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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions: Preventing conflicts

Potentially, actuaries could be involved in conflict situations in a number of different ways. This article considers how the Companies Act 2006 (the Act) affects directors and governance procedures and also how the Pensions Regulator’s (PR) broader guidance will impact on actuaries with pension scheme appointments.

The provisions of the Act concerning directors’ duties in relation to conflicts of interest came into force on 1 October 2008. The new legislation clarifies an historically confusing area of legislation and coincides with the PR issuing guidance (see useful links) on conflicts of interest. The PR aims to offer educational support with a view to sharing good practice and raising standards through providing guidance to trustees who may have conflicts of interest.

The Act defines two different types of conflict of interest, each requiring a different response from directors. A transactional conflict arises where a director, or connected person, has an interest in a transaction or arrangement with the company. This is much the same as the previous position: such interests must be declared to the board. Situational conflicts, described in section 175 of the Act, GC100 (see useful links) are: “anything or any connection which could potentially divert a director’s mind from giving sole consideration to promoting the success [of the company””.

Not only does the Act require that directors avoid conflict situations, this more restrictive regime confers a positive duty on directors to avoid possible conflict situations, rather than simply show that there are procedures in place to manage them. Also, indirect conflicts can now arise through a broader definition of connected persons including parents, civil partners, children and step-children under 18.

Prior authorisation
Breach of company law from conflict situations can be avoided by prior authorisation, which can be obtained in one of three ways:
1 Authorisation by the company board
For public companies, authorisation by the board must be facilitated by the Articles of Association (the Articles). At a board meeting to approve conflicts, quorum must be met excluding the conflicted director. In private companies incorporated after 1 October 2008, the board can authorise conflicts unless this is expressly disallowed in the Articles. Private companies incorporated before that date either require power for the board to authorise conflicts included in the Articles or the shareholders need to pass a resolution to permit board authorisation. In approving any conflict, the directors are bound to act in good faith to promote the success of the company. Authorisation by the company board may be the approach taken where a finance director is to be appointed to the trustee board of the company pension scheme.

2 Authorisation through the Articles
For efficiency in governance processes, it makes sense for companies to make allowance in their Articles for common conflict situations. A ‘safe harbour’ provision exists ensuring that anything done or not done by directors in compliance with such Articles does not constitute a breach of duty under the Act. This route to authorisation could be favoured for example within insurance groups where an actuary may hold directorships in several subsidiaries. The Articles of many companies which form part of large groups now provide that any conflict arising out of a directorship of other companies in that group is approved. Also, in a joint venture situation where an actuary is a director of, for example, Supermarket Life Company representing the interests of Parent Life Company, which has entered into a joint venture with Supermarket Ltd, his situation could be recognised in the Articles.

3 Authorisation by shareholder resolution
For companies with a small number of shareholders, or in unusual situations where all of the directors have potential conflicts, this is a practical route to securing the required authorisation. This could also be used where the directors have concern as to whether authorising the conflict would promote the success of the company. Broad similarity What is notable for actuaries about the legislation and associated GC100 guidance is that the approach to conflict management has broad similarity to the PR’s newly issued guidance on how trustees should identify, monitor, and manage conflicts of interest in the stewardship of pension schemes. The PR published guidance on 1 October 2008, with a view to raising standards in the area of conflict management, bringing into focus tension between the sponsoring employer’s commercial goals and the trust law protection afforded to beneficiaries

The PR has taken a pragmatic approach regarding senior employees who are directors and also trustees of the pension scheme. Despite the potential conflict, such a scheme trustee brings experience to their role and enhances communication between the company and the scheme. The PR favours careful management of such conflicts through its five key principles of conflict management. There are striking parallels between these principles and the GC100 guidance on directors’ conflicts of interests, as seen in Table 1.

The PR’s issuance of this guidance heralds an increased emphasis on conflicts of interest. This comes at a time when the responsibilities that rest with trustees have been growing steadily for several years including, for example, the effect of the recent Transfer Value Amendment Regulations 2008. It is also wholly consistent with the PR’s recent approach to dealing with ‘problem schemes’, as illustrated in the case of Telent, independent trustees can bring the necessary expertise, without the potential baggage of conflicts.

Warning that inadequate management of conflict situations will result in regulatory action that could include the appointment of an independent trustee, the PR suggests that some or all of the following measures may help trustees to manage conflicts:

1 Withdrawal
2 Establishment of a sub-committee
3 Appointment of an independent trustee
4 Resignation/non-appointment of trustees

Through the provisions of the Act, and guidance from the PR, many actuaries will now be required to have increased awareness of possible and actual conflicts of interest. Early identification and effective management through enhanced governance processes may leave affected individuals free to discharge their other responsibilities. Actuaries with concerns about compliance with company law, trust law or the PR’s requirements should seek independent legal advice.

Transactional conflict
The Act at section 177(1) says: “If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.”

Situational conflict
The Act at section 175(1) defines a situational conflict as: “A situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.”

Useful links
>> GC100 brings together senior legal officers and company secretaries from 90 past and present FTSE 100 companies, to provide a forum where members can share best practice in relation to legal, risk management, compliance and other areas of common interest: www.corporate.practicallaw.com/9-382-9498qp=&qo=&q=GC100
>> The PR guidance: www.thepensionsregulator.gov.uk/guidance/conflictsofInterest/index.aspx

Louise Aitchison is a trainee solicitor at Dundas and Wilson CS LLP