The Pensions Ombudsman recently considered the duties of trustees and actuaries in the context of a winding up and the relationship between them. He decided (F00265/F00463/F00264) that both have obligations to be proactive in seeking or giving advice (as appropriate) where they could reasonably anticipate problems.
Facts
In 1991, the trustees resolved to transfer the scheme assets into cash. The employer had gone into administrative receivership and an independent trustee was in place. The trustees then resolved to wind up the scheme.
In 1993, the actuary did a valuation of the scheme which showed it was in surplus. The actuary pointed out that the assets were just sufficient to secure benefits and explained that buy- out costs were linked to gilts. The administrative receiver wrote to the independent trustee expressing concern and querying whether the trustees had considered matching assets with liabilities. The actuary was asked to comment and said that as things stood there was no point as the winding up was nearly completed. The winding up was delayed and the scheme went into deficit.
Investment duties
A member complained that leaving the scheme assets in cash throughout the winding up of the scheme amounted to maladministration by the actuary and the trustees. This raised the question of who was responsible for the investment of the assets and to what extent?
The Ombudsman's view was that primary responsibility lay with the trustees. However, the independent trustee claimed they were entitled to rely on the actuary who had a duty to give "ongoing strategic investment advice". The Ombudsman decided that although actuarial guidance note GN9 required actuaries to comment if they consider a scheme's investment policy to be inappropriate, it applied "only to the production of actuarial reports and not general duties of an actuary" and did not shift investment responsibility.
Even though the independent trustee professed not to have any actuarial expertise, it had a duty to take appropriate advice. The duty of care on professional trustees is higher than that of ordinary trustees and there were enough references to asset/liability matching for the independent trustee to have been alerted to the need for further advice. In addition, although the independent trustee had been advised that the scheme was likely to wind up in surplus, this did not excuse it from a duty to "keep the investment under review and maximise the assets for the benefit of the members". The actuary did have "a responsibility at least to mention" to the trustees that, because of delays in the winding up, their initial advice might no longer be valid.
Transfers
The actuary should also have advised the trustees that because of the worsening financial position of the scheme, the continued payment of transfers might adversely affect the interests of remaining members. This was maladministration as the actuary was clearly responsible for the calculation and payment of transfers.
Exoneration clause
The scheme contained exoneration provisions which protected the trustees except where loss was caused as a result of "wilful and individual fraud or default on the part of the trustee". The independent trustee was not precluded from relying on the exoneration clause as a professional trustee, although it would in the Ombudsman's opinion be liable for breach of trust if "loss [was] caused to the trust fund because it neglects to exercise the special care and skill which it professes to have".
Wilful default was determined to include a trustee who "consciously takes a risk that loss will result, or is recklessly indifferent". So the question was whether the independent trustee knew it was in breach of its duties or was recklessly indifferent.
The Ombudsman decided that the independent trustee was recklessly indifferent and had no "acceptable excuse for failing to undertake its duties properly". It should have been aware of its basic responsibilities in respect of investment. The failure to review investments was "something which a reasonably prudent professional trustee would have been aware would place the Scheme at risk". In addition, "a reasonably prudent professional trustee would be aware that paying an enhanced transfer in respect of one member whilst the Scheme was being wound up might well put other benefits at risk". In failing to take into account these risks, it acted with reckless indifference and could not therefore rely on the exoneration clause.
This decision illustrates the importance of ensuring that trustees, particularly professional ones, are aware of and consider exercising their powers under the scheme where necessary. The fact that a scheme may be winding up does not change this. It is no excuse to argue that the actuary should have been more proactive. However, the actuary shared some of the blame by failing to review his previous advice.
The ruling also highlights the need for trustees to specifically agree with advisers (and then document) who is responsible for what and to ensure that any delegations remain appropriate as circumstances change. This avoids the possibility that anyone might be confused about where responsibility lies.
In case F00898 (and others) the Ombudsman concluded that:
"Whilst the evidence does not justify a conclusion that the Trustee acted in bad faith in its failure to have regard to Rule 27 in its discussions with the Employer, it does not justify a conclusion that the Trustee was wholly innocent either. In particular, the Trustee does not seem to have acted with the care which could be expected of a professional trustee, particularly in the approach which it adopted towards the taking of independent legal advice.
Whilst the Trustee acknowledged the need to take legal advice on the implications and scope of its other powers, it relied on its knowledge of the purpose behind Rule 27, and initially decided to take no legal advice on the scope and relevance of Rule 27 to the proposed agreement. When expressly (if cryptically) warned by Solicitor 2 (the Trustee's usual solicitor, then acting for the Employer) to take such advice, it did not seek the full written advice it required in connection with other aspects of the proposal, but simply passed the cryptic warning on to Solicitor 1, and was content to rely on a short telephone discussion."
