In a determination of the Pensions Ombudsman1, Berkeley Burke, a trustee and administrator of a SIPP taken out by Robert Goodwin, was found not to have any liability for a failed investment made by the member.
Whilst this may appear also to be of comfort to trustees of occupational pension schemes, there are different considerations for them, although lessons can be learned from Mr Goodwin’s case.
Mr Goodwin established his SIPP with Berkeley Burke in December 2011. There is some debate over who gave Mr Goodwin advice in relation to it, but it is clear that it was not Berkeley Burke. Mr Goodwin invested his SIPP funds in an Unregulated Collective Investment Scheme, which failed, going into administration in 2013.
Mr Goodwin complained that there was maladministration by Berkeley Burke, but that was not upheld by the Pensions Ombudsman.
The Pensions Ombudsman referred to the duty on trustees to exercise reasonable care and skill when carrying out functions that is imposed by section 1 of the Trustee Act 2000. There is an exception from that duty contained in paragraph 7 of schedule 1 to the Act, where and“insofar as it appears from the trust instrument that the duty is not meant to apply”.
In paragraph 21 of his determination, the Pensions Ombudsman said:
“In my opinion the statutory duty of care does not apply to Berkeley Burke in relation to investments as explained in paragraph 7 of schedule 1 to the Act. The reason for this is that the selection of the investments is not a decision of the administrator. The trustee has a very wide power of investment but the contractual documentation with Mr Goodwin make (sic) clear that investments will be selected by the member personally.”
The Ombudsman noted in paragraph 18 of his determination that the statutory duty of care sits alongside the common law trustee duties and responsibilities. The Ombudsman did not expressly consider those common law duties and how they were met, although the clear implication is that they were.
On that, it seems that the Ombudsman was satisfied that the risk warnings that Berkeley Burke gave to Mr Goodwin were sufficient to have discharged its duties. The warnings included: that Mr Goodwin should seek advice from a suitably authorised and qualified adviser; that the proposed asset may be illiquid, it is unregulated and so not covered by the FSA or any UK financial services compensation scheme; and that Mr Goodwin will need to understand that any shortfalls would need to be made good by him and that he should be comfortable that he had the ability to finance them, should any arise.
Over the course of a number of years, the FCA issued guidance and carried out reviews in relation both to SIPPs and investments of the particular kind at issue here, which progressively tightened up on what the FCA expects of SIPP providers. However, the Ombudsman made the point that, in considering the conduct of Berkeley Burke, he could analyse the position only by reference to the requirements in force at the relevant time, and in the Ombudsman’s view, Berkeley Burke had complied with those requirements.
Occupational pension scheme trustees
The application of section 1 of the Trustee Act 2000 is limited in relation to trustees of occupational pension schemes by section 36 of the Act. In particular, it does not apply in relation to the exercise of such trustees’ functions in relation to investments.
Nevertheless, of course, there are separate obligations on trustees of occupational pension schemes in that regard under the Pensions Act 1995 and at common law. Those obligations include: to have a statement of investment principles2 ; to invest prudently; to invest in the best interests of members3 ; and to invest so as to ensure the security, quality, liquidity and profitability of the portfolio as a whole4 .
The net effect of all that, is that the obligations imposed on such trustees are greater than those imposed on trustees of SIPPs (at least based on how the Pensions Ombudsman has determined those obligations, as they stood in 2011). As the Pensions Ombudsman noted in paragraph 23 of his determination:
“If the duty of care applied then Berkeley Burke would be required to arrange investments and periodically review them in the manner of occupational schemes and private trusts which would be entirely inconsistent with the purpose of a SIPP” (our emphasis).
In practice, many occupational money purchase schemes are operated in a similar way toSIPPs, in the sense of allowing members to choose the investments made with their funds under the scheme. However, the trustees do choose the initial range of investments that will be made available under such schemes and they tend to be more limited than those available under SIPPs.
Moreover trustees do – or at least, should – monitor whether those investments continue to be appropriate and make any changes necessary to the range of investments available from time-to-time.
What we have not yet seen – outside of a situation of pension liberation or fraudulent arrangements – is a case involving an occupational money purchase pension scheme where an investment has failed and a member has sought to hold the trustee liable for that. Doubtless, it is only a matter of time before there is such a case, particularly in light of the new “pension freedoms” that were introduced in April this year.