Time to Check for Hidden Gems in your Insurance Cover
Let’s start with the key point. If you get a knock on the door from The Pensions Regulator (TPR) then take a deep breath, do not panic and check your insurance policy as soon as you possibly can.
TPR has promised to be “clearer, quicker and tougher” and we have certainly seen the regulator ramp up its enforcement activity this past year. And the pension schemes bill, if passed by the new Government, will give TPR greater powers than ever before in terms of its ability to investigate suspected wronging and bring enforcement action against, amongst others, trustees and employers if TPR thinks something may be going wrong with a scheme. So, we anticipate more investigations and enforcement action against more schemes.
Responding to a firm knock on the door from the regulator can be a time-consuming and costly process, especially given the wide nature of TPR’s information gathering powers under section 72 of the Pensions Act 2004. Trustees or employers may have to deal with allegations of wrongdoing by the regulator, answer searching questions over the scheme’s finances or defend full blown enforcement action.
But sometimes in the heat of battle it can easily be forgotten that trustees and employers may have the benefit of insurance to cover the legal and other professional costs that they may incur in the context of TPR investigations and enforcement action.
Pension trustee liability insurance is generally assumed to protect trustees and employers only against financial losses incurred from third party claims alleging wrongful acts by the trustees (for example, maladministration, negligence and member complaints to The Pensions Ombudsman). But many such policies will also cover costs incurred by the trustees or the employer in relation to a TPR investigation and subsequent enforcement action. Insurance coverage will be generally provided in respect of legal and other professional costs (for example, forensic accountants, expert covenant related advisers or public relations consultants) incurred for the purpose of responding to an investigation.
Points to note:
Some policies only cover costs if TPR alleges a wrongful act by the trustees or the employer in relation to the scheme. But very often TPR investigations start with simple and possibly innocent looking requests for information or documents from the trustees without TPR suggesting wrongdoing. Complying with such requests can be costly as they will generally need legal input to, for example, protect against the risk of inadvertently disclosing legally privileged and confidential advice to the regulator. Therefore, it is important that a provision is negotiated into the policy that an allegation of a wrongful act by TPR is not required for this investigation cover to be triggered.
Generally, insurer consent must be obtained before an insured incurs professional costs in relation to a TPR investigation. So this consent should be asked for clearly, in writing and at a very early stage of proceedings.
It is unlikely that a policy will cover fines imposed by TPR as this is contrary to public policy. And the policy may not cover a “failure to fund” in accordance with the trust deed or a failure to collect contributions. But the policy may cover TPR contribution notices.
Like all insurance policies, insurers’ liability will be subject to an overall limit of indemnity. Remember that this is yearly pot limit in respect of all insured claims against all insured parties under the policy. Many policies will also have a self-insured excess or deductible.
Trustees of many schemes may be well aware of the nature and extent of their insurance coverage. But we have dealt with a number of cases recently where the trustees had liability insurance to help them with costs but this was tucked away in an overall management liability policy that covered many other types of risk. We alerted our clients to the possible existence of such insurance when TPR came calling and managed to save them thousands of pounds in costs that would otherwise have had to have been paid out of scheme assets or reimbursed by the employer.
It is always worth checking the finer points of an insurance policy.