
Charlotte: Yes absolutely.
Jason: Just a couple of other questions which start to get down into an interesting area which is you know we are all seeing a trend towards professional trusteeship and moving on from that sole professional trustees. A couple of questions that I think sort of come out of that from the audience. So one is, given that sort of change and the way that trustee boards are operating do we think that the idea of a quarterly trustee meeting as it were is a bit sort of old hat and actually we should be recognising that things are much more fluid and does that lead to any governance issues, Charlotte?
Charlotte: Whilst it's an interesting one Jason I think I would view it as meet no less than that. I would have that as a sort of bear minimum benchmark but I think there has been comments around boards needing to be flexible and clearly if there is a business need or a trustee need to meet more regularly than that to its you know consider extraordinary business then I think definitely they should be open to that. This isn't ultimately a tick box exercise, I think we have to be really clear on that, there is a lot in the draft single code but it's not about box ticking, you know you've really got to sort of think about the whole management and governance of the fund in a holistic manner.
Jason: Yes absolutely I totally would see that and I think Nick if I can sort of take you to the other question we had around this which picks up on what Charlotte had raised in the PO determinations, sort of a suggestion from that particular case that you know if there were two trustees formal meeting minutes weren't required and if you take that to an extension of the sole professional trustee it's almost suggesting that there is some kind of lower threshold there which can't be right can it?
Nicholas: It can't be right and also I think a sole independent trustee would be mad to take that approach simply because they need to protect themselves. That Ombudsman decision Charlotte sent me a copy of it and told me she was going to mention it at the talk and I was sort of stunned by it when I read it because it was an exceptional case, a really exceptional case, but it should absolute not be taken as a rule of thumb in particular of the sole trustee. The standard doesn't shift it's just all the particular facts of that case it was deemed by the Ombudsman benevolently to be permissible but no I don't think standard shifts at all, if anything I think if there was a sole trusteeship I'd demand even better really records of that governance because may only need to deal with themselves if that makes sense.
Jason: Yes absolutely. Charlotte anything to add to that?
Charlotte: No nothing more. I mean I suppose it's the old, sorry to say, it's the old lawyers sort of get out of jail card was very much turned on the facts of every individual case and on the size of the fund crucially, this Ombudsman determination was in an extremely small scheme so I think that's why it's so exceptional but I suspect I don't know exactly who the question came from but I suspect the schemes that generally most of the participants on this call will be dealing with will be of a sufficient size that not keeping a record of meetings or not having full meeting minutes is just a complete no go.
Jason: Yes I think my experience talking to the professional trustees out there I don't think anyone would be falling into this trap but what people shouldn't confuse it seems to me is the opportunity for efficiency through sole trusteeship and lessening governance around that.
Nicholas: I agree. TPR does place much more focus as does IOPT II on proportionality so I think there is a balance to be struck isn't there but absolutely you can streamline your processes and be proportionate as long as you are making sure your effective system of governance is in place, it should be a cost saving in theory at least.
Jason: There is one other topic that has sort of come up in questions that is linked but we haven't covered but may be just a minute or so on that, which is record keeping and the amount of time that people, trustees keep records for, what type of records they keep, any sort of high level guidance on that for the audience? Charlotte?
Charlotte: Yes I am really happy to deal with this one Jason, thanks. So this is a question again that thanks for raising it, it does come up a lot in practice, people often ask how long should they be keeping records for. I suppose my answer to that is it rather depends on what records we are talking about. I mean TPR's clear that member contribution records, for example, should always be kept for six years but if you take at the other end of the spectrum keeping the schemes governing documentation I would say you would need to keep it for the entire lifetime of the scheme and possibly another 12 to 15 years post windup, and in terms of member data, I have also heard it said that really you should be looking to keep that for 15 years post windup. Again because you never know what claims could arise post windup of a scheme and what challenges may come up and if you have got rid of all that data it's going to make it pretty hard to deal with those challenges and I am aware that sometimes there are situations in which schemes have wound up and it's actually the solicitors that become the custodians of, for example, the scheme governing documentation.
Nicholas: That's consistent Charlotte actually with Oprah's guidance as it was pre TPR, that they said in schemes that are well governed we often see scheme documentation held for the entire lifetime of the scheme and beyond the lifetime of the scheme. And also just thinking about it practically I spend some of my time dealing with rectification cases. It was in a case called Eggerson Pension Scheme last year where we wanted to rectify the scheme because the indexation power had been accidentally changed to omit a power to switch so potentially a valuable power had been lost by accident and the most powerful piece of evidence we have the rectification that Chief Master Marsh said made this an open and shut case was that the particular trustee on the sub-committee who had been delegated to deal with the consolidation. Really detailed notes and his notes had referred to the new rule on the indexation power and he had written same old indexation power evidencing very clearly contemporaneously he had no intentions to change it and he had kept those notes in a filing cabinet in his garage in the Lake District and they were invaluable, so I am a big fan of retaining scheme documentation as long as you can justify an option to GDPR and so on, well in excess of six years, and that's where you need to look at different types of data quite carefully. I am a big fan of it because it makes rectification so much easier.
Charlotte: Great news for all those hoarders out there.
Jason: Thanks Nick, thanks Charlotte. I am conscious of time. We are just approaching the end of our session. Thanks both of you for a great presentation and answering those questions as well. Thanks to everyone in the audience for being with us and for raising those questions. If you do have any other thoughts or questions that occur to you please feel free to contact us separately and we'd be very happy to pick up your questions then. If I could just remind you if you do have a minute just to complete the feedback form when that pops up we'd really appreciate it and thank you again to Charlotte and Nick for a really, really useful session giving people plenty to think about and that has been a perfect way to bring an end to our series of three webinars on the topic of governance.
As I said at the beginning we will be issuing recordings of all three of the webinars so you can catch up on the other two and indeed share with colleagues this one too. So thanks very much Charlotte and Nick, thanks to all of you and have a great afternoon everyone.