In my experience, pension scheme trustees frequently forget to consider the personal risk that they take on when being appointed a trustee. Instead, they are focused on properly discharging their trustee responsibilities. This is particularly the case, at present, for trustees of defined benefit pension schemes, most of which are considering appropriate strategies to deal with the scheme’s funding deficit.

Some trustees may think about their personal exposure as a trustee in the run-up to being appointed a trustee or shortly afterwards, but, once done, they don’t revisit this point on a regular basis. They should.

The biggest risk for a pension scheme trustee is that of personal liability. This can arise where a beneficiary of the pension scheme brings an action against the trustees for breach of trust. An action for a breach of trust may be brought against a trustee because of:

  • the trustee’s own wrongful act,
  • negligence,
  • the improper exercise of a power under the terms of the scheme, and
  • as a result of any of the above, if they were done by a co-trustee.

There are certain statutory protections which should be regarded as the last port of call. Under section 24 of the Trustee Act of 1893, a trustee is liable only for his own acts, negligence or defaults and not those of his co-trustees provided there is no ‘wilful default’ on his part. This indemnity is no help to an honest trustee who turns a blind eye while his co-trustees commit a breach of trust.

More helpfully, a recent statutory protection introduced in 2009 permits a court to exonerate a trustee where he acted reasonably and honestly, even though he may actually be technically liable for breach of trust.

Under the Pensions Act 1990, ‘safe harbour’ rules apply in investment matters. The Pensions Act provides an exemption from liability for trustees who invest pension scheme resources in accordance with the directions of the scheme members. The trustees will incur no liability solely for giving effect to the direction of the members in accordance with the scheme’s rules. Various conditions have to be met in order for trustees to be able to avail of this statutory protection. Of greater concern is that trustees examine and regularly review non-statutory protections that may be available to protect them as a first port of call. Depending upon the size of the scheme, it may be sensible – and appropriate – if the trustees operate through a corporate trustee. This can provide a good level of protection, where properly structured.

Frequently, pension trustees are unaware of the scope and range of protections they may have under their scheme documents. Most properly drafted trust deeds will confer an exclusion from liability on the trustees which would prevent them from being liable for a breach of trust except in the case of ‘wilful default’ or similar circumstances. Additionally, the trustees may have an express indemnity under the terms of the trust document from the sponsoring employer or sometimes also from the fund.

So what steps could you possibly take now to protect yourself if your pension documents do not give you an adequate level of protection?

When considering this, you need to avoid the conflict of interest pitfall. If you were to make changes to the trust deed and rules that improve your position as a trustee to the detriment, or potential detriment, of your beneficiaries, you would be attempting to put your interests above those of your beneficiaries. Thus, a conflict of interest would arise between your interests personally and those of your beneficiaries. Unless the terms of your pension scheme permitted you to amend it, notwithstanding this particular issue, the proposed change would be unlawful. For example, the deed could not be amended to include an exclusion from liability for breach of trust if this provision is not already included. That would be unlawful as you would be putting your interests above those of the beneficiaries. However, as a lawful alternative you may be able to obtain a separate indemnity from the employer – providing it is willing to give you this.

Also, if the scheme documents do not already allow you to insure trustee risks, it may be possible to amend the scheme documents to include such a provision, assuming that the cost of the insurance is not borne by the fund but by the employer. Depending upon the circumstances, it may also be appropriate for the trustees to be replaced by a corporate trustee of which the individuals who currently act as trustees would become directors.

As an ongoing matter, trustees should evaluate their own personal risk and take steps to address how they may be exposed.