The current unsettled times are prompting pension scheme trustees to review their own personal liability position. Good scheme governance reduces the risk of claims, but even the very best governed schemes may experience a claim from a member.

Two cases last year show that first, directors of corporate trustees are safer from direct liability to members than individually appointed trustees are, and secondly, that the rules about paying for insurance from scheme assets are as strict as ever, but now clearer.

A. Directors of Corporate Trustees are 'safer'

Where were we on this?

Until recently the general rule was:

  • a trustee is personally liable to beneficiaries (such as scheme members) for his actions; and
  • directors of a corporate trustee are personally liable in just the same way as trustees appointed in a personal capacity.

And now?

Since the 2008 decision in Gregson v HAE Trustees Limited, individual trustees and directors of a corporate trustee are no longer in the same position. A member is unlikely to be able to sue the directors of a corporate trustee of the pension scheme, although he could sue individual trustees of a scheme.

How did this happen?

A trustee is, as we all know, liable to beneficiaries of the trust for his actions. A corporate trustee is liable to the beneficiaries, just as an individual trustee is. However, the directors of the corporate trustee owe their duties to the corporate body, not direct to the members. In the day-to-day running of a pension scheme this makes no practical difference, because the corporate trustee (to which the director owes his duty) owes duties in turn to the members, and the corporate trustee has the task of running the pension scheme.

If a member sues the trustees of its pension scheme, it names the trustees in its court action; if its pension scheme has a corporate trustee it names the corporate trustee, not its directors personally. This can present problems for the member, since the corporate trustee is unlikely to have assets of its own (it holds the pension scheme assets on trust, not as its beneficial property) and so the corporate trustee may have no assets from which to pay damages for the negligence or fraud of its directors, for example.

So, until now, if a member wanted to sue the director of a corporate trustee (and access the director's personal assets to meet damages claims), the member made a 'dog leg' claim. In this case the member asserts that the director has breached its duty to the corporate trustee, and that the corporate trustee's right to sue the director for that breach is 'trust property' and therefore that right to sue is available to the beneficiaries of the trust - the scheme members.

This 'dog-leg' mechanism for a claim has been looking a bit weak and sickly in recent years (because of earlier case law), but it was the Gregson v HAE Trustees Limited case that weakened its position yet further and all but effectively killed it. The court in this case was clear that the corporate trustee did in fact separate the directors from the trust beneficiaries, and that the "dog-leg" mechanism would cut through the settled position that the director is behind the corporate veil and for that reason could not be allowed. The beneficiary's relationship is with the corporate trustee and not with the directors of that company.

The case means that a director of a corporate trustee is almost certainly safe from direct attack by a beneficiary of the trust (such as a member of a pension scheme). This represents a significant improvement over the position of an individual trustee, who can be sued directly by a beneficiary.

What limitations are there to this 'good news'?

Gregson v HAE Trustees Limited was a case about a private trust, not a pension trust. And the trustee had tasks other than the administration of the trust that was in issue. So the facts do not fit precisely with the situation of a corporate trustee whose sole purpose is to be trustee of a pension scheme. This said, the language the court used in the case makes it seem unlikely that a dog-leg claim could ever succeed, but it remains true that this has not yet been tested in the courts on a single-trust trustee of a pension scheme.

A member may not have a claim against a director of a corporate trustee, but the corporate trustee does have a claim against a director who is in breach of duty. So a member of a pension scheme (or a group of members) might manage to persuade the corporate trustee to pursue a negligent or fraudulent director, and recover assets for the benefit of the pension scheme. Just because the members don't have a right to sue the director doesn't mean that the director is immune.

What are the implications for pension scheme trustees?

Trustee boards composed of individual trustees might want to consider incorporating. The process is not complex, and it is a well-trodden path. While those persons would, of course, want to maintain (or improve) their standards of governance regardless of whether they act as individual trustees or as directors of a corporate trustee, they might sleep better at night, knowing that they are as well protected as possible based upon the law (as it stands under Gregson v HAE Trustees Limited) from direct litigation by scheme members, if they are directors of a corporate trustee.

B. Paying for Trustee Insurance from Scheme Assets

Following Kimble v Hicks in 1999 it has been clear that trustees cannot pay premiums from the pension scheme assets to insure their own personal liability, except in a case where their pension scheme was originally set up with that power in it.

Trustees derive protection from various sources, there may be an exoneration clause in the scheme, or an indemnity from the employer. Trustees with schemes originally set up with a power to pay premiums from the scheme may be insured under policies paid for from scheme assets. Other trustees may be insured under policies for which the employer (not the scheme) pays the premiums.

A case last year concerning the winding-up of the National Bus pension schemes looked again, and in detail, at this question, "if our scheme does not have power to pay insurance premiums from scheme assets, can we introduce that power?" It confirms that where such insurance could never benefit a member, but only the trustees, the premiums cannot be paid from the scheme and a power to do so cannot be introduced.

If the insurance would provide benefits for a member (such as damages were a member's claim to be successful), then the fact that it may also benefit the trustees (by paying their legal expenses, for example) is not a problem. Premiums for such a policy could be paid from scheme assets (and if the power is missing from the rules, it could be introduced) because there is a benefit to the scheme as a whole.

However, where a member successfully suing the trustees would be paid its damages from the scheme assets, meaning that the only purpose of the insurance was to protect the trustees' pockets from the legal costs of the action, (and, of course, the costs of unsuccessful claims) then there is no benefit to the scheme as a whole, and the premiums may not be paid from scheme assets unless the power to make that payment has been there since the inception of the scheme.

What are the implications for pension scheme trustees?

Nothing changes. But it is good to have clarity. And for schemes facing a wind-up, the case provides very good detail about dealing with the last 'unknown' or untraced beneficiaries, the correct approach to closing the wind-up and how insurance may be used to help with that.

Case references:

Gregson v HAE Trustees Limited [2008] EWHC 1006 (Ch)

Kemble v Hicks [1999] PLR 287

NBPF Pension Trustees Limited v Warnock-Smith and another [2008] EWHC 455 (Ch)