Rob King, head of Property Technical at WBR Group looks at how trustees can ensure they are ‘doing the right thing’ under Consumer Duty, in respect of commercial property held in a SSAS.
Oh no, not another article on Consumer Duty? Bear with me – it’s only an introduction! Consumer Duty in simplistic terms asks the provider of a product or a service to examine their proposition and ensure that it is fit for purpose and providing the party to whom that product or service is used, with good outcomes. In essence it is the same outcome that a trustee should ensure is provided to beneficiaries of the trust over which they preside. A trustee’s fiduciary role imposes a duty of loyalty and good faith and to act with the beneficiaries’ interests at the forefront of their actions.
The role of a trustee in relation to a Small Self-Administered Scheme (SSAS) is no different and applies in many situations.
I would like to highlight one that raised its head recently relating to the insurance of a commercial property investment within a scheme.
As is often the case with a SSAS, the premises were originally owned by the founder employer and sold into the SSAS to release capital to the company and at the same time, provide a secure yield to the pension scheme. At point of purchase the insurance of the building was reviewed, as the occupation by the owner and the investment of the property for others are quite different propositions as far as insurance is concerned.
A prudent professional SSAS trustee might be held to even higher standards than a lay trustee/member and as a result will often have given considerable thought to levels of cover that they believe should be appropriate. Whilst some will have had years of experience, others might prefer to seek guidance from the experts. I’d advocate that no matter how experienced you are, there is always something to be learned from the experts and we turned to Berkeley Insurance Group for advice.
There was some reluctance by the client to upgrade the insurance to levels recommended by the professional trustee but as I often say, skimping on insurance cover is a false economy, which will only become apparent when a disaster occurs, and a considerable loss of money may occur. Where decision on insurance levels relates to your own insurance is one matter, but where as trustees are responsible for somebody else’s money, so should not be cutting corners.
The Basics
• The property should be insured on a “Day One Reinstatement” basis with a suitable uplift to the buildings declared value. A minimum uplift of 25% is advisable, but many insurers will offer an uplift as high as 50% when seeking a block solution. It is essential for a recent RICS reinstatement assessment to have been conducted as second guessing a rebuild cost or working to a current sum insured without knowing the source of how/ when that figure was calculated is not advisable!
• Loss of rent should always be included with an indemnity period of a minimum of 3 years. This should ensure there is adequate time following a total loss, to demolish the property, clear the site, submit, and gain approval on planning and completion to enable rebuild commencement. A reinstatement cost assessment should include an estimate on the time to rebuild a property and will factor in current pressures on building supplies/ availability of contractors and planning delays.
• Property Owners Liability – a minimum limit of indemnity of £10m is recommended, but a higher level should be explored. Compensation levels awarded to injured parties continue to rise. A shortfall in cover against the level of compensation awarded to a claimant can have a sizeable impact on the pension fund where an indemnity limit is exceeded.
• Insured Perils. A Material Damage “All Risks” wording is preferable to a specified perils format as a wider wording will minimise the risk of an uninsured loss. Keeping excess levels to a minimum is also advisable although certain underwriting considerations for flood and subsidence may apply for geographical reasons.
Other Considerations: Policy format/wording
The following areas probe into policy wordings a little further and if overlooked could impact on outcomes in the event of an insurance loss.
• Trustee protection. Too frequently policy wordings risk penalising “innocent” trustees where the actions of another trustee could invalidate the insurance – for example breaching a policy condition. A policy can be structured to protect all trustees (including the professional trustee) to remove the risk where the actions of one trustee breach policy conditions that could otherwise result in the repudiation of claim impacting on all trustees.
• Proportionate Remedies. A better approach to how insurers deal with innocent non-disclosure of a material fact should be sought when structuring a block insurance policy. This is a key area of exposure when operating large portfolios and most policy wordings will include the “reduction in claim” approach when addressing elements of non-disclosure of a material fact. Seeking and agreeing the inclusion of the “additional premium” approach within the policy is strongly recommended.
Appropriate levels of cover can be provided through a standalone policy, but economies of scale might be gained through a block insurance policy.
Either way, to summarise, a pension fund will often be one of, if not the most valuable asset contributing towards the beneficiary’s retirement provision and whilst commercial property in most instances may be an appropriate investment asset, the risk to it of a catastrophic loss exists which could be life changing for the scheme members. Appropriate insurance is therefore essential.
Main image: ryan-parker-seQbRNo90Xw-unsplash
