As we explained in our recent Pensions Law Newsletter https://www.burges-salmon.com/news-and-insight/publications/pensions-law-newsletter-february-2021/ many trustees benefit from indemnity insurance often put in place by sponsoring employers. As our article on insurance explained, the benefits of such policies extend well beyond just indemnifying trustees for the cost of defending claims made against them. Many policies now provide extensions to the basic cover which are designed to cover the costs of investigating problems, taking mitigating steps, making applications to court, and even bringing claims against negligent advisers. But, recent hikes in premiums, suggest that these policies and potentially these extensions are proving problematic for the insurance industry and that trustee indemnity insurance is now seen as particularly risky business.
In its recent article Trustees facing up to 50% liability insurance premium hike - DB & Derisking - Pensions Expert (pensions-expert.com) Pensions Expert reports on the significant increase in cost those trying to obtain this type of insurance are facing this year. Increases in premiums of up to 50% is not a small matter but rather a step change in the cost of such cover. But why is this happening in relation to trustee indemnity insurance in particular?
From our perspective, as pension lawyers, and dispute specialists in particular, we see relatively few claims against trustees. That is perhaps to be expected. In a properly run scheme, trustees should be surrounded by a team of professional advisers. If something goes wrong responsibility for the error will likely rest with one or more adviser and it is they who will be pursued for whatever the financial consequences of the claim are. It is therefore relatively unlikely that trustees in these circumstances will have to defend themselves, let alone invoke indemnity insurance to cover the costs of doing so. Even when claims are settled at a discount against the full loss, it is unlikely that this will result in any form of claim against the trustees.
This summary of what we tend to see perhaps masks why premium on indemnity insurance is going up significantly. While the way insurers price risk is of course extremely complex, we think the following points are potentially what is driving the increase in the cost of this insurance:
In the scenario we outline, whilst an adviser might be at fault for the error in question, it is the trustees who bear primary responsibility to members for mistakes in how a scheme is administered. It is not good enough, therefore, for a trustee to point members to the negligent advisers – it is the trustees who must make good the position and then recover their losses from the advisers. As a result, even where the likelihood of a claim against trustees is extremely small, the mismanagement of a scheme (often described as a “wrongful act”) will be a circumstance which will need to be reported to the insurer. Insurers price insurance based on notifications as well as actual claims.
The scenario we outline might also enable the trustees to claim on any number of extensions in an indemnity policy. Any error in the management of a scheme might enable trustees to claim mitigation costs in the form of legal fees for investigating the error and determining how to put things right before member benefits are impacted and claims are made against the trustees. In some cases correcting errors can involve applications to court and claims against advisers to recover the cost of those applications. Where these processes are covered by extensions in the insurance policy the eventual bill to the insurer can be significant – potentially in the hundreds of thousands of pounds even though the end result is no claim against a trustee.
Insurers are likely to be looking both into the past and to the future to inform their pricing decisions. Defined benefit pension schemes are particularly complex and when things go wrong solutions can be expensive. It does not take a large number of expensive claims for insurers to take note. The future of defined benefit pension provision is set to throw up yet more challenges for trustees with matters such as GMP equalisation, a growing trend to de-risk, and new legislation in the form of the Pension Schemes Act 2021. And all of that is ignoring unprecedented economic challenges for employers. It would appear that insurers see some or all of these things as potentially increasing the risk of trusteeship, alternatively the cost of providing indemnity policies with useful extensions.
The increase in premiums insurers are looking for is hopefully sufficient to address the increased risk they perceive in this area. More draconian steps would be for insurers to cut back the cover offered by such policies, such as the extensions described above, or to withdraw from the market altogether. We very much hope that it will not come to this and that the market will stabilise.
Written by Justin Briggs
Hard pressed trustees of defined benefit schemes are facing huge rises in their liability insurance premiums, with the cost of dealing with claims and upcoming new legislation driving insurers to double premiums in some cases.