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All private sector pension schemes are founded upon tile law of trusts. Parliament has added to, or modified the common law (that is the judge made law) by Statute. The main Acts of Parliament affecting pension schemes are the Pension Schemes Act 1993 and the Pensions Act 1995 which was prised to reform pensions law following the klx»vell scandal. There are an enormous number statutory instruments but the common law is still the current which flows under this draft of legislation.

There is surprisingly little case law specific to pension schemes (compared to, say, the case law relating to emplovtnent). The Courts still rely, for back up, on 18th and 19th century cases concerning traditional trusts (which pre dominantly concerned family wealth). But the Courts recognise that pension schemes are different:

(i) benefits under pension schemes are earned by the service of members under their contracts of employment and, where the scheme is contributory, by their contributions;

(ii) The State has an interest in encouraging people (and their employers) to save for their retirement and there are tax benefits available should a scheme choose to become "exempt approved" for tax purposes.

(iii) Occupational pension schemes may also interrelate with the State pension scheme. If a scheme is "contracted out" of the State Earnings Related Pensions Scheme (SERPS) then there is another detailed body of social security law which governs the relationship between the occupational scheme and the State social security system.

(iv) there is a common professional practice relating to occupational pension schemes, arising from the work of actuaries, fund administrators and investment managers as well as lawyers. This is used as a guide to the legal regulation of pension schemes but it is not binding law.

Nine times out of ten, the answer to any question will he found in the deeds and rules..

There is a three-way relationship which lies at the heart of a pension scheme. It is triangular, with the trustees, the employer or employers, and the beneficiaries at each corner. The trustees have rights and obligations in their relationship with the employer, and in their relationship with the beneficiaries, which must he considered separately.


The basic concept of a trust is that one party (the trustees) holds property donated by another (the employer and employees in a pension scheme). It holds that property for the benefit of a third party (the beneficiaries). Although the trustees own the property, it is not theirs to do with as they wish

They hold the property and must invest and manage it in the best interests of the beneficiaries. The beneficiaries are the active employees the pensioners, deferred pensioners and widows, widowers and dependants who are entitled to benefit from the pension trust. The interests of these various groups are not necessarily the same. Active employees have an interest in minimising their own contributions: the other groups of beneficiaries pay- no contributions. Active employees have an interest in ensuring that the employer continues in business: that is less important to the other groups. Different benefit improvements might be given to different groups. The trustees must look to the interests of each group and balance them.

Best interests, for these purposes, are the interests of the beneficiaries under the pension scheme. The object of the scheme is to provide financial benefits and so the duty to act in the best interests of the beneficiaries therefore means the trustees must act in such a way as to maximise the assets available to provide those benefits.

It is not enough for the trustees to act honestly; they must act "prudently".

The Pensions Act 1995 has reinforced the obligations placed upon the trustees, so far as investment decisions are concerned. Whilst, as a general rule, the deed and rules can limit the liability of trustees (by exonerating them for any losses caused by negligence) it is not possible to exclude the trustee's liability for negligence in investment decisions in this manner. That is provided for in Section 33 of the Pensions Act 1995. However, Section 34 gives the trustees a statutory right to delegate investment decisions to it fund manager or committee, and Section 34 says they will not be liable for the act or default of any fund manager provided that they have taken all reasonable steps to satisfy themselves that the fund manager has the appropriate knowledge and experience and is earning out his or her work competently. In other words, they must take care in ensuring that a proper person is appointed, and they must take care in supervising the manner in which he or she carries out the task of investment.

This obligation to take care is further regulated by Section 35 which requires the trustees to draw up statement of investment principles setting out their policy regarding the kind of investments that they will make, and the balance between different kinds of investments. They must take advice when deciding whether an investment is satisfactory and that advice must be given in writing or subsequently confirmed in writing. The policy which the trustees will follow in obtaining this advice must also be contained in the statement of investment principles.

Most of the duties of the trustees are administrative. They must follow the word of the deeds and rules to the. letter (and they must ensure that others do so as well - particularly the employer). They must see that investments are properly made as outlined above; they must ensure that benefits are paid properly and promptly: and they must ensure that contributions are paid on time. They will also have discretionary decisions to make.

In a well drafted scheme, the manner in which these discretionary decisions am to be made will be defined in the scheme itself. In particular, the documents will show whether the decision in question has to be taken by the trustees; in other words, must they consider the question and give a "yes or no" answer or is it a matter left to their discretion?

A discretion once exercised is not easily set aside: the Courts take the view than if the trust deed and rules give the decision making power to the trustees, then the Court should not exercise it for them. There are some important exceptions:

(i) the decision mast be made by the right person. There have been cases, made by people who were not in fact the trustees (or all of the trustees).

(ii) The trustees must observe the limits on any discretion given to them. If, for example, the trustees have a power to pay benefits to a "dependant" they may not give benefits to someone who is not, in fact, dependant upon the deceased member in question.

(iii) If trustees take some action without realising that there is, in fact a decision to be made then the action may be set aside. The typical case is where documents are prepared by an insurance company or advisers and trustees sign them without an attempt to read or understand them.

(iv) If the trustees are given a power then they may only use it for the purpose for which it was

given. The typical case is where the trustees join in the amendment of a scheme in a manner which is designed to protect the employer from the hostile takeover bid: any power of amendment is given to the trustees for the purposes of the scheme and that means the provision of pensions and other benefits to scheme members. The power of amendment is not given to the. trustee s with a view to protecting the employer.

(v) More obviously, decisions can be set aside if, for example, they are taken in bad faith.

Trustees must also tell the beneficiaries what is going on, but within certain limits. The Disclosure Regulations require the trustees to give a members booklet and details of their benefits, and to make their annual report, accounts and the trust documents available to them and to recognised trade unions. The trustees must tell the beneficiaries if and when the become entitled to scene benefit (or use their best endeavours to do so): they must not simply wait until the member asks them if they are entitled to benefit.

There is no general obligation for the trustees to make information available to the beneficiaries, however, regarding the manner in which the trustees administer the scheme. They, need not disclose minutes of trustee meetings, related to the discretionary decisions which they make.

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Pensions and the Law

Once you've survived the formula which tells you how little you get after all these years, you may well be concerned about the legal framework in which pensions are governed, inparticular pension funds.

The text on this page is provided by Thompsons Solicitors, for which we are most grateful. If further advice is required, their Head Office is to be contatced on : 020 7637 9761

If further copies of this text are required, you may contact them or download this material using Acrobat Reader

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The relationship which exists between the trustees and the employer is defined first and foremost by the trust deed and rules themselves. When pension lawyers talk about the "balance of power" they are talking about the powers of the trustees and of the employer, and the manner in which each keeps the other in check.

The most important powers, for these purposes, are:

(i) the power to wind up the scheme;

(ii) the power to amend the scheme;

(iii) the power to set the employer's contribution; and the power to dispose of any surplus;

(iv) the power to make discretionary payments (such as ill health benefits); and

(v) the power to fix the amount of any transfer values which are paid.

The employer usually reserves the power to decide whether or not to allow an employee to

join the scheme in tine first place.

It used to be the case that the employer could also reserve the right to appoint the professional advisers to the scheme.

This is no longer possible. Section 47 of the Pensions Act 1995 requires the trustees to appoint an auditor and an actuary. If the scheme has investments, these are regulated by the Financial Services Act 1988 and the trustees must appoint a separate fund manager. The actuarial appointment must he given to a named individual, not a firm or company, but a company or firm can he appointed as auditor and investment manager.

Legal advisers are dealt with slightly differently. The trustees do not have to appoint solicitors and one firm of solicitors commonly advises the trustees and the employer. The trustees should appoint their own solicitors, either using the same firm as the employer and relyng upon the solicitors to inform them if, there is a conflict of interest; or appoint another firm altogether.

Whatever the deeds and rules provide for, this balance of power is shifted in favour of the trustees by the Pensions Act 1995:

(i) Section 67 limits the power of amendment. If there is even the possibility that accrued rights or entitlements will he affected, then the power can only be exercised with the trustees' consent

(ii) For some purposes, the trustees also have unilateral power of amendment, by resolution, whatever the scheme says. An example is to implement rules requiring equal treatment, between the sexes, relating to the terms upon which they may become members of the scheme and the manner in which they are treated as members.

(iii)The previous law allowed the employer, when drafting the scheme, to set the order of priorities on winding up. This order or priorities is now dictated, in part, by Section 73. The order is:

(a) benefits derived from additional voluntary contributions;

(b) benefits already in payment (excluding pension increases);

(c) pensions clue to other beneficiaries. (Active employees, for example, or deferred pensioners and their families) including the return of contributions to members with less than 2 years service and finally

(d) increases to pensions.

If there is still any surplus left over, then all pensions and prospective pensions must be increased at least in line with inflation or 5%, -whichever is higher; and only then can any surplus be refunded to the employer (after prior notice has been given to the members).

(iv) the power to make a refund of surplus from an ongoing scheme to the employer is also limited by the legislation (that is a cash payment to the employer, not the power to grant a contribution holiday).

The fundamental obligation which the employer owes to the trustees is to pay employer's contributions and the contributions which the employer deducts from employees' pay, as employee contributions. It is now a criminal offence to deduct employee contributions and not to pay them over to the trustees within 19 days or the end of the month in which they were deducted.

The trustees must also draw up a schedule, and attempt to agree it with the employer, specifying the contributions which the employer must make, and the timetable when the payments must be made. If the schedule of contributions is not honoured, the trustees are required under Section 59 to give notice to OPRA within one month, and to the scheme members within three months

Employer trustees wear two hats (as, indeed, do member trustees or trade union nominees). But it is very clear that when the people concerned are acting on trust business they must leave their function as employer at the door. All trustees must act in the best interests of the beneficiaries and for this reason, whatever the 1aw says about the power to act by majority trustee decisions are usually taken uuanimouslv and if there is a split between employer and employee representatives, it is a strong indication that one side or the other is acting in the sectional interests of the body which appointed them.

It used to he the case that the employer could exercise some residual control by virtue of the usual arrangement that the trustees were appointed, and could he removed by the employer.

The employer's power to appoint the trustees is now significantly constrained by the obligations teased upon the trustees (not the employer), under Sections 16 to 21 of the Pensions Act 1995 to appoint member nominated trustees (or member nominated directors in the case of the trustee company).

The provisions are extremely complex but to summarise them:

i) Unless the employer opts out, at least one third of the trustees/directors must he elected by the members of the scheme, with a minimum of two (one in a scheme with less than 100 members).

ii) The employer can opt out by making "alternative arrangements". These will only apply if they are approved by the members of the scheme.

iii) If the employer makes no proposal, or if a proposal is not accepted, the trustees have their own power to adapt the statutory regime.

Ultimately, control of the scheme almost inevitably rests with the employer at least to this extent: it is only in the rarest of cases that the employer's right to terminate the scheme is constrained by the need to obtain trustee consent (or is constrained by any provision in the contracts of employment of the members).


The relationship between the employer and active employees is, of course, dictated by the terms of the contract of employment. The relationship between the employer and other beneficiaries (former employees, and family

members) is probably also dictated by the contracts of employment which formerly subsisted. Usually, the employer's obligations to the members of the scheme are limited not by an express provision, but by the implied obligation of good faith.

It is a breach of good faith to make blanket decisions regarding the manner in which the employer will exercise its discretion for the future: each case must be looked at on its own merits. A typical case is where the employer decides that it will never approve ill health retirements based on, for instance, chronic fatigue syndrome.

Quite apart from the obligations which the employer owes under the contract of employment, the members of the scheme have an independent right to enforce the provisions of the deeds and rules. If the employer is in breach

of those obligations, or of its statutory obligations, the members of the scheme may enforce them by commencing proceedings in Court or by making complaints to the Pensions Ombudsman.

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