Conflict of interest in pension plans

Sanya Goffe, Guest Writer
sanya.goffe@jm.lexcaribbean.com

Jamaica's pension laws require that the board of trustees of any pension plan be constituted with sponsor trustees nominated and elected by the sponsoring employer; member trustees nominated and elected by the members; and where there are 30 or more pensioners or deferred pensioners, a pensioner trustee.

The requirements are laid out in The Pensions (Superannuation Funds and Retirement Schemes) Act.

It is not unusual for the sponsor trustees of pension plans to also be directors of the sponsoring employer. There are several obvious benefits to both the employer and the trustees, and in turn, the beneficiaries, where a trustee wears two 'hats' as it allows the trustees to have greater access to information about the employer, and it also allows considerations and concerns of the employer to be properly ventilated and represented in trustee meetings.

However, all trustees at all times owe an inviolable and fundamental duty to act in the best financial interests of the beneficiaries, which can sometimes conflict with the interests of the employer.

Conflicts of interest can cause real problems if they are not resolved effectively, and so it is critical that actual and anticipated conflicts are managed satisfactorily.

The general principle is that a trustee should not place himself in a position where his duty conflicts with personal interests, or where a duty he owes to one party conflicts with a duty owed to another.

The Pensions (Superannuation Funds and Retirement Schemes) (Governance) Regulations 2006, in Paragraph 8(1), bars anyone from accepting an appointment as a trustee of a fund "if there is or likely to be a conflict of interest" between that and other roles held.

In most instances, the interests of the employer and the beneficiaries will be aligned, as the primary goal of all parties is to ensure that the fund yields the maximum return for the beneficiaries.

However, conflicts can arise, and do arise, especially in relation to funding negotiations, contribution holidays, or the ever-contentious issue of the treatment and distribution of a surplus whether in an on-going plan or in a wind-up.

In a recent decision of the English High Court, David Youlton v Charles Russell, the court held that Charles Russell, a firm of solicitors, breached its duty to the trustees of a pension plan, three of whom were also directors of the employer, for failing to properly advise of the conflict-of-interest risks that arose in the trustees entering into an agreement with the employer and advising how the risk could be reduced or eliminated.

This decision highlights the importance of trustees' decisions being made, and being seen to be made, in the interest of the beneficiaries, having not been influenced by factors such as the trustees' stake in the plan, or their roles as directors of the sponsoring employer.

Regulations

The way to resolve conflicts depends substantially on the specific circumstances of each case.

The governance regulations require that all pension plans have in place a conflict-of -interest policy, and that this policy provide for the documentation of any declared conflicts in a register.

The register should indicate the date the trustees received notification of the conflict, the name of every trustee involved, the nature and details of the conflict, the method of resolution, and the date of the resolution.

It is important that any conflict- of-interest policy also set out in detail the manner in which conflicts will be addressed, and require, in accordance with the governance regulations, that the conflicted trustee withdraw from discussions and decisions affected by the conflict without voting or deliberating on the matter.

The regulations further require that once a notification is received of a potential conflict, the non-conflicted trustees should make a determination as to whether a conflict of interest indeed exists in the absence of the potentially conflicted trustee.

There is no one-size-fits-all approach to the resolution and management of conflicts of interest. It is important, however, that trustees of pension plans understand how to identity conflicts and how to properly manage, evaluate, and avoid them.

Trustees, regardless of how their appointment arises, should never lose sight of the fact that their duty as trustee is to act prudently, conscientiously, and honestly in the best interest of the beneficiaries of the pension plan at all times.

Sanya Goffe is a partner at Lex Caribbean Attorneys-at-Law, Kingston.