Pension scheme trusteeship can be an onerous task. It is very unusual for trustees (other than professional trustees) to be remunerated for their trustee work. One of the sources of comfort for such trustees is the provision which appears in various forms in most scheme rules exonerating them from certain types of liability and indemnifying them from scheme assets or the assets of the employer. The ability of trustees to rely on this protection in the context of an Ombudsman determination against them has been examined in a number of cases.
The point was first considered in. One of the points decided when the determination was appealed to the High Court was that the Ombudsman has jurisdiction over former, as well as current, trustees. This led to the question of whether a former trustee could enjoy the protection of the exoneration clause in the scheme rules which provided that a trustee was not to be held personally liable in the absence of dishonesty or wilful wrongdoing. There had been no "substantiated suggestion" of dishonesty or wilful breach in the case. The Ombudsman had directed that as the complainant and complainant's sister had suffered injustice involving distress and inconvenience as a result of the trustees' maladministration, each trustee was to pay GBP 500 to the complainant and GBP 500 to his sister as compensation for injustice.
Carnwath J considered that the draftsman of the exoneration clause did not have in mind the possibility of awards of compensation for distress and inconvenience made by an Ombudsman. He could not find any justification under the legislation to impose a personal liability on a trustee "contrary to the clear intention of the trust deed, which was the basis upon which he undertook his trust."
The judge therefore remitted the matter to the Ombudsman until he had satisfied himself that the payment of the compensation would not result in a personal liability for Mr Wild. In his Annual Report 1995/96, the Ombudsman described Carnwath J's order as "extraordinary" as it was effectively passing back a pure question of law to the Ombudsman.
In , the Ombudsman considered that the trustees could not rely on the exoneration clause in the scheme rules because it did not extend to wilful default. The Ombudsman's determination was set aside so far as it affected Mr Duffield because of defects in the procedure which he followed during the investigation. Therefore the court did not have to consider the Ombudsman's finding that the exoneration clause would offer no protection against personal liability.
In the Ombudsman concluded that the trustees were in breach of their equitable and fiduciary duty to act properly in relation to the conduct and conclusion of the sale of a property held by a small self-administered scheme. Essentially he thought that the trustees ought to have done more to obtain a higher price for the property, which was the only asset of the scheme. The scheme rules provided that:
"The Trustees shall in no way be liable for or for the consequences of any mistake or forgetfulness whether of law or fact of the trustees or for acting on any professional advice or for any breach of duty or trust whatsoever whether by way of commission or of omission unless it is proved to have been made, given, done or omitted in conscious bad faith of the trustee sought to be made liable."
Chadwick J agreed with Carnwath J's conclusion in that there is nothing in the legislation (PSA 1993) which could justify imposing a personal liability on a trustee which was inconsistent with the instrument upon the terms of which he undertook his trust. The Ombudsman had not found that the trustees had been acting in conscious bad faith and so could not have been made personally liable in the light of their exoneration clause. This was despite the fact that Providence Capitol Trustees was a professional paid trustee and so was subject to a higher duty of care than a lay trustee (following (No2) [1980] Ch 515).
The Ombudsman in his Annual Report 1996/97 explained that he made no finding as to bad faith because the exoneration clause had remained unmentioned during his investigation. The exoneration clause argument was raised for the first time on appeal.
In , Lightman J decided that former trustees can rely on an exoneration and indemnity clause in respect of any compensation which the Ombudsman may order them to pay. His reasoning was that the exoneration provision is part of the terms on which a trustee will have accepted appointment and the protection must continue after the individual ceases to be a trustee.
In Blackburne J accepted that the trustees may have the benefit of an exoneration clause but remitted the crucial question of whether they could be said to be in wilful default and therefore lose the protection of the exoneration clause to the Ombudsman for further investigation at an oral hearing.
This line of cases may well lead the Ombudsman to conduct such hearings in cases where the issue of wilful default or bad faith arises in the context of exoneration clauses.
An exoneration clause saved trustees from personal liability in case D11636. The trustees, following discussions with their consultant, decided to remove three per cent per annum pension increases. This had the effect of turning a shortfall in scheme solvency of GBP 28,147 into a surplus of GBP 20,000. The withdrawal of pension increases was blamed on "the present financial climate" and the inability of the scheme to bear the cost of increases. When a member objected the trustees argued that the increases should be treated as an exercise of the trustees' augmentation powers under the scheme rules and that increases could be taken away if they could no longer be afforded.
The Ombudsman decided that pension increases were not discretionary. Once they had been granted they could not be taken away. The trustees had acted in breach of trust and were guilty of maladministration in removing them. The equitable remedy was for the trustees from their own personal resources to put the complainant back in the position he would have been in if the breach of trust had not occurred. But the exoneration clause saved them, as explained by the Ombudsman in the Digest of Cases for 1996/97 (at p7):
"However, the Trust Deed provided exemption from liability, except for a breach of trust knowingly and wilfully committed, which this was not. The breach resulted from bad professional advice and ignorance of scheme documents. Although trustees were required to be conversant with pension scheme documents and a failure to perform this duty was evidence of maladministration, the exoneration clauses applied."
As personal liability could not be forced on the trustees, the Ombudsman recommended, rather than directed, that they pay compensation of GBP 200.
In case E00205, the exoneration clause did not save the trustees from personal liability. Contributions were not passed to the pension scheme for 16 months before the employer was wound up. No claim could be made for outstanding contributions to be paid from the Department of Employment's redundancy fund because the maximum claim period under the relevant legislation was 12 months. Among other things the complainant alleged maladministration by the company and the trustees in failing to see that contributions were paid on time.
The two trustees were taken to court by the Official Receiver and were disqualified from being directors on the basis that they had knowingly continued to allow the company to continue trading when it was insolvent. According to the Digest of Cases 1996/97, the Ombudsman concluded (at p44) that:
"It followed that, as trustees, they allowed the scheme to continue in circumstances that they knew were such that, in accordance with the rules, it should have been closed. There could be no doubt that it was not in the best interests of the members to continue the scheme in circumstances in which contributions were not being passed to it. They were in breach of trust which, in view of the information available to them, must be regarded as knowing and intentional, so that their liability was not limited under the Deed of Trust."
Therefore the Ombudsman is quite prepared to impose personal liability on trustees where there has been some deliberate wrongdoing. In advising a complainant about whether to bring a case against trustees with the intention of making them personally liable, it will often be very difficult to tell (unless they admit it) whether they knew or were recklessly careless as to whether they were doing something wrong. Consequently it will usually be left to the Ombudsman's investigator to try to establish the extent of the trustees' knowledge and, in the light of the ruling, oral evidence from them at a hearing might well be required.
David Laverick took exception to these clauses in his first annual report (2001/02). This was on the basis that pension schemes are not private trusts where individuals should be allowed the benefit of an exoneration clause to encourage them to act as a trustee. He questioned whether it is appropriate for the trustees of a fund holding several millions of pounds to be exonerated for their actions. This seems unduly harsh when one considers that nearly all trustees of pension schemes are genuinely performing their role on a gratuitous basis and in addition there are many member nominated trustees within trustee bodies (largely due to government policy on trustee appointments).
As a solution to the lack of protection for trustees should exoneration clauses be removed Mr Laverick suggested that the remit of the Pensions Compensation Board be extended or alternatively that pension funds are required to carry indemnity insurance. Both of these options, like an exoneration clause, will involve a cost to the scheme albeit a regular one through an annual levy or an insurance premium as opposed to a one off cost. Dr Farrand had also expressed concern in the past about the wide protection afforded to careless trustees by exoneration clauses. The Law Commission is reviewing the issue generally and is looking in particular at whether professional trustees should have less protection.
