Pension Trustee Liability Run Off Insurance

RUN OFF COVER FOR SCHEMES ‘WINDING UP’

Whilst the Sponsoring Employer relinquishes responsibility for the Scheme upon ‘Wind Up’ or Dissolution, the same cannot be said for the Trustees, as they remain personally responsible for their past actions. Due to the ‘claims made’ nature of any Policy, it is essential that long-term Pension Trustee Liability (PTL) Run Off cover is purchased to protect the Trustees against allegations of, or actual, Wrongful Acts.

Currently, Policy durations can be arranged for anything from 6 to 15 Years, with Indemnity Limits ranging from £500,000 to more than £50,000,000 depending on the requirements and the size of the Scheme (as well, of course, depending on the Insurers’ view of a specific risk). This upper Limit will increase if – as is expected – more Insurers decide to offer this type of insurance protection in the future.

When considering what is an appropriate level of cover, it is important to understand that the Indemnity Limit will be in the ‘aggregate’ (inclusive of any defence costs) for the overall Policy period. This means it is the total amount of cover provided and the Indemnity Limit is therefore eroded by any payment made by the Insurer(s).

Consideration must also be given to the longevity of the Policy, i.e. what appears to be adequate cover now may not be so in 10 or 15 years’ time.

The Policy provides vital cover for the legal costs in defending a claim, even if the claim is unjustified.

ULP have access to all the available Insurers operating in the long-term PTL Run Off Insurance sector. We are not tied to any one Insurer and the Trustees can therefore rest assured that we will approach all the relevant Insurers so that no stone is left unturned.

OVERLOOKED BENEFICIARIES INSURANCE

Schemes may suffer from poor data issues – this could be the result of previous bulk transfers following corporate acquisitions, or simply due to inaccurate historic record keeping. If the Scheme’s data is incomplete or missing, the Trustees may not be able to rely on Section 27 of the Trustee Act 1925 to provide an exoneration from liability, particularly if they had ‘no knowledge’ of something that previous Trustees had been notified of.

Overlooked (missing) Beneficiaries Insurance (OBI) is therefore an important consideration for Schemes approaching Wind Up. The Run Off Policies typically provide OBI cover as a sub-limit (inner limit) within the Run Off Policy Wording, such that OBI coverage levels can be bespoke to the Trustees’ individual needs.

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FReQUENTLY ASKED QUESTIONS

We have compiled a list of frequently asked questions and answers. But if your question is not listed, do call or email us.

Cover includes protection for actual or alleged Wrongful Acts, including but not limited to: Overlooked Beneficiaries, Maladministration, Communication Errors, Investment Risks etc.

Importantly, the Policy provides cover for the potentially expensive legal costs in defending a claim, no matter how spurious the matter may be.

PTL Run Off can be provided with or without OBI cover. The Run Off Policies typically provide OBI cover as a sub-limit (inner limit) within the Run Off Policy Wording, such that OBI coverage levels can be bespoke to the Trustees’ individual needs.

We are able to offer solutions to meet most requirements.

PTL Run Off cover can only be taken out once Wind Up has been fully concluded (usually when the Wind Up Deed is signed). However, if Wind Up is likely to be concluded within the next twelve months, we may be able to source a ‘live’ Policy which allows for automatic conversion to a long-term Run Off Policy upon Wind Up.  There are a number of benefits to this option, including:

  • protection for the Trustees, Scheme and Sponsor whilst the Buy Out due diligence is taking place;
  • guaranteeing the cost of Run Off, and allowing budgets to be finalised;
  • allowing the full premium to be paid across immediately (this may prove particularly beneficial if the premium is being paid from Scheme Assets).

It is not usually necessary to buy as much cover as the Scheme has in assets, but each Scheme will have different requirements.  For an average size Scheme around 30% of assets may be a good starting point, but consideration should also be given to:

  • the Indemnity Limit is provided on an Aggregate basis. This means that the Indemnity Limit is the maximum that the Insurer will pay out during the entire Policy Period – the Indemnity Limit is eroded by any and all payments made by the Insurer.
  • the Indemnity Limit includes the legal costs in defending a claim; these can be considerable.
  • The indemnity limit is not index linked, so what seems like an appropriate limit now may not be so in 10 to 15 years’ time.

We would recommend that Trustees have as many layers of protection as are available to them.

Indemnities can be of benefit to Trustees, however, as with any sort of contract, these clauses need to be very carefully written to ensure that the Trustees have the protection they require. Any indemnity relies on the Sponsoring Employer still being around (i.e. solvent) to honour that indemnity, and in today’s economic climate there are no guarantees.

A PTL Run Off Policy provides an external and vital additional layer of protection to the Trustees. Where an indemnity is in place, the PLT Run Off Policy will usually sit in front of any such agreement and will act as the first line of defence. Importantly, a PTL Policy provides cover for the legal costs in defending an allegation, no matter how spurious any allegation is – this is vital cover that is unlikely to be provided under an indemnity.

This does vary from Scheme to Scheme, but as a ball park figure we tend to find that Run Off and OBI cover can cost as little as 10% of the covers provided by Life Insurers.  For larger Schemes, it is not unusual for all covers to be sought to provide the Trustees with maximum layers of protection possible.

Either party can buy cover. Normally Trustees prefer the Employer to buy the Policy as this implies that the Employer will be prepared to pay the premium! Alternatively, the Trustees can buy cover themselves and pay the premium from Scheme Assets, providing the Trust Deeds allow this.

Even if the Sponsoring Employer is prepared to pay the premium, we would suggest that the Trustees take ownership of the PTL process. This will enable them to ensure that the coverage continually meets their requirements. It is also a good idea to ensure that the Trusts Deeds do allow for Premiums to be paid from the Scheme Assets, in case there is a change in circumstances in the future.