Part II: A trustee's duties
This guide is based on UK law.
Introduction
Directors often have an interest in pensions that goes beyond
their interest in their own pension entitlement. Many are trustees
of the company pension scheme. This inevitably means additional
duties and additional risks. Often the implications are not fully
appreciated when the appointment is offered and accepted.
The risks can be extreme. In one of the leading trust law cases,
a set of trustees acted in accordance with advice received from a
leading barrister about their duties. An aggrieved beneficiary
complained, and the matter ultimately reached the House of Lords,
who by a three to two majority agreed with the beneficiary. As a
result, the trustees were ordered to repay millions to the trust.
One of the trustees committed suicide in the face of
bankruptcy.
Although such an outcome is highly unusual – it is rare to hear
of trustees being sued in a personal capacity – the possibility
exists. Trusteeship is not a role to take lightly, and you should
think carefully before accepting the appointment.
The nature of trusteeship
The trustees hold the legal title of the pension scheme assets
and have stringent legal duties to ensure that those assets are
used to provide benefits in accordance with the terms of the trust
(as overridden by statute).
Essentially, a pension scheme trustee’s duties are to:
- hold the trust assets;
- invest the assets in accordance with the terms of the trust,
and prudently;
- collect the contributions as required by the terms of the
trust;
- pay the benefits in accordance with the terms of the
trust.
Trustees are also legally required to be familiar with the
pension scheme’s documentation and have an understanding of the
legal, funding and investment obligations relating to the scheme.
They will need to keep records to show the regulator that they have
complied.
Essentially, the legal requirements mean that you should read
the trust deed and rules of the pension scheme carefully before
becoming a trustee. While most trust deeds are not exactly
page-turners, this is an effort well worth making.
If you do not understand anything, ask questions. You would be
surprised how often the wording is out of date, ambiguous or just
plain wrong. Since statute often overrides the terms of the trust,
you should make sure you get trustee training, and legal advice
where necessary.
Every pension lawyer will advise you to take these steps, and
every pension lawyer will concede that most clients take no notice.
The late libel lawyer Peter Carter-Ruck was heard frequently to
observe that he ran his office off the clients who took his advice
and his Rolls- Royce off the clients who did not. The same
observation could be made, on this point at least, about pension
lawyers.
Personal liability
Forms of protection
As noted above, trustees potentially put everything on the line.
To what extent can they protect themselves?
There are three different types of protection available to
trustees: indemnities, insurance and exoneration clauses. An
indemnity, whether contained in a trust deed or in a sideletter,
acknowledges that a third party (whether the pension scheme or the
employer or some other party) will ensure that a trustee is not out
of pocket if he or she is found liable in given circumstances. By
this analysis, trustee insurance is effectively just another form
of indemnity.
The concept of indemnities will be relatively familiar to
directors, exoneration clauses less so. Trustees benefit from a
statutory exoneration under section 61 of the Trustee Act 1925,
which says that if it appears to the court that a trustee is
personally liable for any breach of trust, but has acted honestly
and reasonably, and ought fairly to be excused, then the court may
relieve him or her from personal liability. The problem is that
this provision does not automatically apply. It is only effective
if a particular court, in its discretion, decides to make use of
it.
Additionally, trustees may have the benefit of express
exoneration provisions in the pension scheme rules. However, the
courts will not interpret such clauses as allowing trustees to act
in bad faith or recklessly. Trusteeswhothink they can get away with
anything because they are protected by the exoneration clause are
likely to have a rude awakening.
An exoneration clause does not prevent the pensions regulator
from imposing a fine for breach of one of the particular statutory
provisions over which it has control. Fines by the pensions
regulator, however, are rare and can only apply where trustees have
failed to take “all such steps as are reasonable to secure
compliance” with the particular statutory duty.
Under section 33 of the Pensions Act 1995, exoneration
provisions do not apply to trustees in relation to the performance
of their investment functions. But if trustees delegate decisions
about investments to a fund manager, they will not be responsible
for any defaults by that fund manager if they have taken all
reasonable steps to ensure that he or she:
- has the appropriate knowledge and experience for managing the
scheme investments;
- carries out his or her work competently; and
- has regard to the need for proper diversification of
investments.
Limits to protection
Indemnities and exoneration clauses can have substantially
different effects. An indemnity (or insurance) is only as good as
the person who undertakes to pay out. Where the indemnifier does
not have funds to meet the indemnity, it is useless. Where the
indemnifier is unwilling to pay out, the trustees may find
themselves in serious difficulties and may need to take legal
action to recover the money. An exoneration clause, on the other
hand, requires no action by the trustees. The beneficiary seeking
to claim against the trustee will be unable to succeed because the
trustee will not be liable. Exoneration clauses, however, will only
protect you against claims by members or the employer. They will
not help if your investment managers, for example, make a
claim.
From the viewpoint of members, indemnities are often seen as
more desirable than exoneration clauses: exoneration clauses can
leave schemes seriously out of pocket for the mistakes of
trustees.
Trustee indemnity insurance can potentially give added
protection to the trustees if they cannot rely on their indemnity
protection. The insurance may reimburse the trustees for any
successful claim brought against them by a beneficiary.
Trustees should bear in mind that this type of insurance cover
is normally heavily skewed in favour of the insurer. Insurers have
almost never made a payment to trustees under an indemnity
insurance policy. It is very important for the trustees to seek to
ensure that any claims against them are not upheld in the first
place by administering the scheme properly and ensuring that they
are happy with the exoneration provisions – prevention is far
better than cure.
Corporate trustees
There is no rule of law that says that trustees need to be
individuals. It is entirely possible to have a company as a
trustee, and many pension schemes operate in this way, with the
individuals who would have been trustees acting as directors of the
trustee company. This has significant advantages for the trustee
directors, though it has some drawbacks also. The chief advantage
is that it is the company that is liable to scheme members, not the
trustee directors. The trustee directors’ only duties are to the
trustee company. The duties of a director are a little less
exacting than the duties of a trustee (although as this book shows,
they are still demanding).
Pension scheme members can still enforce duties owed by a
trustee director through what is known as a “dog leg” claim (it is
the director who takes the role of the lamp post). But in order to
do this, the member must first show that the trustee company
breached its duties to the pension scheme, and secondly that the
trustee director breached their duties to the company. It is harder
to show two breaches of duty than one.
The chief disadvantage is that company law is much more
restrictive than trust law about the extent to which directors can
be indemnified or exonerated by the companies of which they are a
director (see section 14 of chapter 7).
Conflicts of interest
Trustees should exercise their powers in order to further the
purposes of the pension scheme. The courts have developed strict
tests to ensure that trustees do this. One of the duties of
trustees is not to put themselves in a position where there is a
conflict between their duties as a trustee and their private
interests. The court will not consider whether or not the trustee
has allowed their external interest to influence the decisionmaking
– the fact that he or she has acted while in a position of conflict
of interest will be enough to constitute a breach of trust.
For directors, this can be a particularly difficult problem. If
a director is a trustee and a member of the pension scheme, on any
given issue they may have multiple competing interests (for
example, the setting of employer contribution rates at a time when
company finances are hard-pressed).
The problem has been addressed in part by statute, and the
courts have also set out a limited exception to the strict conflict
of interest rule. Neither of these changes offers a complete
solution to the problems of directors: extreme care still needs to
be taken.
When the government introduced what was to become the Pensions
Act 1995, a central feature was the drive for pension schemes to
have member-nominated trustees. The government recognised that
members would frequently have theoretical conflicts between their
personal interests and their duties as trustees. Section 39 of the
Pensions Act 1995 therefore gives protection to trustees who are
also members of the pension scheme.
This is less helpful than it may appear. It applies only to a
member’s interest as a member. A trustee who owes director’s duties
to the employer would not be able to rely upon the terms of section
39. Also, trustees must still exercise their powers in order to
further the purposes of the pension scheme. Trustees who act in
their own interests and against the interests of the scheme will
find themselves in deep trouble.
Separately, the courts have also been looking to the commercial
realities of pension scheme trusteeship and showing a markedly more
sympathetic approach. The Court of Appeal considered the problem in
Edge v Pensions Ombudsman, where the pension scheme rules required
the trustees to hold or have held an office equivalent to that of
director. The court recognised that decisions of such trustees
would inevitably be perceived by some to favour one interest at the
expense of another. The court concluded that the only sensible
answer was to accept that the scheme was established on the basis
that the pension rules were intended to provide a body of trustees
that could be relied upon to consider all interests fairly and
properly; and that those who seek to challenge a decision of that
body should bear the ordinary burden of establishing that the
decision has been reached improperly.
If your pension scheme rules specify the composition of the
trustee body, this ruling could come to your assistance in cases
where the conflict between the different duties is slight.
Of course, there are occasions where your interests and duties
conflict starkly. Just how should you approach the setting of
employer contribution rates at a time when company finances are
hard-pressed? The company’s and the pension scheme’s interests may
be diametrically opposed. As a director, you owe duties to both. If
you find yourself in such a conflict, you should take legal advice
as to whether you need to step aside from the decision-making
process, or even resign one of your offices.
Between the cases where the conflict is slight (for example,
deciding whether to grant a small increase to all members’
benefits, including your own) and the cases where the conflict is
extreme, there are intermediate cases. How should you decide
whether you can safely act or not? There is a simple rule of thumb:
if you find yourself badly wanting to be involved in the decision,
you should probably stand aside.
Confidentiality of information
A related topic is the subject of confidential information.
Trustees are obliged to use all information at their disposal when
considering trustee business. It may well be that with other hats
on you are aware of relevant information. You are obliged to use
that information, and to share it with your co-trustees, if it has
the potential to affect decision-making.
But what if that information is confidential? The simplest
solution is to persuade the company to allow you to release the
information to your co-trustees “for their eyes only”, but that may
not always be possible. If it is not, you should take legal advice
without delay.
Giving advice to employees
There are specific statutory obligations relating to the
disclosure of information, which your pensions advisers can help
you with. But perhaps surprisingly, neither trustees nor employers
are under any general legal duty to advise pension scheme members
about their pension rights.
In fact, it is good practice not to advise members about their
rights at all. It is all too easy to fall into the trap of giving
advice of the type that is regulated by the Financial Services
Authority (which most directors and trustees are not authorised to
give). Still more dangerously, you could run the risk of giving the
wrong advice because you do not know all of the facts. Employees
may keep crucial bits of information about their personal
circumstances hidden from you – for example, the fact that they are
about to hand in their notice.
Sometimes the advice could run directly counter to the interests
of other members. Trustees should not favour one group at the
expense of another group.
The best policy, despite the natural human instinct to be
helpful, is therefore to avoid giving advice to pension scheme
members, no matter how much they look for a steer from you. And do
not make the mistake of giving advice “off the record” – you are
just as liable for off the record advice as you are for on the
record advice.
