Pension liberation – High Court confirms scheme trustees not exonerated under the scheme rules
The High Court judgment in Dalriada Trustees Limited v Mcauley and others (18 January 2017) concerns trustees' investment duties when making "liberation" investments. The judgment is a clear warning to trustees that they risk being held personally liable if they breach their trustee duties when making investments, despite the trust rules containing blanket exoneration clauses.
What is pension liberation?
Pension schemes cannot usually make payments to members before their normal minimum pension age (which, since 6 April 2010, is usually age 55). To circumvent this, some schemes make investments into companies which then, through making other investments, including payments described as advisory fees, or commissions, or similar payments result in early payments to members of the scheme under age 55. Such arrangements are not, themselves, illegal, but the tax consequences are severe; with payments received by members taxable at up to 55% as unauthorised payments under the Finance Act 2004.
The legal framework – sections 33 and 36 of the PA95
Trustees are often comforted when they read clauses in the trust deed and rules which exclude or restrict liability for their acts or omissions. However, trustees need to keep well in mind section 33 of the Pensions Act 1995 ("PA95"). Section 33 overrides the trust deed and rules. Under section 33, trustees cannot exclude or restrict "liability for breach of an obligation under any rule of law to take care or exercise skill in the performance of any investment functions".
Another pitfall is trustees not obtaining proper advice when making investments. Under section 36 PA95 trustees "must obtain proper advice" from an appropriate person who is authorised under the Financial Services and Markets Act 2000. This advice must be in writing or be "subsequently confirmed in writing".
Background to the 'Dalriada' decision
a. The Schemes
The Claimants (appointed by the Pensions Regulator) were the current trustees of two occupational pension schemes, the Innovation Property Retirement Benefit Scheme and the Merseyside Care Retirement Benefit Scheme, (together the "Schemes"). The Defendants (husband and wife) were the former trustees of the Schemes, who had been removed as trustees by the Court on the application of the Pensions Regulator.
Under the Schemes' trust deeds, the former trustees were not liable for anything provided such liabilities did not result from their wilful neglect or default, or where the member had directed the investment (the "Exoneration Provisions").
b. The Investments
At the time of the current trustees' appointment, the Schemes had received total funds of about £4.3 million. These funds were invested by the former trustees in various ways, with the majority of the funds (£3.275 million) being paid, in breach of trust, to Arterial Distribution Limited under three Gilt Option Agreements (the "Agreements"). The current trustees claimed that the former trustees were personally liable to repay the £3.275 million to the Schemes.
c. The current trustees' arguments
The current trustees alleged:
- The investments made were not proper investments or were made for an improper purpose;
- The former trustees were in breach of their duties to exercise their powers as ordinary prudent men of business (the "Equitable Duty"); and
- The former trustees were in breach of their statutory duty to seek proper advice (the "section 36 Statutory Duty").
The Court decided it was clear beyond any reasonable doubt that the payments of £3.275 million were not investments that a trustee exercising proper skill and care could make. The Judge set out some of the key reasons for his decision, including:
- The Agreements, even on their own terms, were quite remarkable; requiring a very large (1,300%) return to be made on the underlying investments before any profit was made;
- Payments were to be made to offshore entities in respect of a highly speculative business, the development of medical patents;
- There was no evidence that the former trustees gave any consideration to investment diversification; and
- There was no evidence that any proper advice was taken from anyone properly qualified to give such advice.
Basic due diligence would have caused the former trustees to ask what fees, commissions or expenses were being paid in respect of the investment and these enquiries would have revealed information which would have resulted in no reasonable trustee proceeding with the investment.
The former trustees accepted that in relation to their section 36 Statutory Duty, they were unable to rely upon the Exoneration Provisions as section 33 PA95 prevented the trustees from excluding their duty of care to act skilfully in taking investment decisions. Further, they accepted because they failed to obtain written investment advice there was no defence to the section 36 Statutory Duty. The Judge therefore gave judgment in favour of the current trustees.
The Court also awarded judgment in favour of the current trustees in relation to the Equitable Duty. The Court held that section 33 PA95 applies not only to the section 36 Statutory Duty itself but more generally prevents an exclusion or exoneration from liability in respect of "liability for breach of an obligation under any rule of law to take care or exercise skill in the performance of its investment functions".
The judgment is a strong reminder to trustees that they cannot simply rely on exoneration provisions in the trust deed and rules when making investment decisions. Trustees of smaller schemes may in certain circumstances be subject to less onerous rules than those in this case, but the provisions of sections 33 and 36 PA95 should not be forgotten by trustees of all schemes.
Generally, trustees must ensure they seek proper advice and act appropriately when making investment decisions, or else they will be deprived of protection and be held personally liable to refund the pension scheme.