Pensions trusts and the potential liabilities of the USS trustee
Number 53: #USSbriefs53
Alastair Hudson, University of Strathclyde and Academics for Pensions Justice
This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series.
1. To begin at the beginning
If you are looking for an Idiot’s Guide to Pensions Law which will explain the entirety of pension trusts to your perfect satisfaction in 1,500 words, then I am about to disappoint you. (I can undoubtedly provide the idiot; but maybe not the comprehensive guide.) What follows is an explanation of what a trust is, how pension fund trusts are different, what liabilities pension fund trustees owe to the members of a pension fund scheme, and a little about how their regulation works.
To summarise: pensions law is dense. Deliberately so. I have a favourite Peanuts cartoon which sums up the reason why dense, practitioner-dominated areas of law like tax and pensions law are the way they are. Linus is about to play a board game with Lucy. He has just been given the rules and is delighted. He says: ‘I love the rules. Once you know the rules you can cheat’.
This is important: knowing the rules facilitates cheating. Areas of law like tax law, which are comprised of dense, hard-and-fast rules in statutes thousands of pages long, actually make it easier to avoid and dodge those rules at the molecular level. When laws are comprised of overarching principles which govern the interpretation of those detailed rules, then that makes it much more difficult to cheat because the courts and regulators can be purposive in their interpretation of those rules and therefore prevent avoidance.
In the area of trusts law — which supposedly underpins pensions law — there is a productive tension between hard-and-fast rules and high-level, flexible principles. One type of lawyer decries the surface vagueness of the use of principles like ‘unconscionability’ (which underpin trusts law) as a part of that area of law; but it is that flexible concept that allows a court to imply the existence of a trust when a thief steals a car, sells it, and buys a motorbike. Without that flexible principle, the victim of the crime would not be able to translate their property rights from the car into the motorbike. It sounds vague in theory, but centuries of precedent makes it useful.
This preface is important because it explains why a lot of what follows is hard-and-fast when we are considering the duties of pension trustees, and why that need not matter. In fact, if you were trying to sue a trustee, the flexibility of some of the concepts may be very useful, even though many practitioners will claim to prefer certainty.
2. The limited aim here
The limited aim here is to think about some potential liabilities of the USS Trustee and others, and to give you some core information about the legal nature of USS and one or two examples of why the law in this area must be understood as being uncertain. The upshot, in my opinion, is that there must be possibilities for bringing actions against the Trustee and that there are potential legal avenues which could and should be brought to prevent misfeasance by the Trustee. Litigation can have objectives ranging from acquiring compensation for breach, identifying what the law actually is (by asking the court for a declaration of the law), through to preventing misfeasance or correcting misapplications of powers through injunctions and so forth. There are many possibilities open to us.
Back to business. Pensions are organised as trusts. So we need to think about trusts.
3. What is a trust?
The law of trusts is peculiarly English. The history is fascinating (Hudson, Equity & Trusts, Ch.1: it’s all Robin Hood films, Jane Austen novels, and Pinocchio). Briefly put, one person (‘a settlor’) decides that some of their property should be held by another person/people (‘a trustee’) for the benefit of a third person/people (‘a beneficiary’). Imagine the property is money being left in a will so that the trustee identified in the will is supposed to invest that money for the benefit of identified children of the settlor. In that circumstance, the trustee has all of the legal rights of ownership in that money such that the trustee can open a bank account, sign cheques, transfer the money as if she were its only owner. At the same time, the beneficiary is recognised as having property rights of a different type in that same money. This is known as the beneficiary’s ‘equitable interest’ in the money. The trustee is said to ‘hold that money on trust’ for the beneficiary. The beneficiary’s rights attach to whichever property the trustee holds on trust from time-to-time: so, if the trustee uses the money to buy a car, then the beneficiary would have an equitable interest in the car.
Therefore, as members of the USS pension fund, we have the rights of beneficiaries in that property. Our rights are subject to the terms of the Scheme rules (which are oddly quiet about our rights) and to the terms of the general law. The general law of trusts is tooled up so as to protect beneficiaries from misfeasance by the trustees. The Trustee in the USS Scheme has the ‘legal rights’ in the Scheme property — which they need if they are to make investments on our behalf. Under classical trusts law theory, however, we have the ultimate rights in the Scheme property as the beneficiaries. What is different about pensions law is that the employment contract element is often taken to prioritise the place of the employers over the rights of beneficiaries — thus neoliberal economics displaces traditional, protective legal concepts.
The strength of the trust concept is that the trustees owe ‘fiduciary duties’ to the beneficiaries. These duties are more demanding than other forms of duty — they prevent conflicts of interest, and found a very large number of very valuable rights to recover property and compensation in a variety of circumstances. Trusts were identified as the appropriate mechanism for the organisation of pension funds by the Pensions Review Committee chaired by Prof Roy Goode in The Report of the Pension Law Review Committee (1993) because the fiduciary duties which they created were thought (reasonably enough) to provide protections for beneficiaries against misfeasance by the trustees. Later came the Pensions Act 1995, the Pensions Act 2004 and the creation of the Pensions Regulator.
4. What is different about pension fund trust from ordinary fund trust?
Pension fund trusts are different from ordinary trusts because pension fund trusts are governed by statute, are supposedly overseen by a statutory regulator, are supported by the Pensions Ombudsman, and have comparatively few decided cases in relation to them. The key difference is that occupational pension funds are created by the employer, their rules are drafted by solicitors appointed by the employer, their officers are appointed by the employer, and the employer is entitled to withhold their contractual contributions from the scheme in identified circumstances which are often controlled by the employer’s appointees.
Pensions law considers that it will be the employers who are in control, even though the members theoretically have both the rights of beneficiaries under a trust and the rights of parties to a contract. The scheme members are obliged to contribute a part of their salaries each month to the pension scheme under the terms of their contract of employment. Importantly, the trustee bears the duties of a trustee, and yet they are subject to exclusion of liability clauses, discussed below, which greatly limit those rights in practice. So a pension trustee will have fewer duties than an ordinary trustee, and a pensions beneficiary will have fewer rights than an ordinary beneficiary. The question is deciding what those duties mean in individual cases because the principles are flexible.
4.1. The significance of the corporate trustee
It is common for pension funds to be organised as trusts in which the trustee is a company rather than a group of human beings. By using a company — such as USS Ltd — as the trustee, the individual human beings can distance themselves from personal liability for the losses caused by the trustee or the defaults of the trustee. To make the human beings liable, the members of the pension scheme must find proof that those humans dishonestly assisted in some breach of trust which will attach to them personally and not to the company. So, an officer will be liable if they have not acted as an honest person would have acted in those circumstances, or if they have not obeyed the regulations.
The use of a corporate Trustee makes it more difficult to bring personal actions against the directors of USS Ltd. The principal action lies against the company USS Ltd and not against the directors in person. That does not mean there are no actions against those human beings, however.
5. The liability of pension trustees
There are three sources of legal obligations for a pension trustee:
- The scheme rules (from time to time)
- The legislation (Pensions Act 1995, later legislation and regulations)
- The case law (relating specifically to pensions and generally)
USS has several different iterations of the Scheme rules — most recently in 2009 and 2015. Those Scheme rules say remarkably little about rights for the members. The principal function of those rules (about 250 pages in length each) is to identify the rights of pensioners to receive payments after retirement (focusing on exceptional cases at some length), to describe the powers of the trustee, and to limit the liabilities of the trustee and its officers.
6. An example of the liability of trustees under the case law
There are very few cases in this area because members rarely sue. Therefore, we have to go back to general principles from the cases that do exist and extrapolate from there. The example I am choosing illustrates why it is possible to say that the trustees may owe duties under the general law to the members, but that that principle is capable of interpretation and adaptation in different ways. Laws are plastic, not rigid.
6.1. The high-level principle
There is a high-level principle in the judgment of Megarry VC in Cowan v Scargill [1985] Ch 270 which has been discussed in the Merchant Navy case by Asplin J. (This area is discussed in detail in Chs.8 and 9 of Hudson, Equity & Trusts, 2016, which is probably in your university’s library.) Pensions law practitioners are taking the more recent judgment as being the latest turn in the law because they read it as narrowing down the principle and thus helping their corporate clients. The reason why this principle is potentially important is that it is one of the principles that impose positive obligations on the trustee: i.e. a standard which the trustee must reach and duties which they must perform.
Cowan v Scargill [1985] Ch 270 was decided during the Miners’ Strike of 1984. Technically it was a case in which the board of trustees of the pension fund for the mineworkers was divided half-and-half between representatives of the National Union of Mineworkers and management. A decision was made (deliberately provocatively on the part of management) to invest in oil (which competed with coal mining) and in apartheid South Africa (which enraged the trade unionists). The union trustees objected. It was held by Megarry VC that:
The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. The duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.
It is important to remember that the union trustees lost. Megarry VC was not prepared to acknowledge some overarching ethical objective to all investment decisions such that apartheid should be demoted behind less evil investments. Importantly, the obligation is an obligation to act in the best financial interests of the beneficiaries, which empowers the trustees to ignore other considerations such as the beneficiaries’ objectives for the trust.
Ordinarily, this ability to ignore non-financial considerations bothers trusts law academics. It might be useful in relation to the USS Trustee, however. The argument which could flow from this is the following. If the trustee bears an obligation to act in the best interests of the members of the scheme, and if a Defined Benefit (DB) scheme is in the best financial interests of the members, then shouldn’t the trustee operate the scheme so as to benefit those members? The counter-argument would be that the peculiarity of pension trusts is that the employers also have a stake such that it is not solely about the interests of the members.
Significantly, employers do not get a mention from Megarry VC — rather, he said that the duty to the members is ‘paramount’. That is important — the duty to beneficiaries was said to be paramount.
6.2. Another interpretation? Or an undesirable mis-reading?
In Merchant Navy Ratings Pension Fund [2015] EWHC 448 (Ch), Asplin J did seem to move away from the idea that this best interests principle is ‘paramount’. While she acknowledged that the principle exists, she tried to demote its significance to being just one principle alongside other principles. Oddly, this requires ignoring what Megarry VC actually said and re-reading the concept ‘act in the best interests of the beneficiaries … [is a] paramount’ duty as being something that is not actually paramount at all. That does not require acting in their best interests. Importantly, Asplin J does acknowledge the continued existence of the principle and she did hold: ‘the purpose of the trust defines what the best interests are’. The USS Scheme rules (in one of its many provisions) do provide that the purpose of the Scheme is ‘the provision of benefits for employees’. That purpose does not include an intention to massage university finances by cutting employers’ contributions through a contribution holiday, and so forth.
6.3. That the high-level principle is meaningful
It is worth noting that the ‘best interests’ concept also comes from EU law — it is found in the Markets in Financial Instruments Directive (MiFID) (not relating to pensions) and the Pensions Directive (relating to pensions). The MiFID conception has been implemented into UK financial regulation by the Financial Conduct Authority’s ‘Conduct of Business’ regulations. The MiFID high-level principles were used by the Supreme Court in Lehman Brothers v CRC (2013) to justify its interpretation of trusts law principles after the failure of Lehman Brothers. Therefore, these ‘high-level principles’ are often derided by practitioners and some academics as being too vague, but none of those academics works in the finance law field where these principles are central to financial regulation.
6.4. Towards a conclusion
These are the sorts of points — and there are many — which are arguable. This is why there are strong arguments for saying that the Trustee owes duties to the members of USS which may not have been performed properly. This is also why they are arguable rather than being self-evident. This is why a large number of people involved with Academics for Pensions Justice are working on the history and on the legal arguments, and taking professional legal advice from specialists in the field.
Aside from the many detailed, technical arguments, there are ‘big picture’ arguments as to whether the USS Trustee has been either acting in the best interests of the members or acting with due care and skill.
7. Exclusion of liability
This mention of the duty of care and skill is interesting because the USS Scheme document — as is common — purports to exclude the liability of the Trustee (and for its officers and others) for a breach of the duty of care and skill. What does that mean? It means the expensive solicitors who drafted the document provided that the expensive professionals operating the Scheme would not be liable if they did anything which was careless or was done with too little skill.
The decision of the Court of Appeal in Armitage v Nurse (1998) suggests that a trustee will not be liable for a breach of trust if their obligations are excluded by a term in the trust instrument, provided that they have not been dishonest. (The USS provisions are oddly drafted in the light of that decision.) The judges’ assumption behind this rule is that no professionals will act as trustees if they bear liabilities for acting unprofessionally, so it must be possible for them to exclude their liabilities from the outset so as to ensure a market for professional trustees.
There is, however, a more recent decision of the Privy Council in Spread Trustee v Hutcheson in which two minority judges held that the legal basis of Armitage v Nurse is possibly suspect (because it took an arguably strained reading of earlier cases) and that trustee exclusion clauses should not necessarily always be applied. This means that the effectiveness of the USS Trustee’s exclusion of liability clause is arguable — both in its own terms and under the general law.
8. A word on the regulatory scheme
The important change in Pensions Act 1995 was the creation of a regulator and the introduction of the concept of member-nominated trustees. This was a recognition that traditional law — with the need to bring complex litigation through the courts — was insufficient to protect pensioners and members of pension schemes. In turn, that was a covert acceptance of the idea that citizens had become speculators on the financial markets in which their private pension schemes invested, and as such that they needed protection similar to that extended to ordinary financial services. That was considered insufficient and so the Pensions Regulator (tPR) was created by the Pensions Act 2004. That the tPR is unfit for purpose was illustrated by the BHS pension fund failure — on takeover the fund was in healthy surplus but it was in a deficit of £500 million by the time the corpse of BHS was thrown away. Consequently, tPR feels the need to look assertive — very like the Financial Services Authority after the global financial crisis. A summary of tPR’s powers is presented here.
The Regulator has very broad powers. There is a lot of misreading of the nature of the law here in social media: tPR can choose to permit actuarial valuations to take place over time and not necessarily to the strict timetable set out in the regulations. Section 6(1) of the Pensions Act 2004 provides that ‘The Regulator may do anything (except borrow money) which (a) is calculated to facilitate the exercise of its functions or (b) is incidental or conducive to its exercise’. This gives a flavour of the scope that is available to tPR to do as it sees fit in relation to the largest pension fund in the UK (i.e. USS). We should also remember that regulators are political animals and therefore being a regulator in a post-BHS environment may make tPR behave more robustly in the exercise of its powers than might otherwise have been the case. So, there is nothing necessarily compulsory in the valuation timetables and so forth — tPR has wide powers which it can use flexibly.
9. Where does that leave us?
In short, ‘is it possible that the Trustee of USS owes duties to us as members?’ Yes. The trustee owes duties under the general law to obey the terms of the trust. ‘Yes, but might the Trustee have breached duties to the members?’ In my opinion, accepting that the law is fluid and untested, yes, the Trustee might well have done.
For what it’s worth, in my personal opinion it cannot be in the best interests of the members of the Scheme to manage the trust in such a way that it generates a record-breaking deficit for any UK pension fund (allegedly as high as £17.5 billion in 2017) and it cannot be in the best interests of the members of the Scheme to operate the Scheme so that the DB element has to be closed down.
I am doing you the courtesy of not lying to you. The law is not rigid or fixed. Anyone who tells you that it is, is possibly lying to you. Alternatively, they may be allowing a conviction as to what the law ought to be (in their mind) to lead them into overstating the position. Any statutory rule, any regulatory rule and certainly any case law principle (all of which count as ‘law’) is open to interpretation and to different applications in context. That is what lawyers do.
10. The broader context of the USS dispute
Pensions law is a field which is led by specialist practitioners. That means that common understandings of what the law must be (where the position is untested) develop among those practitioners, usually where that is beneficial for their corporate clients. This is why litigation is the only way of shaping what the law ‘is’ or could become. We have to resist that corporate groupthink.
When John McDonnell spoke at the University of Strathclyde, at the University of Glasgow and at various other places, he stressed that he considered the USS dispute to be in the vanguard of a series of disputes across the UK where contractual terms and conditions and pensions rights were under attack. Consequently, the idea that we can work to establish what the law governing the rights of pensions scheme members could become is no small matter. Litigation shapes the content of the law in this way — if no-one brings these matters to court then the case law cannot change. That is why Academics for Pensions Justice are committed to doing this work.
This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series. This paper represents the views of the author only. The author believes all information to be reliable and accurate; if any errors are found please contact us so that we can correct them. We welcome discussion of the points raised and suggest that discussants use Twitter with the hashtags #USSbriefs53 and #OpenUPP2018; the author will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
