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Conflicts of interest

Important

Early draft of the code of practice

This code is not in force yet. It is an early version for the new code of practice consultation.

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Published: 17 March 2021

Conflicts of interest may arise from time to time while running a pension scheme, either among members of the governing body themselves or with service providers, sponsoring employers, advisers and others. Conflicts can also arise for members of the governing body who, for example, are members of the scheme or who represent trade unions. Conflicts of interest may be either real conflicts or potential conflicts. Unless otherwise stated, references to ‘conflicts of interest’ include both real and potential conflicts.

Under section 249A of the Pensions Act 2004,CN1 governing bodies of certain schemes must establish and operate an effective system of governance (see Scheme governance) including internal controls (see Managing risk using internal controls). However, there are certain exemptions.CN2

There are different requirements for the management of conflicts of interest for public service pension schemes. These are set out at the end of this module.

In identifying and evaluating risks (see Identifying and assessing risks), governing bodies should consider conflicts of interest.

A conflict of interest may arise when a member of the governing body:

  • is obliged to act in the best interests of the members; and
  • at the same time has or may have either:
    • a separate personal interest or
    • another fiduciary duty or other duty owed to a different person in relation to that decision, giving rise to a possible conflict with his first dutyCN3

It is possible that members of governing bodies will have other interests and responsibilities and need to understand when actual or potential conflicts arise. A member of a governing body with a conflict should consider withdrawing from decisions where that conflict occurs. Where there are acute or pervasive conflicts for a member of a governing body (for example where a trustee involved in funding negotiations is also the finance director) it is likely to be inappropriate for them to be involved in negotiations relating to the matters causing the conflict.

Members of governing bodies who are also directors of the sponsoring employer will also need to consider requirements of section 175 of the Companies Act 2006. This places an obligation on directors to avoid a situation where they have or can have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of their company.

Certain legal and professional requirements relating to conflicts of interest may apply to members of governing bodies, advisers and service providers. For example, legislation applicable to English local authorities contains requirements for certain people about standards of conduct, conflicts of interest and disclosure of certain interests.

Our expectations for identifying and recording conflicts of interest can be found below.

Note: We have produced guidance on options and approaches to managing conflicts of interest.

Identifying and recording conflicts of interest

  • Have a clear understanding of the importance of managing conflicts of interest and the circumstances in which may arise.
  • Understand any requirements of the scheme’s governing documentation, or regulations under which it may operate, in relation to conflicts of interest.
  • Encourage a culture of openness and transparency in relation to conflicts of interest.
  • Maintain a written policy for managing actual and perceived conflicts of interests.
  • Maintain a register of interests which should be considered in every meeting of the governing body.
  • Consider whether the register of interests should be published (for example on the scheme’s website) redacted to the extent that it contains confidential information and/or personal data.
  • Ensure all members of the governing body, advisers and service providers make declarations of interests and conflicts at their appointment, and as they arise.
  • Ensure contracts and terms of appointment require advisers and service providers to operate their own conflicts policy and disclose all conflicts to the governing body.
  • Record conflicts of interest in relation to a decision-making process, as well as the action taken to manage them, in the written records of the meeting. See Meetings and decision making.
  • If carrying out transactions with related parties, governing bodies should ensure transparency by complying with Financial Reporting Standard (FRS) 102 – Related Party Disclosures.
  • Consider seeking independent legal advice to help decide the best approach to manage or avoid an actual or potential conflict of interest.

Under section 249B of the Pensions Act 2004, scheme managers of public service pension schemesCN4 are required to establish and operate internal controls which are adequate for the purpose of securing that the scheme is administered and managed in accordance with the scheme rules,CN5 and with the requirements of the law.

To the extent that conflicts of interests is within that section, scheme managers should consider conflicts of interest in identifying and evaluating risks (see Identifying and assessing risks). Where relevant, our expectations on scheme managers for identifying and recording conflicts of interest are the same as the table above. The specific expectations which apply will vary from scheme to scheme.

Under section 5 of the Public Service Pensions Act 2013, scheme managers of public service pension schemes have to meet certain requirements relating to conflict of interest regarding the pensions board. In this situation, a conflict of interest is a financial or other interest which is likely to prejudice the way in which someone carries out their role as a member of the pensions board. It does not include a financial or other interest arising merely from them being a member of the scheme or any connected scheme. The scheme manager must:

  • be satisfied that a prospective member of the pension board does not have a conflict of interest
  • remain satisfied that none of the members of the pension board has a conflict of interest

Glossary and legal references

Governing bodies

Trustees or managers of an occupational pension scheme which is subject to the requirements under section 249A of the Pensions Act 2004

Internal controls

  • arrangements and procedures to be followed in the administration and management of the scheme
  • systems and arrangements for monitoring that administration and management, and
  • arrangements and procedures to be followed for the safe custody and security of the assets of the scheme. See Section 249A of the Pensions Act 2004.

Pensions Board

Board set up as required by section 5 of the Public Service Pensions Act 2013 to assist the scheme manager with the matters set out in that section

Scheme manager

The person responsible for managing or administering:

  • the scheme, and
  • any statutory pension scheme that is connected with it. See section 4 of the Public Service Pensions Act 2013.

Sponsoring employer

The employer, or employers, responsible for making payments to a pension scheme. See our Statement on identifying your statutory employer.

CN1Article 226A of The Pensions (Northern Ireland) Order 2005

CN2Section 249A(3) of The Pensions Act 2004
[Article 226A(3) of The Pensions (Northern Ireland) Order 2005]

CN3Such conflicts of interest may affect not only trustees but also directors, agents, professional advisers and others

CN4As defined in section 318(1) of the Pensions Act 2004
[Article 2(2) of The Pensions (Northern Ireland) Order 2005]

CN5As defined in section 318(2) of the Pensions Act 2004 2004
[Article 2(3) of The Pensions (Northern Ireland) Order 2005]