Out-Law Analysis | 08 Jun 2016 | 11:53 am | 4 min. read
Improved governance standards introduced last year will help to guard against poor outcomes from saving into a DC pension - but, by their very nature, these schemes are risky for members. Benefits are not guaranteed, and the members bear all of the risk that their income will not be what they expect once they reach retirement age.
Given the complexity of pension schemes and the general lack of member understanding, claims may be imprecise in nature. The general thrust will be that the member's pension is less than expected, and that retirement plans have to be postponed or that other financial commitments cannot be met as a result of the poor outcome from the scheme.
In the member's eyes, the blame for this position will naturally rest with the trustees – with compensation of some kind the only fair remedy. Litigation, not a pleasant prospect, may well arise from a mismatch between member expectations and the retirement reality.
Dissecting the claim
In very broad terms a successful claim against a board of trustees will consist of three component parts: financial loss; causation, and derogation of trustee duties. The member will need evidence to prove each of these parts of the claim before a trustee board will be found liable to make good the loss.
A poor pension outcome when measured against the member's expectations is not the same as actual financial loss.
In many cases, the member's loss will simply be the loss of an anticipated gain, which is not generally considered worthy of compensation. After all, there are no guaranteed outcomes in DC schemes.
But what if member expectations have been raised beyond unrealistic levels by unduly rosy communications over the years? In this case the member may have stronger grounds to argue a financial loss where the investment performance does not meet the expectations set by those communications. Unfortunately, the standard of DC communications is generally lower than it should be - leaving DC trustees vulnerable to challenge.
Derogation of trustee duties
The improved governance standards introduced to DC schemes in 2015 set out a prescriptive range of statutory duties for trustees. These include adherence to the charge cap rules and regular value for money assessments. Compliance with these standards, as now described in detail by the Pensions Regulator's DC guides, is an important way to fend off successful claims.
There are two elements to causation:
For a claim to be successful and compensation to be paid, the member must be able to show both elements of causation.
Bringing the claim
The first port of call for the member will be the scheme's own internal disputes resolution procedure (IDRP). Assuming this does not deliver what the member is after, the logical next step is a claim to the Pensions Ombudsman. The Pensions Ombudsman will, at no cost to the member, consider the legal basis for the claim - as well as what is fair to the member in the circumstances. The decision is then usually published on the Pensions Ombudsman's website.
An unfavourable determination by the Pensions Ombudsman can be challenged in the court by either party. This is where the dispute resolution process becomes much more expensive.
Defending an IDRP claim can be expensive, but the costs will generally be borne by the employers through the 'expenses' clause in the scheme's rules. However, the further the claim progresses through the legal system, the less likely it is that the employer will be required to fund the trustees' defence costs.
This is where trustee insurance comes into play. In fact, the true value of trustee insurance is often in funding defence costs. These costs can be considerable and, depending on how far the claim progresses through the courts, can easily reach six figures.
The case for the defence
Building a defence to even a spurious claim can be a significant burden to the board of trustees, and will involve collation and detailed scrutiny of scheme deeds, meeting minutes, chair's statements and communications over the years. The regularly-shifting position in best practice and statutory compliance requirements will not make this task any easier.
If trustees become involved in litigation then their defence will depend on a clear audit trail of the proper exercise of their trustee duties. Record-keeping - and the content of those records - is of paramount importance. Trustees must not forget that minutes are legal documents that may one day be read by the court.
If the member is ultimately successful, then there will be an award of compensation to mitigate or eliminate the financial loss. Compensation will be valued as the amount required to restore the member's pot to the value it would have had had the breach not occurred. But with what money?
Unlike in DB schemes, DC scheme liabilities are not automatically underwritten by a sponsoring employer. It may be possible to require the employer to bear the cost if there is a suitable indemnity in the scheme rules - failing which, the trustees may need to turn to their insurance policy if they have one. In either case, the conduct of the trustees which gave rise to the claim may affect whether the indemnity or the insurance policy can be relied upon.
The best way to avoid costly and unpleasant litigation is to guard against claims arising. As a good starting point, trustees should proactively manage the scheme members, as well as third party suppliers.
Manage the members
Member communications give trustees the best opportunity to create realistic expectations - and to equip members to improve their eventual outcomes through increased contributions or self-selected investments. It's often not too late to address unhelpful messages in past communications, provided they are discovered before a claim emerges.
Manage third party suppliers
DC schemes are generally delivered through a series of third party supply arrangements with administrators and investment managers. Large amounts of member data and member money may be held by these third parties - and standard term contracts are generally designed to push risk and liability back to the trustees if something goes wrong. Getting contracts right means the party at fault can be held to account if a claim arises.