We are pleased to see the announcement from the Pensions Ombudsman (TPO) that it is launching a pilot Pensions Dishonesty Unit to investigate allegations of serious breaches of trust, misappropriation of pension funds and dishonest or fraudulent behaviour by pension scheme trustees. Whilst the vast majority of trustees take on the role knowing that their raison d'être is to run the scheme in the interests of its beneficiaries, there have been a number of recent high profile cases where trustees have used schemes for their own personal gain and/or committed a serious dereliction of duty.
We recap the types of conduct that can lead to trustees being held personally liable to members before taking a brief look at the cases that led to the establishment of the unit.
Recap: when can trustees be held personally liable?
The starting point is that trustees are personally liable for a breach of trust, but what constitutes a breach of trust? Put simply, a breach of trust means a failure to comply with a legal or statutory duty. This could be a failure to comply with a scheme’s trust deed and rules e.g. by failing to pay members the correct benefits or a failure to comply with the statutory duty to diversify a scheme’s investments. Individuals can be found liable for negligent or innocent breaches as well as deliberate or reckless ones. Where a scheme has a corporate trustee, it is the trustee company that is liable to members for a breach of trust, not the individual directors. Incorporating the trustee board may provide individuals with an additional level of protection although directors may still be liable for any breach of duty owed to the company. Whilst not every failure in the categories above will always be a breach of trust, there is the potential for there to be such a breach and therefore robust processes to guard against this are recommended.
The most common form of trustee protection from this strict liability is the exoneration clause found in a scheme’s trust deed and rules. Broadly, exoneration clauses exempt trustees from liability for all forms of conduct except dishonesty. This means that if a member brings a successful complaint against a trustee before the Courts or the Pensions Ombudsman, generally the trustee will be excused from liability even if the scheme is required to compensate the member in some way. However, there are some limitations/exceptions:
- the extent of the trustee’s exoneration will depend on how widely the relevant clause is drafted e.g. some scheme rules do not exonerate professional trustees from any liability due to their negligence;
- exoneration clauses cannot protect a trustee from his own dishonesty – in the 1997 Court of Appeal case of Armitage v Nurse the court held that to permit a trustee to act dishonestly would derogate from the "irreducible core of obligations" of honesty and good faith;
- trustees are personally liable for performing their investment functions with care and skill, responsibility for which cannot be excluded or restricted except where delegated to a FSMA authorised fund manager. Where that responsibility is so delegated, to avoid personal liability, the trustees must take all reasonable steps to satisfy themselves that:
- the fund manager has the appropriate knowledge and experience for managing the scheme’s investments;
- he is carrying out his work competently; and
- he is complying with section 36 of the Pensions Act 1995 regarding diversification of investments and providing written advice to the trustees as to the suitability of those investments;
- trustees cannot use a scheme's assets to pay fines following a criminal conviction or civil or regulatory penalties. Whilst pension trustee liability insurance policies may cover civil and regulatory fines and the costs of responding to a criminal or regulatory investigation (which can be significant), they will not cover fines imposed following a criminal conviction. Furthermore, statute prevents scheme assets from being used to pay for such insurance so the cost will need to be met by the scheme’s sponsoring employer.
What types of behaviour led to TPO establishing the unit?
The cases mentioned in TPO’s press release and which led to it establishing the unit are those of Norton Motorcycles, Henry Davison and the Grosvenor and Grovesnor schemes. TPO has already scheduled oral hearings in relation to two other schemes and continues to investigate other cases brought to it by members and independent trustees appointed by the Pensions Regulator (TPR). As the cases involved the potential for the trustees to be found personally liable for their acts and omissions, oral hearings were arranged. In two of the cases, the trustee attended the oral hearing to give evidence but in the other two they did not.
In all four cases, TPO found the trustee to have acted in breach of trust and maladministration. The breaches of trust involved similar conduct in all four cases, namely:
- breach of fiduciary duty to manage conflicts of interest and failing to operate internal controls to manage conflicts of interest;
- transfer of large sums of money into companies owned by or connected with the trustee (all cases bar Henry Davison);
- breach of statutory investment duties including the need to ensure diversification of investments and obtain written investment advice from a suitably qualified adviser;
- failing to exercise due skill and care in the performance of their investment functions which resulted in loss to the schemes.
In each case, TPO concluded that the trustee was not excused from liability under the terms of the scheme’s exoneration and indemnity provisions. In all four cases, the trustee had attempted to exclude or limit his liability for the investment performance of the scheme by asking members to sign a waiver on joining the scheme. TPO confirmed that under section 33 of the Pensions Act 1995 the trustee could not rely on any exoneration or indemnity in relation to performance of his investment duties, irrespective of whether the provision was contained in a scheme’s trust deed and rules or another document.
Furthermore, the trustees were not entitled to be absolved from liability under section 61 of the Trustee Act 1925 which gives the Court discretion to relieve a trustee from personal liability if it appears that a trustee has "acted honestly and reasonably" and "ought fairly to be excused".
The Norton Motorcycles case has been controversial and long running (the arrangement began in 2012) and led to TPR conducting an internal investigation in relation to its regulatory response in the case following concerns raised by the Work and Pensions Committee. On 7 February, Stuart Garner, the trustee of three schemes sponsored by the Norton Motorcycles Group, of which he was director, pleaded guilty to three charges of breaching employer-related investment rules by investing more than 5% of assets from each scheme into his business. Nearly £14 million was invested in the group, consisting of the pension pots of 228 members from the three schemes concerned. Mr Garner was due to be sentenced on 28 February and faces up to 2 years in prison and/or an unlimited fine but the sentencing hearing has been postponed to a later date, to be determined.
According to Trafalgar House’s Trust & Confidence Index of 2021, 31.5% of people say they have no or very little trust in the pensions industry — slightly down from 34.5% in 2020. Sadly, the headlines surrounding these types of cases do little to improve the public’s perception. However, any initiative that holds those responsible accountable by requiring them to repay misappropriated funds to the scheme should be welcomed.
Whilst not every failure in the categories above will always be a breach of trust, there is the potential for there to be such a breach and therefore robust processes to guard against this are recommended