- Make sure you have a conflicts of interest policy in place to help you identify, manage or avoid conflicts for trustees, employers, advisers and service providers.
- Outline approaches to adviser conflicts of interest in your conflicts policy, risk register or in other documented procedures. Some service providers, for example legal advisers, are professionally required to not have conflicts of interest.
- Make sure you’re satisfied with your advisers’ and service providers’ conflicts policies.
- Make sure you’re aware of the services your provider or adviser supply to the employer, and manage any potential conflicts.
Trustee toolkit online learning
The ‘Running a scheme’ module contains a tutorial on ‘Conflicts of interest’. You must log in or sign up to use the Trustee toolkit.
Managing conflicts of interest and why you must do it
A conflict of interest can arise when you’re required to make a decision that is in the best interest of your scheme members but where you may also have a personal interest in the decision. For example, these could arise, in relation to employer-appointed trustees, who are also company directors, when agreeing operational costs with the employer such as those relating to administration or communications.
As a 21st century trustee, you must be aware of possible conflicts within your scheme. Whilst conflicts of interest aren’t uncommon, you’re legally obliged to have adequate internal controls in place, this includes having a process to identify and manage any conflicts of interest among those involved in running your scheme, including trustees, service providers and advisers.
Failure to have a process in place can have serious consequences for you, your board and scheme members, and can lead to poor decision-making, wasted time and cost.
How to do it
If you haven’t got one already, you should make sure you have a conflicts of interest policy in place that maps out your approach to managing conflicts if they arise. The conflicts of interest policy should be reviewed by a legal adviser from time to time, to pick up scheme-specific issues.
We’ve produced an example policy document (PDF, 110kb, 4 pages) to help you understand what should be included.
You should also identity and document conflicts of interest in a register, which should include:
- details of the conflict
- the actions taken to resolve them
We have produced a conflicts of interest register template (PDF, 48kb, 6 pages) to help you get started with documenting conflicts in your scheme.
A register of gifts and entertainment that have been offered to trustees should also be maintained, recording their value, whether they were accepted and the action that was taken. You can use our gifts and entertainment register template (PDF, 52kb, 6 pages).
Advisers and service providers conflicts of interest
You’ll need to make sure that your conflict of interest policy includes your approach to managing conflicts with advisers and service providers. These can arise because your advisers and service providers may recommend services or products offered by related parties, for which they may gain financial or non-financial benefit.
Where you believe that any advice or service may be compromised, you should consider further measures to manage the conflict. This may include speaking to other advisers or providers, tendering for alternate advisers or providers and comparing products. You should document any actions you take.
Your advisers and service providers should also have their own arrangements in place for identifying, managing and disclosing their own conflicts of interest, and this will include a conflicts policy. You should review this policy with your advisers and make sure you’re satisfied with it.
Make sure that you’re aware of any services your advisers and providers offer to your employer, and document them. You should consider whether you are content for this situation to continue, or whether you should take steps to address potential conflicts. An example of a common conflict is where the trustee board’s actuarial adviser is asked to provide accounting or actuarial support to the employer.
The steps you need to take will depend on the type of adviser and advice. You should ask your advisers and service providers to inform you when they tender for services to an employer.
Examples where ways of working could be improved
Sole trustee on the board
The employer of a closed defined benefit (DB) scheme looking to wind up were advised by the professional trustee on the board to use them as the sole trustee, rather than a board made up of member-nominated trustees. This represented a potential conflict of interest as the advice provided, whilst it may be of benefit to the members of the scheme, would also benefit the sole trustee.
The employer and trustee board should have conducted a full tender process to appoint a sole trustee to represent the board. In doing this, they would ensure value for money for both the scheme and its members, and avoided the conflict.
Conflicts with the employer
An employer-nominated trustee wanted to recruit an independent trustee to the board to wind up the scheme, and consent was required from the employer to start the recruitment process. The employer was reluctant to spend money recruiting an independent trustee, even though this would be in the best interest of the members in the long run. The employer-nominated trustee accepted the employer’s decision not to invest in recruitment, and didn’t pursue the matter. The scheme remained open, which didn’t represent good value for members.
The employer-nominated trustee should have taken steps to improve their knowledge and understanding to better recognise the conflict. They should have challenged the employer’s decision not to invest in recruiting an independent trustee, which would have been in the interest of scheme members. The conflict and any key decisions should have been documented in a conflicts of interest register.
Managing director acting as a trustee on the board
The managing director of a family-run business sat as a trustee on the pension board of the company’s DB scheme, and was a dominant force in discussions around covenant and funding. They were the driving force in providing a valuation that showed a weak approach to funding, a risky investment strategy and very low deficit recovery contributions versus the level of dividends paid to shareholders.
Whilst the company was performing relatively well, the size of the pension scheme liability, and the risks associated with it, dwarfed the size of the company – the covenant was therefore considered weak. The trustees didn’t seek professional advice to manage the conflict or assess the covenant.
Whilst there are many benefits for a managing director to sit on the trustee board, conflicts of interest can inevitably arise. In this case, the trustees should have documented the conflict and considered the following options:
- challenged the decisions made by the managing director
- considered whether the managing director should have remained on the trustee board
- received input from expert advisers such as a lawyer or covenant adviser
- considered appointing an independent trustee
- be clear in trustee meeting minutes in what role a particular trustee is acting
Examples of managing conflicts of interest effectively
Appointing a fiduciary manager
The member-nominated trustees on the board felt that, due to work commitments, they were unable to spend enough time on pension issues.
They decided to appoint a fiduciary manager to look after their investment portfolio, helping to reduce the burden on the trustees, allowing them to focus on more strategic issues for the scheme.
The trustees had an existing investment consultant, who recommended a fiduciary manager from the same company. The trustees were mindful that this presented a potential conflict of interest. As a result, the trustees documented the conflict and conducted a full and transparent recruitment process to hire the fiduciary manager. They also appointed an independent adviser to monitor the performance of the fiduciary manager.
A scheme implemented a process to manage any conflicts of interest that might arise from decisions taken following investment advice from their advisers. To make sure that any conflicts of interest were acknowledged and accounted for, they insisted that the adviser was removed from any discussions about advice that might have a benefit to the adviser or any related parties, and the actions taken and reasons for doing so were fully recorded.
Check your governance
- Got a documented conflicts of interest policy in place?
- Got and maintain a register of interests?
- Ensured that declarations of conflicts of interest are made at the appointment of all trustees and advisers?
- Made sure advisers and service providers have their own conflicts of interest policy, and disclose these to the trustee board?