Pension trustee decision-making: Fishing for a solution?

Pension trustee decision-making: Fishing for a solution?

Published:

Author: Jacqui Piper

On 9 May, the Supreme Court gave judgment in the cases of Futter and another v HMRC and Pitt and another v HMRC. These cases are very similar and deal with decision-making by pension trustees.

Background

Historically, trustees have sometimes used what is known as the Rule in Hastings Bass to allow them to unwind decisions where, for example, a drafting mistake in trust documentation is discovered, without the need to resort to the costly and time-consuming process of rectification.

Essentially, what the Rule has been interpreted to mean is that if trustees do not take into account all relevant factors, or do take into account irrelevant factors, when making a decision, and the effect of that decision is different than they intended, then that decision can be treated as if it had not been made. The scope of the Rule has been narrowed by the Supreme Court's judgment.

The main area where this Rule has been used is where trustees have made decisions which have then had unforeseen tax consequences. HMRC felt that the Rule was being stretched too far and therefore commenced consolidated proceedings in these two cases.

In the case of Futter, the trustees of two non-UK resident trusts, following erroneous legal advice, had exercised their powers to distribute capital to the beneficiaries in the hope that they would benefit from tax advantages by offsetting the trust gains against personal losses. However, this was not actually possible. The facts of Pitt differed slightly in that the actions were taken by a receiver. However, he had also acted on professional advice.

Court of Appeal

When the cases came before the Court of Appeal, the Court held that the Rule was much narrower than had been originally interpreted by the courts and concluded that:

  • where a trustee's act is outside the scope of his powers (for example if there is a defect in the exercise of that power or it consists of a fraud on the power) the act is void (of no legal effect); but
  • where the act is within the scope of the trustee's powers, but he either takes into account an irrelevant factor or fails to take into account a factor that is relevant, the act may be voidable, but only if it amounts to a breach of fiduciary duty by the trustee (eg if the trustee fails to inform himself properly as to the class of beneficiaries and as a result exercises his powers inappropriately). Such an act will be valid unless and until a successful application is made to set it aside, usually at the instance of a beneficiary
  • a trustee will not be in breach of his fiduciary duty if he takes into account the advice of a professional adviser, even if that advice subsequently turns out to be incorrect
    The Court of Appeal held in Futter that the trustees acted within their power, so their action was not void. They took proper advice and did not act in breach of trust, so their actions were also not voidable. Any remedy would therefore have to be pursued against the trustees or their professional advisers.

Supreme Court

In the Supreme Court, the appeals against the decision of the Court of Appeal in favour of HMRC on the above point were dismissed. The Court said that for the Rule to apply, 'the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty'.

It was held not to be sufficient to show that the trustees' considerations have simply fallen short of the required standard. The Supreme Court did not, however, go as far as the Court of Appeal in relation to the point about acting on professional advice, recognising that redress cannot always be achieved in these circumstances by pursuing a claim against the advisers.

The Pitt case also considered an application for rescission on the grounds of mistake. On this point, the Court of Appeal had dismissed the application for rescission saying that it could only be granted if there was a serious mistake as to the nature of a transaction and not as to its consequences.

The Supreme Court however, allowed the application and set aside the trust on the grounds of mistake. It said that 'the requirement for rescission on the ground of mistake is simply for there to be a causative mistake of sufficient gravity'.

So the mistake does not have to relate to the nature of the transaction. Having said this, other case law has indicated a limited liability to set aside a rule of a pension scheme on grounds of mistake.

Summary

The decision by the Court of Appeal, as upheld by the Supreme Court, on the scope of the Rule should now provide certainty as to the extent of when a decision may be set aside by the Courts. The narrowing of the Rule by the Courts does mean that scope for reliance on the Rule by trustees will be more limited.

Given this and the decision in a previous case, Smithson v Hamilton, where the use of the Rule as an alternative to rectification in the pensions context was rejected, the use of the Rule must be considered limited in such a context.

In Smithson, the Rule was described by the judge as a 'blunt instrument' on the basis that applying the rule would set aside a trustee decision without putting anything in its place.

In practice, other remedies such as rectification may be more likely to be appropriate where a problem is identified in the drafting of a pension scheme document and the Courts have recently shown a willingness to take a practical approach to such circumstances.

The two recent cases concerned unforeseen tax consequences, but the decision will have much wider effect.

If you are concerned about how this decision might affect your scheme, please call your usual Shoosmiths contact or one of our Pensions specialists.