PART 3 – MEANING OF “NECESSARIES” OF LIFE FOR DEATH BENEFITS – DOES A LUXURIOUS LIFESTYLE COUNT?
23 / 03 / 2022
The short answer is, yes it can do. The scheme’s independent trustee was unsure and sought Court approval. This was given by the High Court in its decision on 1 February 2022 in the “Benge” case (Punter Southall Governance Services v Nigel Benge (1) and Kay Margaret Barrett (2)).
The case explored the circumstances in which the court may approve trustee decisions, the legal meaning of the expression “necessaries” in the scheme’s rules, whether the scheme definition and HMRC’s definition of dependant were aligned, and whether the trustee had acted properly given conflict of interest on the trustee board. So many interesting practical points.
Below we set the scene and then consider the court’s answers.
There are many elements of a good novel ! Simplifying somewhat:
- the late Mr Benge (“Mr Benge”) had a wife (who predeceased him) and 3 children who survived him, including Nigel Benge the first defendant. Mr Benge, his wife and the 3 children were members of a pension scheme established by Mr Benge’s company;
- Mr Benge’s secretary, the second defendant, also became a member and trustee of the pension scheme;
- Mr Benge purchased jointly with the second defendant two expensive homes, with Mr Benge supplying the whole purchase price for each of the properties and paying most of the bills;
- under the pension scheme established by Mr Benge, on Mr Benge’s death the scheme trustees had various options regarding distribution of the scheme assets relating to Mr Benge’s benefits under the scheme; one option was to provide a pension to a “dependant” of the deceased member, defined as: “such other person who in the opinion of the Trustees is (or was at the date of his death) dependent or interdependent on him for all or any of the necessaries of life”;
- following Mr Benge’s death, the second defendant claimed she was dependent on Mr Benge for the necessaries of life within the above definition and that it was accordingly proper for the trustee to provide her with a scheme pension; and
- having obtained and considered legal advice, the scheme trustee agreed in principle with the second defendant; however this course was strongly opposed by the deceased member’s son Nigel Benge. Accordingly, the trustee decided it would seek court approval.
When does the court give approval?
The court’s power to approve “difficult” trustee decisions was confirmed in Public Trustee v Cooper in 2001. One category, which applied to the Benge case, is where the trustee’s power is clear (here to distribute death benefits) but because the decision is “momentous” the trustee wishes to receive the blessing of the court. It is not a case of trustees surrendering their discretion to the court (the court is always reluctant to accept surrenders as, on the face of it, trustees are in a much better position than the court to know what is in the best interests of the beneficiaries.)
The court indicated it would give its approval if:
- It was satisfied the trustees have formed the opinion that they should act in the way for which they seek approval;
- The opinion of the trustees was one which a reasonable body of trustees, correctly instructed as to the meaning of the relevant provision, could have properly arrived at (taking into account relevant matters and not taking into account irrelevant matters); and
- The opinion was not invalidated by a conflict of interest under which any of the trustees had been labouring.
The court noted the trustee had obtained legal advice and wished to act in line with that advice. Whilst emphasising it was not substituting its own decision, the court approved the trustee’s decision.
When is a person dependent on another person for all or any of the necessaries of life? The court’s view:
There was no definition of “necessaries” in the scheme’s rules. In these circumstances the court considered common law – previous decided cases. The court concluded that the circumstances in which a person can be dependent on another person for necessaries can be wide and that one can properly take into account the position in life of the person concerned – here the second defendant’s very comfortable financial lifestyle with the deceased. Therefore although the second defendant had substantial means of her own, she had enjoyed a particular – and some might say luxurious – lifestyle with Mr Benge and so, having taken legal advice, the trustee could properly conclude she was dependent on Mr Benge for the necessaries of life. An important distinction is that the test of dependency is judged at the date of the deceased member’s death – and so the second defendant’s previous standard of living (before her dependency on Mr Benge senior was engaged) was immaterial to what constituted her necessaries of life at his death.
Was the different HMRC definition of “dependant” satisfied?
An important question as only if the HMRC definition is satisfied could the pension be paid to the second defendant without incurring an unauthorised payment tax charge.
The tax definition of “dependant” is in paragraph 15(3) Finance Act 2004 and does not use the concept of “necessaries”. Instead the HMRC definition focuses on financial dependence, mutual dependence and dependence because of physical or mental impairment. The court decided that the trustees proposed decision would satisfy both the FA 2004 definition and the scheme rules definition which were “materially the same”.
Point to watch – it is all very well satisfying the relevant definition in scheme rules but it is also important for a proposed payment to meet the relevant tax definition.
Was the trustee’s decision invalid due to conflict of interest?
There was a clear conflict between the second defendant’s position as a trustee of the scheme and her claim to be a dependant of Mr Benge.
The Court confirmed the independent trustee of the scheme had taken reasonable steps to manage this conflict by seeking independent legal advice to determine whether there was a relationship of dependency and ensuring that the second defendant (in her role as trustee) was not part of the decision making process and thereby treating her solely as a member of the Scheme. In doing so the court confirmed that the independent trustee was able to make the decision free of conflict.
All’s well that ends well?
May be but it took an awful long time to get there. The court proceedings started in 2020 and were relatively speedy, concluding with the court’s decision on 1 February 2022, but it took 10 years for the matter to reach the court (Mr Benge senior having died in 2010).