Taking root

The legislation relating to occupational pension schemes and the regulatory framework ?is becoming ever more complex. This ?has had the result that pension schemes are finding it increasingly difficult to comply with the requirement that at ?least one third of the trustee board should be nominated by scheme members. Unsurprisingly, volunteers ?for these trustee positions are in ?short supply.

Ticking bomb

So, is this an overreaction or are the duties and responsibilities of a pension scheme trustee really that much more onerous than those of other trustees?

The principal common law duties ?of a pension scheme trustee are:?

• to comply with the terms of the trust;

• to act in the best interests of the scheme’s beneficiaries;

• to act impartially between the different classes of beneficiary; and

• to deal effectively with conflicts. ?

These duties will sound familiar to anyone who regularly advises in relation to private client trusts.

However, the pensions law background adds some layers of complexity. First, there is a multiplicity of primary and secondary legislation affecting occupational pension provision. Since 1993, we have seen 55 Acts and approximately 850 statutory instruments in this area. These include the Pensions Act 1995 and the Pensions Act 2004, both of which contain duties and responsibilities that overlay and reinforce trustees’ common law duties.

Second, the Pensions Act 1995 introduced a Pensions Regulator whose statutory objectives include protecting the benefits of pension scheme members and promoting the good administration of occupational schemes. As part of its functions, the Pensions Regulator publishes codes of practice which are to be followed by pension scheme trustees. The terms of these codes are admissible in evidence in any proceedings involving a scheme’s trustees. As an example, the code of practice based on the statutory requirement for a trustee to have sufficient knowledge and understanding requires a trustee to be conversant with the scheme’s documentation and to have an understanding of the law relating to pensions and to trusts, as well as of the funding and investment obligations relating to the pension scheme in question.

Third, there are established and effective methods of challenging pension trustee decisions and actions. These methods are free for scheme members. The methods include raising complaints through the internal dispute resolution procedure (which all occupational schemes are required to maintain) and complaining to the Pensions Ombudsman. The latter is able to make binding decisions which can only be appealed to the High Court.

All of this means that a comparatively straightforward duty, such as the duty to comply with the terms of the trust, can become a minefield. For example, many pension scheme documents contain historic provisions which cannot be changed, but which were not designed for and can be difficult to interpret in a modern context. Added to that, the scheme documents will be overridden ?by much of the legislation referred to above – some of which is itself ambiguous and untested in the courts. As a result, trustees can and do find themselves in a position of having, in good faith, provided incorrect benefits for many years and of having to unravel previous benefit payments.

Protective shield

One obvious way of overcoming the particular problems caused by the complexities in this area is for pension scheme trustees to use professional advisers. Indeed, there is a statutory obligation for trustees to appoint investment and actuarial advisers and auditors. This obligation does not ?extend to legal advisers.

Of itself, appointing advisers is not sufficient, however, and a common mistake of many pension scheme trustees is to assume that they will be protected if they are acting on the basis of professional advice. The statutory requirement for trustees to have knowledge and understanding means that trustees must understand the advice that they are being given.

But what constitutes ‘understanding’ for this purpose can be difficult to define. A particularly tricky area is that of pension scheme investment. Pension scheme investment strategies are becoming increasingly sophisticated, with schemes commonly investing in derivatives. Just how much should a pension scheme trustee understand about specific underlying investments? Is it enough for a trustee merely to understand the scheme’s broad investment strategy and the rationale ?for that strategy?

The answer may lie in section 34 of the Pensions Act 1995, which confirms that trustees can only be protected against the consequences of investment losses if the trustees have properly selected investment managers and have regularly monitored investment manager performance. Effective selection and monitoring require a trustee to be able to assess a manager’s competence. In practice, it will be difficult for a trustee to do that without having at least a ?broad understanding of the main types ?of investments and the risks associated with them.

Although the particular provision described relates only to investment advice, the underlying principles are of wider application. Essentially, pension scheme trustees need to know and understand enough to be able to judge whether their professional advisers are reasonably likely to have the skills needed to advise them proficiently. Trustees should continually question their professional advisers to improve their own understanding and as a means of assessing advisers. As a rule of thumb, an adviser who is unable to explain an issue in terms which the trustees can understand probably does not have a sufficient understanding of that issue him or herself.

Added interest

A particularly difficult area for pension scheme trustees is that of conflicts of interest – especially for those individuals who are also officers of the scheme’s sponsoring employer. These conflicts have become particularly acute in recent years, with many employers seeking to reduce their pension liabilities, at the same time as scheme deficits are increasing and trustees are pushing employers to minimise these deficits.

Confidential information is a related issue. Trustees are obliged to use all the information at their disposal when considering trustee business and making decisions and should share anything of relevance with fellow trustees. However, this can be tricky where that information is confidential – maybe because it has been acquired in the trustee’s capacity as a director of the sponsoring employer. Employers can help here by allowing a trustee to disclose confidential information of this type to the other trustees – although an employer will probably only be prepared to do that where all of the trustees have signed a confidentiality agreement. Alternatively, an employer will often make sure that a trustee who is also a director is excluded from particular company decisions and discussions which could cause difficulties for that director in his or her trustee role.

In any event, it is essential to identify and manage conflicts at an early stage so as not to risk invalidating trustee decisions.

The underlying duties and responsibilities of pension scheme trustees are much the same as those of a trustee of any private client trust. The pensions law context undoubtedly complicates the position, however; trustees who approach their responsibilities seriously, who act diligently and in good faith and ?who apply common sense will have ?little to fear.

Notwithstanding the large ?volumes of complaints to the ?Pensions Ombudsman and of High Court litigation involving pension scheme trustees it is extremely rare ?to hear of trustees being liable in ?a personal capacity. n

Carolyn Saunders is a partner at Pinsent Masons LLP