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The Actuary The magazine of the Institute & Faculty of Actuaries

Duties of pension scheme trustees

An actuary must not give actuarial advice
unless satisfied of personal competence in
the relevant matters. We know this because
it makes sense and because it is stated in paragraph 3.3 of our professional conduct standards. In practice, some of our work is very comfortably within our area of personal competence and some is nearer to the edge. When we get near to that edge, we may be in an area of actuarial work where we have less experience, or perhaps undertaking client work involving non-actuarial issues.
In the real world, problems tend not to confine themselves to a single professional discipline. Therefore we find that work sometimes falls into grey areas between the domain of the actuarial profession and that of another profession. Typically, for a pensions actuary, the other profession might be investment or law, but there are others too. For example, has there ever been a situation where an actuary proposed a change to a pension scheme’s design where an expert scheme administrator could have pointed out that it was too complicated to operate cost-effectively?
In this article, however, I am concerned with the grey area between pensions actuaries and pensions lawyers. In particular, I am concerned with the question of the duties of pension scheme trustees and, beyond this, how they should relate to the employer.
In my experience, most actuaries will readily offer an answer to the question of trustee duties. However, a number of the answers which I have heard at events at Staple Inn (both from speakers and from audiences) have surprised me. These have included phrases such as ‘to get the best benefits for the members’ and ‘to maximise the debt on the employer’. These indicated that the employer was to be viewed in some sense as the opposition. I was not sure about this and so felt that a little research would help.

The basics
John Quarrell, partner at Nabarro Nathanson, contributed the ‘Beginners’ Page’ for the September 1998 edition of Pensions World magazine, writing about the duties and responsibilities of trusteeship. He opened with the following:
The trustee’s role is to ensure that the terms of the trust are complied with and followed. The role of a pension scheme trustee is to apply the scheme assets for the benefit of the scheme members and other beneficiaries in accordance with the scheme’s trust documents.
This seems to be an excellent starting point for an actuary’s understanding of the trustee’s job. It is interesting that John includes the phrase ‘and other beneficiaries’. I note that he does not suggest that the interests of members are necessarily superior to those of other parties; the main thrust is that the trustees should do what they are told by the trust deed and rules.

The lecture
As regards research, I found that I did not need to do much more because when Edward Nugee QC gave the 1998 Association of Pension Lawyers annual lecture. his subject was, rather conveniently, the duties of pension scheme trustees to the employer. Jane Samsworth, partner at Lovell White Durrant, was reported as describing the speech as a model of its kind and ‘most brilliant’. I am fortunate to have a complete transcript of the lecture and some pertinent extracts follow.
Having acknowledged the employer’s obvious duties to the trustees, Edward Nugee explained:
In the other direction the trustees have fiduciary duties to the employers, both to give effect to the rights of the employers defined by the trust deed and rules and with regard to the manner in which they exercise the discretions conferred on them by the trust deed and rules.

In the context of pension scheme surpluses, Edward Nugee explains as follows:
There is a school of thought which holds that the principal duty of the trustees is to the members of the scheme, and that prima facie they should apply the whole of the surplus for the benefit of the members, at any rate up to Revenue limits. I have no hesitation in saying that that view is mistaken, and that if the trustees do not give proper consideration to the interests of the employer their decision may be invalid. It may still be that, after giving such proper consideration, they can properly exercise their discretion in the circumstances of the particular case by deciding to apply the whole balance in augmenting the benefits of the members; but if they disregard the interests of the employer their decision will be open to challenge’.
The judgment of Sir Donald Nicholls vc in the case of Thrells Ltd v Lomas provides some guidance on how trustees should approach the exercise of their discretion. In that case, an element of the surplus was repaid. The company was insolvent and so the payment was made to the liquidator for the benefit of the creditors.

The ombudsman
It is not just actuaries who struggle with understanding the duties of pension scheme trustees. Some politicians, lobby groups, and journalists have perhaps chosen to take a particular stance which has confused the position. The judgment of Sir Richard Scott vc in the case of Edge v Pensions Ombudsman shows that even top lawyers can have different views. Whereas the ombudsman appeared to consider that the trustees’ role is ‘to try to promote the interests of the members, almost if not wholly to the exclusion of the employers’, the vice-chancellor, when reversing the ombudsman’s determination, considered that trustees ‘should act in a manner which they feel to be fair to everyone involved with the scheme’. As Edward Nugee summarised, ‘It cannot be right that the trustees should exclude consideration of their [the employer’s” interests from their deliberations as to how they should exercise their discretions’. You might have read that the ombudsman was unsuccessful again when this case went to the Court of Appeal.
In an extension of the comments on the impression given by the ombudsman that relations between trustees and the employers are basically antagonistic, Nugee states:
If the employers have reasonable grounds for wishing to effect an amendment to the scheme it would in my opinion be wrong for the trustees to insist on some additional benefit being conferred on the members as a condition of their agreeing to make the amendments necessary to give effect to the proposals, especially if a refusal to agree to the amendments would impose a greater burden on the employers than if the amendments were made.

A general view
A more general theme of the lecture was a reminder that pension schemes are generally established voluntarily by employers. The Pension Law Review (Goode) Committee described this as occurring through self-interest. Edward Nugee comments that ‘the employer hands over the management and control of the funds to the trustees, but it is on his behalf, as well as the members’, that they are managing them, it is his pension promise to his employees that they are discharging’.
He also comments that ‘in a very real sense the employer is a major beneficiary of a well-managed scheme, irrespective of any beneficial interest to which he may be entitled under the rules of the scheme’.

The answer
There is no doubt that pension scheme trustees have a big responsibility towards the members of their scheme. It seems, however, that their role involves more than serving just these members. They must keep in mind the interests of the employer too.
I hope that you find these extracts informative and that they help you next time a client seeks your guidance in this area when there is no pensions lawyer present.