This briefing looks at five common misconceptions about the law applicable to occupational pension schemes.
In most cases the misconception contains a grain of truth and so is not totally misleading. But, as with most legal issues, there are often exceptions, qualifications and nuances that mean that a brief summary or “stock phrase" is not accurate in all circumstances and should be treated with caution.
Pensions legal myths
This briefing discusses five common legal myths and misconceptions in relation to pension schemes:
- Trustees have an overriding duty to act in the best interests of members.
- Trustees cannot fetter their discretion.
- Trustee directors have no liability to pension scheme beneficiaries.
- Amendment powers in scheme rules cannot themselves be amended.
- TUPE does not apply to pensions.
1. Trustees have an overriding duty to “act in the best interests of members”
This (or a variant) is often stated, not least in court judgments and in guidance from the Pensions Regulator. It even appears in the statutory investment regulations.
However, it is now clear that there is no literal overriding “best interests” legal duty on trustees (or directors) – see the 2015 decision of Asplin J in MNRPF1.
In practice talking about trustees exercising their powers in the best interests of beneficiaries of a trust can sometimes be a useful shorthand encapsulating that trustees should not act in their own interests, but instead owe fiduciary duties to exercise their powers in a way they think will promote the success of the trust.
This is, all too easily, collapsed into a general “best interests of members” duty, which is easily stated and appears easily understandable. It gets picked up in the media2. But taken literally it is often very misleading – for example:
- Trustees must exercise powers for a proper purpose - which normally looks at the purposes of the trust as a whole, not just the general rights and interests of all the beneficiaries.
- Any best interests duty must relate to all the beneficiaries of the trust, not just the members. Beneficiaries will include spouses and dependants and also, usually, the employers.
- Any duty can only relate to the trustees exercising a relevant power under the trust. It cannot be said to be a freestanding duty. If taken literally it would require trustees to act in the best interests of a trust by paying all their personal cash and assets to the trust.
- Any duty is probably subjective – did the trustees exercise the relevant power at the time in what they thought would promote the success of the trust?A literal best interests duty would amount to a retrospective test of whether the action of the trustee turned out to be the best one for the trust. For example did they choose the best individual investment or class of investments, judged by what has happened later? – if not, then have they broken a “best interests duty”? This would impose an intolerable burden on trustees3 - and demonstrates squarely the flaws in any such literal duty.
- Trustees must carry out the terms of the trust – even if they think this is not in the best interests of the members or beneficiaries.For example, trustees must pay a pension when it is due to a member where this is required by the trust instrument or pay a transfer value where required by the member under a statutory provision. There is no defence for the trustees to say that they did not think such a payment would be in the “best interests” of the relevant member4.
2. Trustees cannot fetter their discretion
Again this expression is often found in court judgments and guidance from the Pensions Regulator. This goes too far and should not be treated literally.
It is more accurate to say that, depending on the power being exercised, trustees should exercise that power at the right time. Depending on the terms of the relevant power, this may mean that they should be reluctant to agree in advance how they will exercise a relevant discretion or power. But there is no blanket “no fetter” rule.
There clearly are circumstances when trustees can exercise a power in advance – for example in selling a property there will usually be a contract some time in advance of closing. Provisions in a scheme may require trustees to exercise a power in advance (e.g. an amendment power can have effect to vary future benefits) and there can be circumstances where it is appropriate:
- for trustees to enter into contracts binding themselves as to future actions (e.g. to enter into a liability swap contract or agree a scheme merger or apportionment). Indeed a prohibition on such contracts will often mean that benefits cannot be obtained by the trust (the other side to a contract will often be reluctant to agree a contract with future obligations on it if the trustee will not); or
- for trustees to have policies which they generally follow (this is common, for example, when looking at assessing transfer values and commutation rates).
Case law or statements that refer to a “no-fettering” duty tend to be off the cuff remarks not reflecting a full consideration of the issue. There is clear case law that trustees can agree some matters in advance and bind themselves (and potentially their successors)5.
It is a difficult and relatively unexplored6 issue whether a beneficiary (e.g. a member) could bring a claim against trustees who have made a statement about provision of increased benefits which is outside their powers under the trust instrument. Is a claim for an increased benefit based on misrepresentation or estoppel possible and effective to bind the trust and future trustees, given that trustees’ primary responsibility is to obey the terms of their trust (rather than giving misleading statements)?
3. Trustee directors have no liability for breach by the trustee company
Again this contains a kernel of truth. Directors of a trustee company are not themselves trustees. They do not, just by virtue of their office, owe any direct fiduciary obligations to the beneficiaries of the pension scheme of which the trustee company is the trustee. There is no such automatic fiduciary liability.
However trustee directors can incur liability in various ways to beneficiaries of a scheme or in relation to acting as directors of the trustee company:
- Directors can incur liabilities to the trustee company itself if they breach the usual obligations applicable to directors of a company where the trustee company incurs a liability as a result of a failure by the trustee directors to act properly.
- Directors who dishonestly participate in a breach of trust by the trustee company can have direct liability to beneficiaries as an accessory.
- Directors can be liable for breach of anti-discrimination legislation if they “help” an act of unlawful discrimination.
- Pensions legislation includes various provisions for directors to incur criminal and civil penalties if they are responsible for breach by the trustee company.
- Directors can be liable in other circumstances – for example for costs in litigation, if these costs cannot be met from the trust assets.
See further our briefing: ‘Things you may not know about Trustee Liability’.
4. Amendment powers in scheme rules cannot themselves be amended
Amendment powers are necessary for pension schemes – schemes last a long time and they need to cope and adapt to changes in employment patterns, tax and pensions legislation. In practice the courts often give a wide and purposive construction to amendment powers.
But can the amendment power itself be amended? Quite often a blanket “no” is put forward. But in fact the position is not that absolute.
There is no reason why, as a matter of scope, an amendment power cannot be used to change the existing power (it of course remains subject to the various duties applicable to trustees and employers as to whether or not, and for what purpose, the power should be exercised). For example if the existing power says that amendments must be made by deed, there is no reason why an amendment could not be made (itself by deed) providing that future amendments need only be in writing.
Some judgments7 refer to a no “two steps” principle – i.e. that you cannot achieve in two steps what could not be achieved in one. Taken literally this would seem to prevent an amendment to the amendment power. But this would be very inconvenient and, on looking at the cases, they are in fact all concerned with an amendment that would be contrary to a restriction in the amendment power.
For example a provision that restricts amendments so that they “cannot result in payments out of the fund to the employer”. Such a restriction cannot be deleted by use of the amendment power, because the only effect of such an amendment would be to allow future amendments that result in a payment to the employer and this is precisely the sort of amendment that does not fall within the scope of the amendment power.
5. TUPE does not apply to pensions
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) do generally operate to exclude occupational pension schemes from the automatic transfer provisions applicable where an employee moves as part of a transfer of undertaking.
However, this is subject to various restrictions and exceptions. It cannot be said that pensions are outside TUPE altogether. For example:
- The pensions exclusion only applies to the automatic transfer provisions – it does not apply (for example) to the obligation to consult about any “measures” being envisaged – this would apply to pension changes.
- Only pensions under occupational pension schemes are outside the automatic transfer provisions in TUPE. This means that obligations relating to personal pensions and (probably) death benefit only schemes, will be within the automatic transfer provisions.
- The pensions exclusion itself (in relation to automatic transfer) contains an exclusion for benefits which do not relate to “old age, invalidity or survivors”. This means that if there is a benefit under an occupational pension scheme which is not within this category (e.g. a redundancy pension), then liability for this can transfer under TUPE8 - this is the “Beckmann” issue, named after the ECJ case9 on this point.
- Where an employee was an actual or prospective member of an occupational pension scheme before the transfer an obligation will arise on the purchaser/transferee to offer a minimum level of benefit accrual (DC or DB) going forward (unless the member agrees otherwise, after the transfer)10. The transferee company must secure that the employee is (or is eligible to be) an active member of an occupational money purchase scheme or a stakeholder scheme, into which the transferee employer makes (or, in the case of a stakeholder scheme, offers to make) “relevant contributions”.
The law relating to pensions and to trusts is quite complex. It can be helpful to have some understanding of basic principles which can be encapsulated in “bite size” statements including the “legal myths” mentioned above. There are others:
- “TPR guidance is binding”; “Double Counting is not allowed”;
- “the Pension Protection Fund (PPF) has various moral hazard powers”; and
- “the PPF is government funded”. (these last two are a common newspaper statements at the moment).
Quite often phrases such as the five discussed in this briefing are useful indicators of the relevant law. But they do not apply in all circumstances. Care needs to be taken not to apply them blindly or ignoring the exceptions and qualifications that apply to them.
We leave you with a comment from a university law lecturer to one of us many years ago:
“This is a rule of law that everyone knows. That of course means that it is subject to various exceptions”.