This information is essential reading for trustees of pension schemes to avoid the risk of a breach of duty.

Conflicts of interest – common problems
There has long been a common law duty requiring company directors to avoid putting themselves in a situation of conflict of interest.  The most obvious example is where the director’s personal interest conflicts with his or her duty to act in the best interests of the company.  Another example, which is particularly relevant in the context of pensions, is where the director also owes a duty to act in someone else’s best interests and those interests conflict with the best interests of the company. 

A common illustration of this problem is where a director of the sponsoring employer of a pension scheme is also a trustee of that scheme.  As a trustee, his or her duty is to act in the best interests of the scheme’s members; but as a director of the sponsoring employer, he or she has a duty to the company to act in its best interests as well.

This often gives rise to difficulties where the pension scheme is a final salary scheme which is underfunded (as many of them are); particularly with regard to the setting of employer contribution rates and decisions concerning investment strategy.  Problems can also arise in the context of possible corporate mergers or acquisitions, where the director may have received (in his capacity as director) information which is of significance to the pension scheme, but is also highly confidential. 

The situation is not necessarily any easier where the scheme has a corporate pension trustee: if one or more directors of the trustee company are also directors of the sponsoring employer, the same issues of conflict arise.  Indeed, the situation may be even more complex, as the director in question will owe the duty to avoid conflicts of interest to not one but two companies: the trustee company itself and the sponsoring employer.

Companies Act 2006 – A new statutory duty
This common law duty has now been codified in the Companies Act 2006.  One of the key provisions of that Act (which will come into force on 1 October 2008) says that “a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company” (section 175(1).  The possible penalties for breach of this duty are the same as currently apply for breach of the equivalent common law duty.  Therefore, the real interest in the Companies Act provisions lies in the various ways in which a director may be able to avoid a breach of the duty in the first place.