D&O claims and the Pensions Regulator - the triple threat

Pension Scheme deficits are frequently in the headlines and go hand in hand with corporate insolvencies. When there is a major corporate insolvency, there is likely to be regulatory scrutiny of the directors’ conduct relative to the pension scheme assets and the funding of the scheme. Notably, last year, the Pensions Regulator determined that it had no grounds to take any action against Carillion or its officers in relation to its scheme deficit.

That said, the powers of the Pensions Regulator, and an enhanced sanctions regime following the implementation of the Pensions Scheme Act 2021 (the “Act”), means this is yet another topic to disturb the sleep of directors.  In an insolvency, the company will not be able to provide an indemnity to its directors, and so they will be wholly reliant on coverage under the D&O policy for protection of personal assets.

In this bulletin we look at the three main areas of concern for directors when it comes to pensions, and ask: how can a D&O policy help?

It’s not a Crime – is it?

The short answer is: yes it is. A significant concern for company directors is the criminal sanctions created by the Act.  Directors (and other individuals) can face up to seven years in prison (and/or a fine) where found to have:

• Acted so as to detrimentally affect, materially, the ability of the scheme to pay benefits owed.  The individual must have known that the conduct would have that effect.
• Acted in a way that impacts, compromises or reduces the recovery of the “employer debt^[1]” to the pension scheme.

Notably, the Act was not in force at the time of Carillion’s collapse, and so these offences were not under consideration.  Plainly there is a lot of discretion (and no lack of legalese) in these definitions, so there is clear risk for directors where a pension has a deficit. 

All good D&O policies will provide cover for the defence costs associated with criminal claims (although criminal fines are likely to be uninsurable as a matter of public policy).  Even if a director is cleared or not even charged, the policy can provide valuable cover in defending allegations.  The precise trigger can vary, with some policies responding only to the formal legal proceedings, others triggering following arrest or even for a voluntary interview under caution, and some more vague as to the point at which insurers will be funding legal costs.  A criminal conviction, or even being subject to a criminal process, can have devastating consequences for an individual.

Counting the Cost of Investigations

The Pensions Regulator has a number of investigative powers, and may require directors to provide information or documents, or attend an interview. All D&O policies will provide some form of investigation cover.  The key points here are whether the particular form of investigation falls within the types of investigations covered, whether the Pensions Regulator meets the test of an Official Body (or equivalent term) in the policy, and whether there is any sublimit on the cover. 

The Pensions Regulator states that it usually seeks to engage with relevant persons before commencing enforcement action^[2].  The point at which a discussion becomes an investigation will be important for coverage, as will any pre-investigation or similar cover, which may be available prior to the formal investigation (again, covering those legal costs).

The capacity in which an individual is pursued will also be relevant.  A D&O policy covers directors in their capacity as directors of a company, but will not cover shareholders or trustees of a scheme.  Individuals may wear multiple hats. Directors and officers may be covered under a Pension Trustee Liability policy, but only when they are acting in relation to a pension plan. The criminal actions discussed here appear more likely to relate to an individual’s action as a director, and so D&O would be the first port of call (although it will all depend on the facts).   

Orders to Top-Up a Scheme

The Regulator can issue Contribution Notices, requiring a person to pay a sum of money into a scheme.  If a contribution notice is issued to a director, theoretically there may be cover under a D&O policy.  However, given such notices are only provided in the most serious of cases, and aim to put the scheme into the position it should have been in but for the wrong, insurers will consider closely the conduct and illegal gains exclusions, and whether there is truly “loss” within the meaning of the policy term.  Failure to comply with a Contribution Notice can, itself, be subject to a criminal sanction.

Circumstances – Protection for Future Claims

Pensions issues are likely to arise following the insolvency of a company.  By definition, an insolvent company does not have sufficient funds or assets, and so is unlikely to be able to purchase ongoing D&O cover for its directors.  All is not lost, as policies allow the notification of circumstances, with future claims arising from those circumstances tying back to the policy period in which those circumstances were notified (even if the policy itself has expired).  However, circumstance provisions differ from policy to policy, and specific terms must be considered:

1. Is it possible to notify matters that “may” give rise to a claim, or only if they are “likely” to give rise to a claim (or some other test)?  The “may” wording is a lower threshold in English law, meaning circumstance notification is more likely to be successful.
2. Does the policy require information as to the claims anticipated, potential claimants, dates and details of wrongful acts or other information for a circumstance to be valid?  Is that qualified by reasonable attempts to obtain that information?  If certain material is required and not provided, a circumstance may be invalid and future claims may not tie back.  Even if qualified by a reasonable attempt to obtain information, the insured will be required to demonstrate taking reasonable steps.
3. Beware of insurers asking further questions on a notification, in an attempt to narrow its scope (and the scope of future claims that may be covered).  Ultimately, a director needs to comply with the policy terms and no more.

These issues, and the potential claims (including pension related concerns) must be considered when drafting circumstance notifications to ensure the greatest prospect of insurers providing cover for future claims.

The increasing director burden

The number of ways in which directors can face claims or investigations appears to grow year on year.  Pensions related liabilities have not always been at the top of the agenda, competing for space with director disqualification, FCA investigations, Insolvency Act related claims and even Parliamentary enquiries amongst other exposures.  Nonetheless, the risks are real with arguably the most serious potential consequences for directors.  The scope and amount of coverage available under a D&O policy are important considerations in arming a Director to defend pensions related claims.