The CFO's Dilemma

While it is common for the CFO to act as a trustee of their company's defined benefit pension scheme, the Pensions Act of 2004 introduced the requirement that trustees identify and manage potential and actual conflicts of interest. This has caused CFOs to question if they can continue in this role.

The Pensions Regulator, the UK authority charged with policing UK private sector pension schemes, has issued a statement on dealing with trustees' conflicts of duty or interest.

The regulator is not saying that CFOs must resign as trustees; it is saying that any conflicts must be identified and understood when decisions on the management of the scheme are being considered.

This means that they must consider whether they can make a decision that gives more money to the scheme but could leave less money for shareholders.

UNDERSTANDING THE PENSIONS REGULATOR

It is helpful to understand the Pensions Regulator's position. The regulator wants to ensure that a defined benefit scheme has sufficient money so that in the event of insolvency the Pension Protection Fund will not be required to lend a hand. The regulator expects trustee boards to obtain prompt and proper funding and to pay much closer attention to the financial status of the employer.

The regulator regards defined benefit pension schemes as unsecured creditors and expects trustees to ask for the same information that a bank would normally ask for.

It also expects trustees and employers to enter into confidentiality agreements giving trustees access to information about the employer's activities that may not be ready for public consumption, so that they can assess its effect on the scheme.

THE CFO'S PROBLEM

This places the CFO in a precarious position, as he has to work out how to use or interpret the information he is aware of as a CFO when wearing his trustee hat. He also has to decide when to disclose certain facts that he is aware of as a CFO to his fellow trustees.

This is a very thorny predicament. The strict legal position is that a trustee's fiduciary duties require him to disclose to his co-trustees and/or to use for the beneficiaries' advantage relevant information acquired by him in his capacity as a trustee or in any other capacity.

Moreover, even a conflicted trustee who does not participate in the relevant trustee decision still has a duty to disclose relevant information to his co-trustees. A failure to do so could result in any consequential loss landing at the feet of the fiduciary who allowed this decision to be made. That is why it is not a good idea for those company officers particularly vulnerable to conflicts, especially the finance director, to be appointed as trustees.

MASS EXODUS?

There has not been any mass resignation of CFO trustees as yet, although many are considering their position. A CFO trustee of a well-funded scheme backed by a strong employer is in an easier position than a CFO trustee of a weaker employer who has the potential for serious conflicts relating to scheme-funding issues.

However, as the pressure on improving scheme funding grows, at least to the level where the Pension Protection Fund would not be required to step in, and with the greater power that trustees now have on corporate activities, CFO trustees will have to learn how to protect their dual responsibilities by managing both their roles better.

A number of recent surveys have indicated that a growing minority in the pensions industry believe that holding both roles is untenable.

One option is for the CFO to resign as a trustee but to attend trustee meetings. This ensures that there is an informed dialogue on matters relating to the employer's business, but that there is also a clear separation in the event of any difficult or contested decisions.

The counter argument is that having senior management representation on trustee boards is a positive factor for all parties. Some factors in favour of this representation include:

• Potential conflicts may help to ensure that all issues and opinions are fully appreciated and understood
• The company has a significant financial stake in the scheme and will want to ensure this investment is being well managed
• Senior management often have crucial financial expertise
• There is less chance of disengagement by senior management from the scheme, particularly at a time when the scheme, as an unsecured creditor of the company, will require more engagement

MANAGING YOUR ROLES

What this means in practice is that CFO trustees have to think very carefully about their dual roles and decide whether they are prepared to manage any potential conflicts.

These conflicts, in extreme circumstances, may require the CFO trustee to implement funding packages that are detrimental to the growth of the business or the immediate cost of financing the scheme. The regulator has suggested that trustees should seek independent legal advice on managing such conflicts.

Perhaps the first issue is to identify all the potential conflicts that might occur. While the issues mentioned above will be common to all schemes, this is an area that can only really be tackled on a scheme-specific basis and should form part of a wider review of scheme governance practice and procedure.

This exercise will help identify potential conflicts and, crucially, how these conflicts can be dealt with. It will also form part of an overall risk management assessment that the regulator wishes to see trustees develop and maintain.