As investment strategies become more complex it is crucial that trustees comply with the relevant legal requirements. Recently there has been a series of Pensions Ombudsman cases that have imposed personal liability on trustees for inappropriate scheme investments. This article looks at two of these cases and the lessons that should be learnt from them. Adams & ors
This was a complicated case relating to multiple failures by the trustees in their investment duties. The Ombudsman upheld three of the five complaints and several of the trustees face personal liability, on a joint and several basis, for sums totalling £525,000. The Ombudsman held that the trustees:
- Failed to obtain proper advice as to the suitability of an investment in preference shares (which turned out to be worthless) in a participating employer. The trustees could not rely on the scheme’s exoneration or indemnity clause because of the prohibition in the Pensions Act 1995, which prohibits restrictions on trustees’ duties of care in relation to investment decisions.
- Failed to follow a suitable investment strategy for four years when all scheme assets were invested in cash and gilts. Again the trustees could not rely on the exoneration or indemnity provisions.
- Authorised an improper transfer of the chairman of trustees’ benefits, which they would not have done had they known the scheme’s true funding position.
Lawrence Graham
The independent trustee (Lawrence Graham) complained that the trustees had made a loan to the principal employer. The loan was outstanding when the principal employer became insolvent, triggering the scheme’s wind up. The Deputy Ombudsman found the trustees personally liable for breach of trust. The loan breached the employer-related investment requirements, as well as being a ‘hazardous’ investment. There was no evidence that the trustees had been advised that the loan was prudent or that they had delegated investment functions to a fund manager. Again, the trustees were not able to rely on any exoneration clause.
lessons
Issues relating to pension scheme investments are complicated. Although each of the cases mentioned above relates to relatively small schemes, they are a salutary lesson that the Pensions Ombudsman can, and will, impose personal liability for breach of trust on offending trustees. In these cases the scheme’s exoneration clause did not prevent imposition of liability. It is important to remember that, even though employers will be interested in the trustees’ investment decisions, and indeed must be consulted in relation to the statement of investment principles, scheme investments are a matter for the trustees and not the employer. This was reinforced by The Occupational Pensions (Investment) Regulations 2005, requiring trustees to take account only of the interests of members (and beneficiaries) when deciding on investment policy.
In the Lawrence Graham case, the investments that were made breached the employer-related investment requirements. This is a rule that prevents trustees from investing more than 5% of the scheme’s assets in the employer. The rationale behind this is that if the scheme has significant investment in the employer and that employer becomes insolvent then a large proportion of the scheme assets might be lost.
The cases also demonstrate the importance of good investment advice. It is key that trustees understand whether or not an investment decision will satisfy the requirements of suitability and diversification. It is important to note that trustees are subject to regulatory constraints when deciding on a suitable investment. We are currently waiting for the government to decide whether or not it will be excluding certain collective investment schemes to comply with the European IORP Directive (2003/41/EC) on the activities and supervision of institutions for occupational retirement provisions.
In both of the cases it appears that the chairman of trustees (amongst others) was a strong character who ruled the board. In addition, there were also trustees who were, for example, directors of the employer. Apart from issues relating to the investment decisions themselves, it appears that the trustees did not have appropriate conflicts identification and management processes in place. Conflicts issues do not automatically mean that employer trustees must step down from the trustee board. Instead, the regulator guidance makes it clear that conflicts must be identified, monitored and managed. Where this takes place the employer trustees may be able to remain on the trustee board.
By Terry Saeedi, partner, Eversheds LLP.
E-mail: terrysaeedi@eversheds.com.