Man cannot serve two masters ­ – a concept any finance director considering whether or not to sit as a trustee on their organisation’s pension scheme board well knows.

In the good old days it was natural for the FD to be a trustee. They brought to their fellow trustees a breadth of numeracy and analytical skills that most trustee boards sorely missed. But that was before the 2003 legislation (which stopped companies walking away from their pension fund and turned any shortfall into a statutory debt) and before the 2004 Pensions Act (which strengthened the powers of trustees).

Even today, with all the pressures on the FD to declare themselves conflicted-out, there is still a strong feeling that, without the FD, the trustee board would be considerably weakened.

Rachel Brougham, a principal at benefits consultants Mercer, says there is no doubt that, despite the relatively widespread awareness today of the conflict issue, there are still plenty of FTSE FDs retaining their seats on the board of trustees.

However, David Pollard, a partner at the law firm Freshfields Bruckhaus Deringer, who has made a careful study of the conflicts that can arise from the occupational pension scheme, points out that the law is quite categorical in stating that a senior officer of a company who acts in breach of any duty owed to the company or to the trustee board, can quite legitimately be held personally liable for such a breach.

Conflict of interest
That is not a comfortable thought since it may not be possible to honour one duty without breaching the other, even though a careful FD might argue that a serious breach giving rise to a significant personal damages claim is unlikely. However, this is the kind of argument that gives corporate lawyers grey hair. They take the view that if something negative can happen, it probably will.

“The problem haunting FDs is that, inevitably, they know things that are highly confidential,” says Pollard. In many instances, these are things that the trustees would be very keen to know about if there was any way they could get a glimpse into the mind of their FD trustee board colleague. The problem is that the FD, sitting as a trustee, can’t pretend they do not know, in a fairly direct way, that much of what is going round in their head from time to time would be interesting and useful to their fellow trustees and pertinent to their deliberations.

Rashpal Bhabra, head of corporate consulting at Watson Wyatt, puts the point simply. “It is hard to devise a process that deals with this kind of conflict. FDs know a lot of stuff that is of interest to trustees and it is very difficult to withhold it while sitting beside them,” he says. In his view, the way legislation has developed in recent years has sharply increased the number of times when the FD will be conflicted in their role as trustee.”

“Take scheme funding, for example,” Bhabra adds. “After September 2005 the trustees have to agree with the company what funds will go into the pension scheme. This power used to lie solely with the company board. So this is a big change.” In the old process there was no conflict since, while the trustees might have had a view on scheme funding, the board alone had the power to do something about it. Now trustees have both a view and the power to press that view.

Develop this thought a bit further and the nature of the FD’s conflict emerges with crystal clarity. From the trustee’s standpoint, their natural starting point is to look for the maximum security for their members and the better funded the scheme, the more protected the members.

From the company side, however, Bhabra says there is no point in overfunding the scheme since the money is effectively lost. “The scheme is a one-way valve as far as the company is concerned. It can’t get its money back, so the optimal point that the FD is going to want to fund has to be lower than the optimal point for the trustees. So every time the talk is about funding, the FD has a conflict,” he says.

Mercer’s Brougham points out that while corporate transactions, such as the purchase of a company, may throw up clear instances where the interests of the trustees and the interests of the company might diverge, companies have the option of a voluntary clearance process that they can go through with The Pensions Regulator at the start of any acquisition project.

“The key here is that the trustees need to be brought on board for this process. The Regulator is not going to give clearance without hearing from the trustees. So there needs to be an agreement about what information can be shared with the trustees, and there needs to be some agreement about confidentiality,” she says. This kind of agreement process can rationalise areas of conflict and clear the air.

“The point here is that trustees are powerful and they have to take appropriate advice on how the covenant with the employer is likely to be affected in any transaction. Our advice at Mercer in these situations will probably be that, yes, the covenant is, almost by definition, being weakened slightly since acquisitions hold increased risk. But if the trustees can get more money into the fund from the employer to compensate, then this will be good enough,” Broughman says.

This is what the Regulator will generally look for and with a process like this set out in advance, the FD who also holds a trustee position need not feel so conflicted.

It is all about putting numbers to the risks, and if the scheme is well funded, then the risk is probably going to be small. “Trustees like to have the FD sitting at the trustee board table since they bring expertise and deep knowledge of the company,” she says, adding that the ICAEW has issued guidance to members covering the role of the FD on trustee boards.

“One of the options they have recommended is to get independent professional trustees on the board,” she says. Obviously, the presence of strong, professional trustees on the board makes it more likely that any conflict the FD might have in playing a dual role will be understood and dealt with effectively.

Stay on board
Brougham says there are a growing number of trustee boards that don’t want the FD to be sitting there as a member, but are very keen for the FD to attend meetings. “That is a great solution and enables the company and the trustees to forge a proper relationship that need not be adversarial,” she says.

Freshfields’s Pollard agrees. “Sometimes the most practical alternative is for the FD to stay on the board and to manage the conflict, declaring himself for the company on some major points, and abstaining from any vote,” he suggests.

Watson Wyatt’s Bhabra does not agree. “There are too many situations where real conflict arises. And when you have a problem it is very hard to find an adequate process that will deal with it,” he says. In his view, any company setting up a pension trustee board today would almost certainly not choose to have the FD as a member.

With rising inflation, areas of conflict between trustees and the scheme sponsor are likely to sharpen. A 1% increase in inflation can mean an impact in the order of 20% on scheme funding liabilities. This is particularly true where the pension scheme is inflation-proofed. Any sharp rise in inflation will be particularly painful for such schemes. This, in turn, puts pressure on the funding of schemes.

Add to this the pressures coming from increased longevity, volatility in the equity markets and an environment of low returns generally, and the stage is set for a more adversarial relationship between boards of trustees and the company. Clearly, this makes it increasingly difficult for FDs to think they can straddle this divide, with a foot in each camp.

One can also overplay the adversarial bit, though. “Going the other way, if you put aside structural points such as the different optimum funding points for the two sides, there are some grounds for a commonality of interests. We should not lose sight of the fact that trustees are looking after members’ interests and the employer is spending a great deal of money aiming to look after members,” says Bhabra.

Given that commonality of interests, and even accepting the relationship between the company and trustees has come under a great deal of legislative pressure, it is obvious that FDs should take a strong interest in the company pension scheme. “They do need to look at the scheme from both points of view,” he says.

The trustees, of course, are not that strongly obliged to take both points of view. Their priority is their members interests, though, of course, their members will not thank the trustees if, in their zeal to protect pensions, they tip the company into liquidation and cost the members their jobs. So trustees of necessity cannot be completely blind to the company interest.

What this amounts to is that where there might be several options which the trustees will want to explore in detail in a particular set of circumstances ­ all of which will be of interest to the FD as well ­ there will also be two or three other options that are of no or little interest to the trustees that the FD will want to explore in detail.

In particular, there are things companies want to examine to offload, or to partially offload pension liabilities.

Those are not options the trustees will have much interest in initiating and exploring thoroughly, though they are going to become interested once the company puts one or more of these action plans on the table for discussion.