Liability Insurance for Pension Fund Trustees

Traditionally, Pension Fund Trustee Liability Insurance has been a line characterised by low claims incidence. The effect of this has been extremely low insurance policy rates and widened cover. But things are no longer what they used to be, creating new

With markets becoming progressively more dynamic, Pension Fund Trustee Liability insurers are now faced with increased claim frequency and severity and need to be properly equipped to respond to these market fluctuations, says Lucian Carciumaru, liability underwriter at Camargue.

Catch-all cover

According to the Pension Funds Act, all pension funds must be controlled by a board of trustees.

“In reality, however, trustees delegate the majority of their duties to third party service providers such as administrators and investment managers,” explains Carciumaru. “Current experience shows that most losses are coming from the said third party service providers, not the trustees themselves. Therefore the policy has become a ‘catch-all’ type cover which responds as soon as a loss occurs. Should an administrator cause a loss to the fund, the pension fund policy would pay out the fund and subrogate against the guilty party. Premium rates were set low on the assumption that subrogation would be a simple process.”

A new playing field

However, the subrogation process has proven to be extremely challenging and expensive, since third party service providers cannot admit liability without prejudicing their own PI insurance. Also, some service providers limit their liability via their service level agreements with the fund, which in turn restricts the insurer’s potential recovery. Another potential problem arises if the administrator or investment manager does not take out adequate PI cover and therefore no assets are left from which the pension fund insurer can claim.

Managing the risk

“Pension fund trustees should therefore ensure that all service providers have adequate PI cover, and be aware of any restrictions that exist within service level agreements. Trustees should also ensure that sufficient cover is in place for the fund, in order to avoid being held liable in the event of a claim,” advises Carciumaru.

“Trustees must bear in mind that the delegation of duties to third party service providers does not limit their potential liability should a claim arise. It is therefore crucial for trustees to remain up to date with the conditions of the fund, as well as developments within the industry.”

Opportunity for brokers

Given the complexity of the industry, the onerous duties trustees must fulfil and the significant risks funds face, brokers certainly have an opportunity to add value in this industry segment. And the resources to do so are also available.

“For example, in order to assist pension fund trustees in carrying out their duties, Camargue applies its M³ Principle of managing, mitigating and migrating risk, as a comprehensive approach and solution to the current risks facing the industry,” comments Carciumaru. “Pension fund trustee liability insurance policies should also be wrapped up in risk management benefits which includes, among others, arbitration services, trustee and principal officer education, governance surveys, and bank account verification for large payments. Such benefits assist the broker to add value by assisting the fund to manage the risk and to support trustees in carrying out their fiduciary duties to the fund.”