Trustees of pension schemes need to understand what protections are available to them if something goes wrong. How can they protect themselves from the results of actions brought by disgruntled members, beneficiaries, potential beneficiaries, or a dissatisfied employer?

Our pensions experts consider the levels of protection that can be available to a trustee, looking at the position for both individual trustees and the directors of a corporate trustee, and summarise what trustees need to do to make sure their position is as secure it as it can be.

Key action points for trustees

  1. Check what the scheme rules say
    Scheme rules often include provisions which protect the trustees (or directors of a corporate trustee) from liability.
  2. Is there any insurance in place?
    Trustees may have the benefit of an insurance policy.
  3. Individual or corporate trustee?
    The structure of a corporate trustee provides an additional layer of protection.
  4. Are there any protections available under general law?
    In specific circumstances, trustees may be able to take advantage of protections set out in statute.
  5. Good governance
    Ensuring good governance procedures are in place will reduce the risk of successful claims.

Why should trustees be concerned?

Trustees risk unlimited personal liability under trust law for breach of trust. Additionally, fines can be imposed on trustees by the Pensions Regulator under the Pensions Act 1995 and the Pensions Act 2004. The Pensions Regulator has the power to fine directors of corporate trustees, not just the corporate trustee itself.

Protections in the rules

Where to find trustee protection in the scheme rules?

The trustee protection provisions are generally in the "trust deed", which will often be the first part of the trust deed and rules.

How much protection

The detail of the relevant rule(s) will dictate what kind of protection it gives. Many rules will include:

An "exoneration rule"

Almost all pension scheme rules include a rule which says the scheme trustees are not held personally responsible ("not liable") if they make a mistake; the scheme bears any loss that results from the trustees' actions.

The rule may say it exonerates trustees from actions "properly taken" or "taken in the course of exercising their duties as trustees". Although this seems reasonable, questions could arise around whether an action that results in loss was indeed "properly taken".

If the rule says nothing about actions "properly taken" or similar wording, but simply that it exonerates the trustees from the results of all their actions "excluding fraud and wilful default" that's a better rule for a trustee, because it doesn't beg the question whether the action was "properly taken".

The law will not give protection to a trustee who deliberately acts wrongly. Even if the rule doesn't say "excluding fraud and wilful default" the Court would not give protection ("exoneration") to a trustee to relieve them of responsibility for their own fraud or deliberate wrongdoing.

The rule may provide more limited protection for professional trustees, for example not giving them an exoneration for negligence.

An Indemnity

Many pension scheme rules include, in addition to an exoneration, an indemnity from the principal employer.

The indemnity may well use wording similar to the exoneration rule (for example, using wording such as "in relation to actions properly taken" if that appears in the exoneration rule).

An indemnity from the employer is good news for the pension scheme, because where a loss has been caused, the principal employer will make good the loss under an indemnity, rather than leaving the pension scheme to bear the loss.

An indemnity will be good news for the trustees too. While the exoneration rule clears the trustees from personal liability for the result of their mistake, it will not reimburse a trustee's expenses in dealing with any claim. Such expenses might be met under a separate Trustee Expenses rule. But, if there is an indemnity from the principal employer, this will cover the trustee's expenses relating to a claim, as well as the claim for the loss itself.

Some pension schemes also contain an indemnity from the fund. This is useful if the principal employer is not robust, or does not provide an indemnity in the scheme's rules. However, trustees cannot be reimbursed from the fund for fines or civil penalties in relation to breaches of legislation.

Insurance

Some pension scheme rules go on from exoneration and indemnity to provide a power for the trustees to insure against liability arising from their actions, and to pay the premiums from the scheme assets.

Individual Trustees or Directors of a Corporate Trustee?

If the trustee of the pension scheme is a corporate trustee, the pension scheme rules should be checked to determine whether it is clear that the trustee protection provisions apply equally to the directors of a corporate trustee as well as to individual trustees. Also, if the trustee company is in the same corporate group as the scheme's sponsor, the terms of any indemnity need to be in line with certain restrictions in company law.

Insurance for trustees

Where rules allow trustees to purchase insurance, there may be situations where this would be a prudent thing to do, for instance:

  • if your principal employer is not robust, even if it provides an indemnity in the rules, and there is no indemnity from the fund assets;
  • if the exclusion clause and/or indemnity in your rules is limited and could leave trustees with some exposure;
  • if the indemnity only kicks in after trustees have exhausted the cover available under an insurance policy; and
  • if the scheme is reaching the end of its life and winding-up.

The insurance market is ever evolving and the type of products available and the premiums charged are changing as the requirements of trustees and schemes' sponsoring employers also evolve. Larger schemes will also find they have more "buying power" and can negotiate and secure terms that a smaller scheme would not be able to.

Before renewing a policy, trustees may wish to investigate the market to see if better terms can be obtained.

As the terms of policies and what they cover can vary widely, trustees should be clear what they expect to be covered by the policy when they go to the market. For instance, will it only cover trustees once they have claimed under any indemnities under the rules (this would be of no use to trustees whose rules require them to exhaust their insurance policy before their indemnities kick in)? Does the policy cover the expenses of defending claims, even where that claim is not upheld by the court or ombudsman? Does the cover extend to former trustees and directors of a corporate trustee? If you are looking for insurance on a scheme wind-up, how long will the cover last for? The policy document will need reviewing carefully to ensure the cover provided is what the trustees are expecting and that they can rely upon it. Where there is a corporate trustee which is part of the same group as the sponsor, the directors of it may benefit from a group wide directors and officers insurance policy. The sponsor might also provide, and pay for, a separate insurance policy for people who act as trustees or trustee directors of its pension schemes.

Corporate trustees

Structuring the trustee body as a corporate trustee rather than a group of individual trustees adds an additional layer of protection for the individuals involved.

Current case law indicates that, unlike individual trustees who can be held personally liable to scheme beneficiaries for any breach of trust, the Courts are likely to take a different approach in relation to directors of a corporate trustee. A trustee director will not usually be personally liable to a scheme's beneficiaries either directly (as is the case with individual trustees) or indirectly (for instance where a director breaches a duty it owes to the trustee company so the company is entitled to bring a claim against the director and the scheme beneficiaries 'piggyback' off this claim).

It is therefore much more difficult for a beneficiary to claim against the director of a corporate trustee. At the very least, the Courts are likely to require an additional element (for instance dishonesty or knowing participation in a breach of trust) before directors of a corporate trustee would be found to be personally liable to beneficiaries of a scheme.

Getting appropriate advice

Professional Advice

Where trustees make decisions with the benefit of advice from professional advisers who are suitably qualified to give that advice (and have been appropriately appointed by the trustees), and the trustees have acted in good faith, the trustees are unlikely to be liable for such decisions.

Trustees do, however, need to be careful to ensure that the professional adviser has all of the facts (and relevant documents) in order to advise and that questions are asked of the adviser where anything appears unclear or unexpected to the trustees.

The meaning and use of your trustee protection provisions

If a loss occurs in your pension scheme, or something comes to light which suggests there might be a loss in the future, trustees should consider (first) what action needs to be taken in relation to the scheme and affected members to minimise the effect of the loss.

Second, consider whether the trustees or directors of the corporate trustee are personally liable for the loss, or whether there is an exoneration or indemnity provision in the scheme which relieves or protects them from loss. Also, consider the terms of insurance policies and make sure any notifications are made to insurers as required by the policy. Trustees may wish to consult the scheme's legal advisers if there is any doubt about the position.

Drafting new or amended trustee protection provisions

A new pension scheme can include whatever trustee protection provisions the employer and trustee decide on; it is a blank page while there are no members to whom the trustee owes duties.

An existing pension scheme will have a power to amend the rules, but trustees are under a duty to look after the scheme members' interests. Amendments which extend the protections offered or available to trustees need care. If they reduce members' rights of recovery against the trustees or are not in the members' interests, then the trustees will not be able to agree to those amendments.

Advice about insurance

Advice on an insurance policy designed to cover trustee liability - taken before entering into it - is essential. The terms of policies vary widely, and some contain wide-ranging exclusion clauses. Premiums can be very sizeable and the cost of advice by comparison is very modest, and can save expensive mistakes.

For an ongoing policy, obtain advice on its terms before a renewal premium is paid.

The law

There is limited protection for trustees in statute.

Section 61 of the Trustee Act 1925

This gives courts power to relieve a trustee from personal liability for breach of trust. For the court to grant this relief, it would need to be shown that the trustee acted honestly and reasonably, and ought fairly to be excused for the breach of trust. Courts have exercised their discretion under this provision in limited circumstances. For instance, relief would not be granted if a trustee's conduct has fallen below the standards of a reasonable trustee.

Section 31 of the Trustee Act 2000

This provides a statutory power of indemnity from scheme assets where costs have been properly incurred in connection with the execution of the trust. The Courts are likely to interpret the expenses that could be claimed under this indemnity narrowly.

Section 34 Pensions Act 1995 (for investment powers)

Trustees can only delegate their powers if their trust deed allows them to do so and generally delegation does not absolve the trustees from liability. However, a proper delegation of investment decisions in accordance with section 34 Pensions Act 1995 is an exception to this rule. If trustees delegate to an authorised fund manager, the trustees will not be liable for that fund manager's acts and defaults so long as the trustees are satisfied that the fund manager has the appropriate knowledge and experience and have taken steps to ensure that the manager is carrying out their work competently. This is generally relevant where discretionary investment mandates are put in place with a fund manager as opposed to trustee decisions to enter into pooled investment funds with a particular manager.

Good governance

There are ways in which trustees can reduce the likelihood that a claim will be brought, or if it is, that it will be successful. Section 256 of the Pensions Act 2004 (the "2004 Act") prevents schemes (but not a principal employer) from indemnifying a trustee against criminal fines or civil penalties and so even where trustees have good cover from a scheme's indemnity provisions there can remain some exposure. If trustees have good procedures in place, comply with their duties, take appropriate professional advice, ensure secure decision making, monitor their delegates and manage their conflicts of interest it is less likely that claims will be brought or fines imposed. The trustees may be able to get protection for such fines and penalties from the sponsor or from insurance policies paid for by the sponsor.

Next steps for trustees

To understand to what extent they are exposed to personal liability, trustees should assess the protections available to them.

The first place for trustees to look is in the scheme's trust deed and rules. Possibilities include an exoneration clause and indemnity provisions.

Trustees may also have the benefit of insurance, paid for either out of scheme assets or by the employer.

The structure of the trustee body will also provide additional protection if it is set up as a corporate trustee.

Trustees can also protect themselves from claims by ensuring the scheme has good governance standards reducing the likelihood of claims (especially successful claims) being brought in the first place.