An issue that is increasingly affecting pension schemes, their legal advisers and (in extreme cases) the courts, is that of ineffective trustee appointments and removals. An ostensible change to a trustee board which turns out to have no effect can have dramatic consequences for a scheme and its members, not to mention the employers that ultimately have to pick up the pieces from a financial perspective. We recommend a formal review of the past to give a clean bill of health to previous trustee changes, and pre-emptive action to ensure that any problems in the future are nipped in the bud before they spiral out of control.
Background
Alterations to the rules of a pension scheme can only be implemented in the manner set down by its 'power of amendment' and generally, as an absolute minimum, have to be made by deed to which the scheme's trustees are party. In order for a deed to be valid, all trustees have to execute it.
The courts have long taken a very strict line with regards to formalities such as this: if they are not followed then the change that is purportedly being made will simply be of no effect, end of story.
Day-to-day decisions of pension trustees can usually be made less formally, and can properly be made on a majority basis unless a scheme's rules set down more stringent requirements. However, any such meeting will only have been properly convened if due notice was given in the proper manner to all of the scheme's trustees.
Furthermore, as a matter of law, trustee appointments and removals can only be made with prospective effect. Although it is increasingly common to see them expressed as operating retrospectively, this would result in a 'rewriting of history' that would offend the fundamental principle of legal certainty and would be extremely unlikely to be upheld by any court.
And finally, once a benefit has been earned, it becomes an accrued right that is protected by section 67 of the Pensions Act. It cannot then be taken away – however inadvertently or unintentionally it was earned in the first place – without a prescribed process being followed, and fully-informed member consent being obtained.
A mounting problem
From this we can see how a small slip, such as failing to properly remove an outgoing trustee from office, can give rise to potentially significant problems in the future if the effect of that slip is not 'nipped in the bud' at an early stage. That individual will still be a trustee of the scheme, despite everybody (the outgoing trustee included) believing that he no longer is.
Let's just side-step for a second, though. We mentioned in the introduction that failure to appoint trustees properly is also a potential problem. It is; but holding yourself out as a trustee can and generally will lead to the individual being deemed to have assumed the role (and the responsibilities that go with it), even if the formal appointment itself was ineffective.
By contrast, inactivity cannot operate to bring about someone's removal from office. And yet the potential impact of that inactivity could be dramatic, for example the discovery – some years down the line – that decisions were not taken properly or deeds were not executed properly simply because one individual, who was still unwittingly a trustee, was not involved with them. In extreme cases benefit changes, or ever the cessation of accrual in a scheme, might turn out to be ineffective.
And this is likely to be the case, however minor the failure to comply with all requisite formalities. A deed which is signed by only one officer of a company, or an individual trustee's signature that is not witnessed, is all that is needed to cause an entire deed to fail. The simple expedient of checking, immediately after signature, that a deed has been properly executed by all parties would – in the vast majority of situations we have encountered recently – have allowed the problem to be identified and put right at the time.
The attitude of the courts
We make no excuse for repeatedly stressing how the courts would view a failure to comply with the formalities needed to amend a pension scheme (because, for example, it had not been executed by everyone who was still a trustee). Although such matters do not (in spite of any apparent doom and gloom!) regularly end up in court, the courts do set down the general standards of conduct that are expected in order for acts and documents to have legal effect. And whilst employers may decide to be commercial and take a chance on getting away with something, trustees' duties require them to exercise prudence and give effect to the law, whatever the consequences of so doing.
Two decisions of the courts serve to illustrate just what level of compliance with prescribed formalities is expected.
- In Walker Morris, the power of amendment required the trustees to take actuarial advice before changing benefits. They obtained section 67 certificates, but not explicit advice on the changes. The court held that they were invalid.
- More recently in Gleeds, the court reached the same conclusion where – over a period of some two decades – deeds executed by a partnership had not involved each individual partner's signature being witnessed, as they should have been.
In each case both benefit reductions and benefit improvements were found to be of no effect, and certain sections of one of the schemes were held never even to have lawfully existed! Granted that neither of these cases involved changes being rendered ineffective because not all trustees of the scheme had been party to the deed; but the court's approach to any such conundrum, can be expected to be similarly strict.
Does Armageddon really beckon?
However this is not to say that in any such case, there will always be a total meltdown of the scheme concerned. Two matters on which we have advised in recent months serve to illustrate the more palatable outcomes that can sometimes be experienced.
- In one, a series of potentially ineffective changes to a trustee board were capable of being construed (with, in our view, sufficient certainty) as effective, such that there was no ultimate impact on the scheme concerned or on any of the subsequent rule changes that the "wrong" trustee board had then purported to make.
- And in the second, despite a series of clearly ineffective trustee appointments and removals, the only deed of any substance that had been executed was one which sought to maintain pre-2006 Revenue Limits. Despite this deed being of no effect, the salary and service history of the scheme's members resulted in there being no impact on the scheme's liabilities, quite simply because Revenue Limits had never bitten on any of its members in the first place.
Get it right first time
It is not always appreciated that behind every reported court decision concerning the proper construction of a pension scheme's governing documents, there is an unreported professional negligence claim against the advisers (actually or allegedly) responsible for the error. And if those advisers are adequately insured, and their wrongdoing can be sufficiently demonstrated, then nobody – other than the insurers themselves – have lost out, have they?
Hmmm. Far better, in our opinion, to get things right at the first attempt, rather than spending lots of time and money (and emotional energy) sorting out a problem which, to many of those involved, can appear to have arisen on the merest of legal technicalities. Even if resolution of the problem comes about in straightforward fashion, as two of our clients have recently discovered is possible, why risk a less palatable outcome when a few pre-emptive steps can usually stop issues from arising, let alone spiralling out of control.
A few simple steps will help in this regard:
- Whenever a deed is executed, check and then check again that every attestation clause points towards it having been validly executed.
- Be particularly careful with the removal of outgoing trustees. Have all necessary formalities been complied with? If they have, check again anyway. And to be on the safe side, get a second opinion as well.
(Remember too that under the 'new' MNT regime, a member-nominated trustee whose term of office has expired will need to be removed by deed, just like any other outgoing trustee.)
- Perform a one-off check of your scheme's entire "chain of trustees". Today. Even if an unwanted issue comes to light, far better to be able to deal with it in leisurely fashion now, than to be compelled to do so – possibly in a hurry – in X years' time.
(And if there is any doubt about whether there might be broken links in the chain, take legal advice immediately about the effect on historic trustee decisions and/or previous amending deeds.)
- Consider altering your scheme's rules so that any requirement for outgoing trustees to be a party to their own removal is deleted. (Provisions of this nature were once common but are becoming increasingly anachronistic.) Naturally such an amendment can only be made once any issue with historical removals has first been sorted out.
- And have a sweep-up deed prepared, to remove – in whatever way your scheme's rules require – anybody, other than those believed to be the current trustees, who was once a trustee of the scheme. We cannot stress highly enough how, in our opinion, good practice requires both trustee boards and employers to consider exercises such as this when known issues, such as ineffective trustee removals, start to appear regularly within the industry.
And last of all, Don't Panic! Issues are (we promise) rare, and if they do arise then ultimately your legal advisers' job is to provide help and support through whatever process is needed to put things right. It might not turn out to be a pain-free exercise, but it can be one in which the burden is shared with those who are best-placed to advise on how a speedy resolution, of any problem that has come to light, might properly be brought about.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
