The last few months have seen insurers increase their premiums for fidelity and trustee’s indemnity covers by up to 25% as the number of claims lodged by retirement funds has skyrocketed.
“While some retirement funds’ assets have grown, most have shrunk, some by up to 20%, over the past twelve months. Trustees are also increasingly aware of stricter oversight by the Pension Funds Adjudicator who has cut trustees little slack in recent adjudications” says Brian Gillespie of Alexander Forbes Risk Services.
Fidelity claims account for many of the losses suffered by funds. That said, insures don’t carry the entire burden as they are entitled to some relief. For example, once an insurer has paid a fund’s claim they are entitled to recover their outlay from the responsible person and/or their employers in the funds name. However, “recovery processes are often lengthy and can be complicated by collusion between the guilty parties” says Gillespie.
In cases where the individuals involved in the fraud are without recoverable assets or have squandered their ill-gotten gains by the time insurers are in a position to sequestrate, recovery is impossible. To avoid this, Gillespie warns that “insurers should always institute recovery action against the guilty person and their employers without delay to improve their chances of recovery”
Recently there has also been an increase in claims following negligence. Whilst loss due to negligence is more frequent the sums involved are not nearly as large as those following fraud. Moreover, losses resulting from negligence are often the fault of the service provider. These can, for example, arise from inefficiency in the registration of new members of funds and withdrawal benefits, along with the payment of death claims without properly identifying beneficiaries etc. “These losses are, however, recoverable from the service provider, as long as their liability is not limited under contract and assuming they are still in operation” says Gillespie.
Occasionally administrators fail to properly reconcile or reconstruct records, resulting in considerable costs to the fund. Often trustees mistakenly believe that the fund can just claim for these increased costs under their fidelity policy. Unlike claims following fraud, however, the fidelity policies are not triggered following loss due to negligence until a quantified claim is made against the fund or its trustees – typically by members or their dependants or beneficiaries.
The same principle applies “following incorrect (though not necessarily dishonest), distribution of fund surpluses where, if no member claims from the fund or its trustees, the policy is not triggered” explains Gillespie.
Finally, losses are not always recoverable from service providers. For example, a few administrators have recently gone into liquidation, leaving the funds which they had administered to carry the additional costs of appointing new fund administrators. Under these circumstances if a claim is made against the fund it will have to rely on whatever indemnity is available under the insurances previously arranged” explains Gillespie