A quick guide to pension scheme contracts

Entering a contract is as easy as a click of the mouse these days, but decoding contractual terms can be much less straightforward, and there are many potential traps for the unwary.

Louisa Knox and Daniel Boynton discuss commercial contracts for pension schemes, and set out three key points that every trustee should think about before signing on the dotted line.

15 June 2023

All trustees rely on help from their advisers to run their pension schemes. From administration to actuarial services, investment consultancy to legal advice, advisers and service providers have a key role to play in ensuring that schemes are properly run and that members are paid the right benefits.

All these relationships are governed by commercial contracts, and contract governance and review is a key role of trustees in the day to day running of their scheme. Poorly worded or unclear contract terms are a key risk management issue for trustees, and badly drawn contracts can come back to bite trustees many years after they are signed.

Contract governance is only set to increase, with new requirements under TPR’s General Code of Practice around monitoring adviser relationships.

Similarly, pension scheme investments are governed by the terms of each investment structure, some of which may be based in overseas jurisdictions, or be made under unusual or complex structures. It is vital that this structure is clear and well understood.

While trustees should take legal advice on any contract they plan to enter, here are three key things to think about when considering any contract.

What are you buying, and how much are you paying for it?

Advisory and service provider contracts should include detailed provisions setting out the services that are being provided, the standard to which they will be delivered, and the cost to the scheme.

Terms should be carefully considered and appropriate advice taken, to make sure they are clear and comprehensive. Where advisers or service providers have been appointed after a tender process, care should be taken to make sure that the output – including any fixed fees - match what was requested and promised.

It can be tempting to include a general catch-all of ‘such other services as may be requested’ – but trustees should be careful that this doesn’t result in them paying much higher hourly rates, when a carefully scoped service schedule could provide savings through fixed fees.

Where services are being delegated – for example, to the administrator to make decisions about member transfers – this should be separately documented and kept under review in a delegations schedule, as part of the trustees regular governance processes.

If member data is involved, the contract will need to include data protection terms – these are often standard, but should still be reviewed to make sure they meet the necessary requirements, and any particular policies or procedures that the scheme has in place.

How will you monitor the service provided?

Where service providers form a key part of the day to day running of the Scheme – most obviously in scheme administration – it is important that the contract contains clear provisions about how the quality of service will be monitored in practice.

Key performance indicators (KPIs) and service level agreements (SLAs) are both common, with reporting and feedback that can form part of regular trustee business, but it is important to not lose sight of members and the service they receive – after all, it’s what pension schemes are for.

Investment contracts will often contain standard terms on the reporting of performance and other investment information. While these terms may be standard form – and therefore challenging but not impossible to negotiate depending on amounts involved - care needs to be taken to understand how this will operate. The investment consultant has a key role in ensuring that they will receive the information they need in order to be able to properly advise the trustees.

What happens if it all goes wrong?

It is important when entering any contract that trustees ‘think ahead’, and pay careful attention to the terms governing what happens if it all goes wrong. Standard notice periods of six, nine or even twelve months may be included, and trustees should make sure they have power to get out a contract earlier if they need to, for example due to repeated service failures.

Limitation of liability is also key. Advisers and service providers will often – legitimately – seek to limit their liability to trustees, but it is important that any liability is commercially reasonable and does not result in the trustees being out of pocket. Similarly, trustees may be asked to indemnify the adviser or service provider against any liability that it incurs – any such indemnity must be treated with caution, as it may be incompatible with the scheme’s trust deed.