Partner Insight: Protecting trustees after wind-up

Securing the benefits for all members in a pension scheme through an insurance transaction is a key milestone. At some stage, this is likely to mean the end of the life of the scheme, and at this point trustees should be adequately protected from any claims which may arise in future. This is especially important, given post wind-up there are no scheme assets left to fund any investigations needed and no parties left in place to consider such claims.

If there is a claim brought by disappointed members or an investigation by regulators, trustees and others who were involved in the management and administration of the pension scheme are likely to be the first in line to come under scrutiny (rightly or wrongly). This not only applies to those involved at the date of the transaction, but also to those involved at the time of alleged errors, which may be decades earlier. Furthermore, this may relate to a time when trustees did not have the additional protection of being a director of a corporate trustee company.

Run-off cover is designed specifically for this scenario, with the primary intention to cover legal defence costs in the event of any claim, but it can also include cover for the cost of securing additional benefits or beneficiaries.  It is similar to annual Trustee Indemnity Insurance (TII), but provides cover for a much longer period of time – potentially as long as 15 years – and is specifically designed to work after the scheme trustees end their roles. The cover begins (and is purchased) at the point of wind-up of the scheme.

What will the trustee and sponsors need to do

It is important for trustees and sponsors to consider their views on post wind-up protections early in the journey to settlement process, so all parties are aligned and this important workstream is factored into the project plan.

Three key steps to take in this process are:

• Consider your objectives for the cover

The assembly of any strategy must be tailored to your needs, reflecting your specific objectives and ensuring the insurance dovetails with your other protections (for example a corporate indemnity, and any relevant cover under the bulk annuity policy).

• Understand your options

Plan for training and advice on the run-off market and cover options, to help plan your market approach.

• Agree and secure the optimal solution for your scheme

Instruct your broker to negotiate and secure the cover which delivers the best value and protection, which may include building a bespoke solution and using multiple insurers to increase cover available.

If you're a professional trustee, it is also important to consider how the scheme's insurance strategy aligns with your own professional indemnity cover.

When deciding your strategy, there are two variables to consider:

• Term - the maximum term offered by insurers is 15 years (the longstop date for professional negligence claims), with a lower bound at 6 years (the limitation period for bringing legal claims).
• Capacity – the level of cover desired will depend on the size of the scheme and number of members but we are currently able to place programmes of upwards of £100 million of capacity by layering with multiple insurers.

Once you have decided on these two elements, you can either buy 'off the shelf' or start to build a bespoke solution. Either way, starting this process and aligning all stakeholders as early as possible will help make the final part of the journey to wind-up as smooth as possible.

A further important consideration is that a portion of the premium which relates to coverage of civil fines and penalties needs to be paid by the sponsor since trustees are not permitted to pay for this from scheme funds. The portion is usually between 2-3 percent of the total and needs to be factored into the wind-up plan.

What does the run-off market currently look like?

The market for run-off cover is currently favourable for potential policyholders, with 18 insurers currently active in this space, although their appetite to size and length of cover does vary by insurer.  That number has grown substantially over the last few years, creating greater opportunities to achieve the level and shape of cover you wish to implement. Strong insurer appetite and healthy competition means large limits are available for trustees and sponsors, therefore, working with a broker who understands the market and is able to access the entire market will provide the optimal result for you and your scheme.

Here to help

Aon have a dedicated team who specialise in supporting schemes on their post-buy-in journey to wind-up via the Aon Buyout and Wind-up Services. With the most experienced team in the market, having supported more than 500 schemes to settlement, we have developed a deep understanding of the range of requirements from trustees and sponsors. Working closely with our specialist broking colleagues who are experienced in sourcing this run-off cover, we can provide a comprehensive solution for all schemes to help you meet your desired outcome and provide the comfort you and your members are protected once wind-up is complete.

Further reading