UK - The National Employment Savings Trust (NEST) is tendering for pension fund trustees indemnity insurance to indemnify trustee members for legal defence costs and damages arising from alleged maladministration by trustee members.
The tender is for a 12-month contract.
The Pension Act 2008 and the NEST Scheme Order and Rules provide various levels of exoneration and indemnities for cases where the trustee members have acted in accordance with their duties, both as a collective trustee and in the discharge of their duties as part of a non-departmental public body.
Trustee members have the power to insure against any losses, costs or damages arising from a liability in connection with the administration or management of the scheme, subject to certain statutory exclusions such as pay fines or penalties.
NEST's chair of trustees, Lawrence Churchill, and seven other trustee members were appointed earlier this year.
Since then, Jeannie Drake and Dianne Hayter have been created Labour peers and therefore stood down, while Paul Hewitt, non-executive director of Co-operative Financial Services and Collins Stewart, has joined.
The chair has the power to appoint as many as 14 trustee members in addition to him or herself.
However, Robin Ellison, partner at Pinsent Masons, said that even with indemnity insurance, member trustees could find themselves in a very exposed position.
He said: "The overwhelming majority of conventional schemes contain exoneration, employer indemnity and plan indemnity clauses.
"But NEST legislation does not provide for such protection, and, in particular, there is no employer sponsor who can underwrite any losses to members."
He added: "Insurance is a necessary but very uncertain protection, particularly since insurers commonly refuse to pay up for technical reasons.
"And while losses by defined benefit (DB) schemes can generally be underwritten by the employer, any compensation for defined contribution (DC) schemes has to come from elsewhere.
"If NEST does not have the right to dip into members' funds to pay out any claims, the trustees are even more exposed to personal liability, especially since they are personal rather than corporate trustees."
In practice, says Ellison, trustees of other UK DC schemes have some protection from the courts.
"By and large, judges have said they are reluctant to impose liability on trustees because, otherwise, nobody would take the job," he said.
"But if something goes wrong with NEST, you are talking about big amounts, big publicity and the NEST trustees could become scapegoats."
Ferdinand Lovett, solicitor at Sackers, said indemnity insurance could form an important part of the suite of protections that may be available to trustees, whether in the DB or DC context.
Lovett said: "In general, trustees have a duty to ensure the right benefit is paid to the right beneficiary at the right time. It is arguable that what is the 'right' benefit is less clear-cut in DC schemes than in DB schemes, as actual DC payouts often depend on fund choice and consequent investment performance."
He added: "For trustees of DC schemes, there will inevitably be risks around picking the appropriate default fund - i.e. the pensions savings vehicle that members will contribute to in the absence of an active choice on their part.
"In deciding what fund options to offer to members, it is important for trustees to obtain robust investment advice and to communicate the options clearly and effectively to members - this will be no different for NEST."
Lovett said the protection available to trustees - which can include restrictions on the extent of liability, indemnities or insurance - depended on the exact provisions of a scheme's rules.
"Where trustees cannot purchase insurance in their own right, it may be that they can be covered by the insurance arrangements of the sponsoring employer instead," he said.