Trustee liabilities

Managing a scheme effectively can be challenging. It can be hard for trustees to ensure everything runs smoothly.

Most trustee boards work well and effectively as long as the rules are followed correctly and they keep within the restrictions of the legislation and scheme documents. The law requires you to appoint certain advisers and advice should always be sought before making complicated decisions.

Trustees of occupational money purchase schemes have some additional responsibilities to protect members. They mainly relate to charges and governance and are laid out in The Occupational Pension Schemes (Charges and Governance) Regulations 2015.

What is a breach of trust?

It's important to realise, however, that if anything goes wrong, you could be personally liable for any loss which you or, any trustee, cause to the scheme as a result of a breach of trust. Even if you stop being a trustee, you are still liable for the decisions you took when you were a trustee.

A breach of trust happens when:

  • you carry out an act as a trustee which you are not authorised to do under the trust deed and rules (unless agreed by the court or directed by The Pensions Regulator)
  • you fail to do something which you should have done under the trust deed and rules
  • you do not perform one or more of the duties that you have under trust law or pensions legislation

Although rare, a breach of trust could also happen through fraudulent or dishonest behaviour. More commonly, though, breaches of trust happen unintentionally. For example, this could be due simply to an administrative error or oversight.

Ensure the right procedures are in place

To stop either of these from happening, there should be adequate procedures in place for checking that those running the scheme are doing everything correctly. You can also be held responsible for a breach of trust by another trustee if you fail to stop them committing a breach.

If TPR or a court fine you as a result of a breach, you cannot pay the fine out of the scheme's assets unless the court agrees to this. However, the trust deed and rules should contain an indemnity clause which will excuse you from liability except in cases of wilful negligence or wilful misconduct meaning the employer can pay the fine, if you are sued. They may also be able to reimburse you or provide indemnity insurance.

The rules may contain an exoneration clause exonerating you from responsibility for financial loss except in cases of wilful negligence or wilful misconduct. Both of these clauses however, won't cover criminal penalties.

New responsibilities from April 2015

The Government set out measures aimed at further protecting members of occupational money purchase pension schemes These new regulations, known as The Occupational Pension Schemes (Charges and Governance) Regulations 2015, came into effect from 6 April 2015.

What are the key changes?

The key changes can be broken down into:

  • Cap charges that can be made to members invested in the scheme's 'default arrangement' in occupational money purchase pension schemes used by employers to meet their automatic enrolment duties.
  • The duties under the Regulations fall on trustees and managers.
  • If more that 80% of members are invested in an arrangement other than the default, it will be classed as a deemed default and will be subject to the same rules as a default arrangement.
  • The Regulations include three tests trustees and managers can use to identify the default arrangements in their schemes.
  • The cap introduced by the Regulations is set at 0.75% annually of funds under management, or an equivalent combination charge.
  • The measures restrict the charging structures schemes may use in their default arrangement. There are three permitted options:
    1. a charge that's a percentage of the size of the member's funds under management.
    2. a combination of a funds under management charge and a charge that's calculated as a percentage of the contributions paid into the scheme by, or on behalf of the member.
    3. a combination of a funds under management charge and a flat-fee charged to the member.
  • The measures prevent trustees and managers from switching between these three charge structures within a charges year.
  • The charge cap covers all costs and charges relating to general scheme administration and investment administration.
  • Transaction costs are excluded from the charge cap. Transaction costs are defined as costs that a scheme incurs as a result of buying, selling, lending and borrowing investments.
  • A small number of other costs do not come under the charge cap. These are the costs associated with complying with court orders, pension sharing on divorce cases, winding up a scheme, and costs solely associated with the provision of death benefits.
  • Trustees and managers can charge in excess of the cap for services which the member has agreed to. This is subject to a number of safeguards. For instance, the agreement must be in writing and state that it will result in charges that exceed the level of the cap.
  • The charge cap was not designed to cover arrangements that include a promise to the member about the benefits they'll receive. Details can be found in the regulations.
  • AMDs are banned from qualifying schemes from April 2016. AMDs may remain in place between April 2015 and April 2016. However, the charge cap itself will still apply to members in the default arrangement who stop contributing during that period.
  • The measures do not ban employers from subsidising the charges of contributing members, or prevent trustees or managers charging members at different rates, as long as the total level of charges imposed on a member who has stopped making contributions is no higher than it would be if they were contributing.
  • The Regulations set out minimum governance standards for relevant occupational pension schemes. They require trustees and managers to ensure that:
    1. default arrangements are designed in members' interests and kept under regular review;
    2. core financial transactions are processed promptly and accurately;
    3. trustees assess charges and transaction costs paid by scheme members for value for money.
  • Trustees and scheme managers must appoint a Chair (where the scheme does not already have a Chair in place). The Chair will be responsible for signing off an annual Chair's Statement on how the minimum governance standards have been met. This statement will be included in the scheme annual report and made available to members and other prescribed persons on request along with the annual report.
  • Where the trustee board governing a scheme is a corporate entity. In these case the same requirements for the minimum numbers of trustees, independent trustees, limited term appointments, and open and transparent recruitment apply to the trustee directors of the trustee.
  • Trustee boards must encourage members to make their views known on matters relating to the scheme.

How we’ve communicated the changes to trustees

Crest trustee mailing – March 2016

Mailing to Crest trustees and their advisers to confirm the outcome of our value for money review of Crest Secure and Crest Growth plans.

Crest & Retirement Solutions trustee mailing – Dec 2015

We reminded trustees of Crest and Retirement Solutions plans about their new legal responsibilities and provided more information to allow them to take action. This included confirmation of the outcome of our value for money review of Retirement Solutions plans.

One of the new responsibilities for trustees is to assess the value of costs and charges borne by scheme members. To help trustees with this we reviewed our workplace pensions to assess our own view of the value for money we provide. Trustees may wish to take account of this when forming their own views.

Pensions flexibility mailing – June 2015

We flagged up the new legislation to trustees as part of the pensions flexibility mailing in June 2015.

To find out more about the outcome of the reviews read our Trustee mailings questions & answers.

Regulations in full

We would encourage trustees to discuss these regulations with their legal and other advisers as appropriate.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.