UK: Trustee Knowledge Update

Last Updated: 18 June 2008
Article by Mark Grant

We have now published the fourth edition of our Trustee Knowledge Update. The Update aims to provide trustees with information on recent legal developments to help them satisfy their duties in relation to the requirements in the Pensions Act 2004 concerning the need for knowledge and understanding of the law relating to pensions and trusts.

Some of the key features of this Update are:


  • Proposed extension of moral hazard powers

  • Consultation on conflicts of interest

  • Revised clearance guidance


  • Consultation on GMP equalisation


  • Bainbridge v Quarters Trustees : whether a DC section was a separate fund

  • Gregson v HAE Trustees : duties of directors of trustee companies


  • Changes to the Employer Debt Regulations

  • Revised Transfer Value Regulations


A full copy of the latest edition of our Trustee Knowledge Update can be seen below:

Full Article

Welcome to the Spring edition of our Trustee Knowledge Update. The purpose behind this Update is to inform trustees about changes in the law to help them to comply with the duty under the Pensions Act 2004 for each trustee (or trustee director) to have knowledge and understanding of the law relating to pensions and trusts. It is also intended to help trustees work out what impact legal changes may have on their scheme.

Regulator (

Proposed extension to moral hazard powers: In April DWP published a consultation paper setting out proposed extensions to the Regulator's powers to issue contribution notices and financial support directions. The main proposals are:

  • Allowing contribution notices to be issued where the effect of an action or course of action is materially detrimental to the scheme's ability to pay benefits (the current test focuses on intention rather than effect);

  • Enabling the Regulator to look at a course of actions when deciding whether to issue a contribution notice;

  • Introducing a new test that could trigger the issue of a financial support direction where the employer's corporate group as a whole has sufficient resources in relation to any section 75 debt rather than looking for a single company.

These requirements are effective from 14 April 2008.

To try to ensure that the proposals did not cause undue panic, the Regulator issued a statement setting out under what circumstances it intended to use these new powers prior to the legislation being drafted. They include running a scheme for profit without taking into account the members' interests, splitting the operating company from the scheme or assets from the operating company without appropriate mitigation or moving the employer or scheme to another jurisdiction.

A full copy of the consultation report is at: powers.pdf and the Regulator's statement is at

Consultation – conflicts of interest: Potential conflicts for pension scheme trustees have become an increasingly important issue in recent years. The guidance is based around five "high level" principles which the Regulator believes need to be borne in mind at all times:

  • understanding the importance of conflicts of interest;

  • having a conflicts of interest policy;

  • identifying conflicts of interest;

  • evaluation, management or avoidance of conflicts; and

  • managing conflicts with advisers.

Clearance Guidance: The Regulator has published the final version of its revised clearance guidance. It is consistent with the approach taken in the draft and no longer refers to type B and C events. Type A events are divided into events which might affect the scheme and those which affect the employer. The guidance sets out how to identify them (focusing on the impact on security of members' benefits and the scheme's funding position). In particular, the guidance says that the introduction and operation of apportionment provisions can amount to a type A event, so trustees looking at such provisions should consider the guidance. It also explains that when a type A event has been identified, the parties need to consider whether there is any way in which its impact on members' benefits could be mitigated.

Guidance on multi-employer withdrawal arrangements: When considering withdrawal arrangements, trustees should have regard to their fiduciary duties as well as ensuring that the relevant statutory requirements are met. The Regulator is still working on more detailed guidance on trustee and employer responsibilities for employer debts, which should be available "in the coming months".

Code of Practice on dispute resolution and response to consultation: The Code says that the Regulator expects that disputes will be decided, and the applicant notified of the decision, within four months of receiving the application (where a scheme has retained a 2 stage procedure, 4 months will be allowed for each stage). Applications to use the procedure must generally be made within six months of ceasing to have an interest in the scheme. Trustees making changes to their IDR procedure need to ensure that they comply with any disclosure requirements as details of the Scheme's IDR procedure form part of the basic information which must be given to members and they should be notified of material changes to that information. Trustees will need to consider their IDR procedures at their next trustees' meeting (if they have not already done so).

Consultation - Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality: This consultation on the regulation of defined benefit pension schemes outlines a new approach to considering mortality assumptions. The proposals state that, in the context of recovery plans submitted to the Regulator: mortality assumptions that appear to be weaker than the long cohort assumption will attract further scrutiny and dialogue with the trustees where appropriate; and assumptions which assume that the rate of improvement tends towards zero, and do not have some form of underpin, will also attract further scrutiny.

Legislation (

Pensions Bill 2008: Deals with the establishment of personal accounts and miscellaneous other reforms. It will widen the Regulator's powers to appoint new trustees, and allow it to intervene where it determines that technical provisions in relation to funding have not been determined prudently.

Finance Bill 2008: The Finance Bill contains regulation making powers in relation to a number of proposals made in the budget, including:

  • allowing schemes to reduce a pension which has been overpaid but not collect the overpayment;

  • allowing payments of pension after a member's death to be treated as authorised and allowing payment of a benefit after a member's death where for some reason it was not possible to make payment earlier;

  • allowing trivial commutation of "stranded pots" of up to £2000 without requiring that the member trivially commute all benefits.

Draft regulations have been published which provide further details in relation to these issues.

Employer debt regulations: On 6 April 2008, regulations came into force which amended the regime for the payment and calculation of section 75 debts. Where employers leave an ongoing multi-employer scheme in the future, existing scheme apportionment provisions may not be able to be used.

The Regulations set out four alternative ways of dealing with debts in multi-employer schemes including apportionment and withdrawal arrangements which, if they satisfy certain conditions, do not require authorisation by the Regulator. The calculation of section 75 debts is also clarified, in particular the treatment of orphan liabilities and what happens where a buyout quote cannot be obtained.

Transfer payments: Changes to the transfer payments regime have been proposed for over a year. These regulations implement the Government's initial proposals together with some additional changes. In particular, trustees should:

  • calculate transfer values by reference to the expected cost of providing the alternative deferred pension benefits;

  • determine, on a "best estimate" basis and on actuarial advice, the actuarial assumptions to be used; and

  • be able to deduct any reasonable administrative costs. Trustees can adopt a basis that delivers more generous transfer values than "best estimate", subject to any requirements in the scheme rules. As at present, trustees have broadly 3 months from the member's application to supply the transfer quote, but the conditions under which it is possible to defer by a further 3 months have been broadened to any "reasons beyond their control".

Financial Assistance Scheme (

Draft Miscellaneous Amendment Regulations: contain various provisions to improve the FAS, including:

  • allowing schemes which started winding-up between 1st January 1997 and 10th June 2003 to be eligible for FAS where the employer has paid the relevant statutory debt;

  • allowing early reduced payment for members unable to work due to ill-health; and

  • speeding up initial payments.

Draft Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2008: These draft regulations extend FAS so that members will be guaranteed 90% (as opposed to the current 80%) of their accrued pension at the date of wind up (subject to a cap) and provide that assistance will be paid from the scheme's normal retirement age, subject to a lower age limit of 60 (as opposed to age 65 currently).

Response to consultation: DWP's response reiterates that the Government continues to believe FAS payments should only relate to periods after the date FAS was first announced (14 May 2004) but "will continue to consider this point".


Sampson and others v Hodgson (review of ill health claim and weight given to evidence)

H injured his back. In January 1994, his contract of employment was terminated on the grounds of ill health on the advice of the company doctor. H then made an application for an ill health early retirement pension which was rejected on the ground that he did not meet the ill health test. H complained to the pensions ombudsman, who upheld the complaint in 2000 on the ground that the trustees had applied the wrong test in requiring ill health to be permanent. The trustees accordingly reconsidered H's entitlement. By that stage a variety of medical opinions had been expressed as to H's condition. The trustees decided H would be allowed an ill health pension up to September 2000 but not for the future. H complained again to the ombudsman, who overturned the trustees' decision as (i) they had effectively disregarded relevant material and (ii) their decision was perverse. The trustees appealed.

The court held that the the ombudsman had confused the question of what evidence should be taken into account with the question of what weight should be given to that evidence. Provided the relevant material had been taken into account, which it had been in this case, it was for the trustees to determine its weight (including giving it no weight at all).

Gregson v HAE Trustees (duties of directors of trustee companies)

HC created a family trust holding shares in a family company. In November 2004, the family company went into administration and the property of the trust became worthless. G was a beneficiary of the trust and claimed that the trustee company H was in breach of duty in failing to review the need to diversify the assets of the trust. He also claimed that the directors of H were liable to H for breach of their duty of care to it and that such claims were property of the trust.

The court held that the scope of a director's duty was to exercise reasonable care, skill and diligence in the performance of his functions for the company. These duties were owed to the trustee company and the directors did not owe duties directly to thetrust beneficiaries. The fact that the performance of the directors' functions involved the trusts administered by H did not mean that the duties of the directors could be defined as avoiding loss to the trust.

Bainbridge v Quarters Trustees Ltd [2008] EWHC 979 (Ch) (whether a DC section was a separate fund)

The scheme was established as a DB scheme in 1989. By the time the definitive deed was executed in 1995 an additional DC section had been introduced. The rules of the DC section were set out in a booklet which said that provisions of the definitive deed would prevail in case of any inconsistencies. The windingup clause set out a priority order which did not distinguish between liabilities which arose under the DB and DC sections.

B joined the scheme as a DC member in 1998 and became deferred in 2002. The employer went into administration in 2003 and winding-up of the scheme commenced. If the scheme was a single fund, the effect of the winding up rule would be that B, as a member of the DC section, would effectively have his entitlement wiped out. He maintained that the assets of the scheme supporting DC benefits were distinct from the assets supporting DB benefits so that the former were available only to meet the DC benefits. The Deputy Pensions Ombudsman found that there was a single fund within the scheme. B appealed.

The appeal was dismissed. The court held that as a whole, the definitive deed provided for a single fund. It was also not possible for the member to rely on the booklet as a representation that a separate fund would be maintained: although the booklet read in isolation indicated that each DC member would have a separate 'Fund' allocated to him, the disclaimer made it clear that the formal scheme documentation governed in the case of any inconsistency.

Ombudsman (http://www.pensions-ombudsman.

Thompson (S00068): No general duty to warn that funding depends on employer's continued participation

The complaint was basically whether anything specifically required "members to be told, in so many words, that a scheme's funding depends on the sponsoring employer's continued participation." The Deputy Ombudsman noted that the courts have stopped short of finding a general duty on an employer to take reasonable care of an employee's "economic well-being" (as opposed to where an employer has assumed responsibility for giving financial advice). He also noted that the cases had relied upon the existence of an employment contract, but by the time the member was contemplating taking his pension, he was no longer an employee. In any case, the Deputy Ombudsman was doubtful that any duty of care would extend to providing T with an unsolicited warning that the employer's continued sponsorship of the scheme was not guaranteed. "Even if it had, there could be no requirement to issue a warning as to unforeseeable events, such as the change in legislation relating to the priority order." The complaint was not upheld.

Howard (R00697): Member can be compensated without identifying specific items of expenditure

In 2000, it had been incorrectly represented to H that his pension from the scheme would not reduce when he reached state pension age in 2005. His claim that he had relied on this incorrect quotation of benefits was that, had he known this, he would have gone to "more modest destinations" on holidays he had taken in the meantime, and would have flown economy rather than first class. He also referred to home improvements and new cars he had bought during the period before the error was drawn to his attention.

Although the Ombudsman could not be satisfied that any of these items could individually be shown to have been paid for in reliance on the error, he nevertheless decided that some award should be made: "I do not think he should not be compensated because it is impossible to identify any individual item of expenditure that would not have been undertaken". The Ombudsman said that it would not have been unreasonable for the member to have spent 3 months' worth of his future income in anticipation of its receipt, and therefore assessed his loss as £1,300. The award made for distress and inconvenience was an additional £1,000.


Consultation on equalising compensation in relation to GMPs: Sets out how the PPF proposes to deal with GMP equalisation. By law, the PPF has to ensure that equal compensation is paid to comparable male and female members. The PPF-specific solution (which TPR has indicated its agreement to) is that compensation will be equalised for men and women who have transferred in to the PPF where a comparator (defined as "someone of the opposite sex doing work of equal value") exists.

The PPF warns that: "... it is now the Board's clear view that trustees of schemes that have entered an assessment period can no longer do nothing. If they wish to avoid changing the scheme rules trustees must look for comparators and, if comparators exist, they must determine equal levels of compensation according to the Board's requirements; otherwise they must change the scheme rules so that benefits at the assessment date are equal... that male members are entitled to the same level of post-16 May 1990 benefits at the assessment date as their female comparator would be, levelling up if necessary."

Tax (

Earnings cap: The notional earnings cap for 2008/9 is £117,600.

Money laundering: Following the continued confusion as to precisely what types of paid trustees might be regarded as "acting by way of business" and so subject to the new money laundering regime, confirmation had been given that HMRC would allow businesses to apply to register as a TCSP (trust and company service providers) without penalty until 31 May 2008 (as opposed to the statutory deadline of 1 April). The Revenue has now said that it will give at least a further four weeks to register from when it publishes updated guidance. Trustees who have not yet registered are advised to wait until it is published before doing so.

Things to look out for

Maternity: Amendments to sex discrimination legislation extend the scope of rights on additional maternity leave. Where the expected week of birth is after 5 October 2008, women will have greater rights for periods of additional maternity leave: according to the Explanatory Memorandum, the new regulations "eliminate... any distinction in the types of claim a woman can bring in relation to the periods of ordinary and additional maternity leave. This means a woman may have a claim if she is not afforded the same benefits of the terms and conditions of employment during additional maternity leave as she is during ordinary maternity leave." The Government are intending to publish guidance as to how these provisions will impact on the accrual of pension benefits during maternity leave.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/06/2008.

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