When Pension Trustees get it wrong, what happens?

Posted 29th April 2022 by ctatax-admin

The answer to this question depends on a number of factors, not the least of which is exactly what the trustee has done, and their intent when it was done.

In cases such as the recent one covered by the BBC, whereby two trustees were jailed for a ‘scam’ which had defrauded millions of pounds from the pension savings of some 245 people, the reasoning is obvious and logical – these are trustees who have deliberately abused their position in order to obtain funds which have then been fraudulently distributed amongst themselves and others.

But what about when a Pension Trustee acts in a genuine fashion and still gets it wrong? What might the outcome be for you and your retirement plans? Here’s a few things you need to check in your to get that question answered:

• Liability – this is the first thing to check as the pension rules will often contain a provision relating specifically to the liability of the trustees. Obviously acting as a trustee can involve holding and investing large sums of money on behalf of others, and having unlimited personal liability for that is not usually viable. Pension rules will therefore often contain a clause which limits or excludes the responsibility of the trustees for any mistakes made in their duties. Note that this must be an honest mistake – there is no possibility to exclude deliberate wrongdoing or fraudulent actions.

This kind of ‘exoneration’ of the trustees means that in the event that they make an honest error which causes loss, that loss will be borne by the scheme itself.

• The robustness of the Principal Employer – where there is an indemnity in place – some schemes will – in addition to a rule limiting the responsibility of the trustees – contain an indemnity from the principal employer. This means that effectively where an error is made, the employer assumes the liability for the loss rather than the fund itself. You should satisfy yourself that the employer is robust and able to bear this kind of cost.

• Insurance – the pension rules may also grant the trustees power to insure against liability for their actions relating to the pension, and will usually allow for the payment of relevant premiums for this to be taken from the scheme assets. This may be provided for a number of reasons – the robustness of the employer being in question, certain limitations placed on any indemnity or exoneration and so on.

• The status of the trustees – if the trustees of the scheme are structured as a corporate body rather than being individual trustees, it may be harder to claim against them in the event of an error which proves costly.

• The history of the scheme itself – if the provider is established, it will be a matter of public record whether they have experienced previous issues, and whereas previous performance is of course not a cast iron predictor of future potential, it can give a solid indication of how the scheme may respond to issues that arise.

Ultimately, like any major financial decision, investing in a pension scheme is not something to be done lightly. This is the cornerstone of your whole retirement plan, and you need to be satisfied that it forms a solid foundation for that plan. In our experience, pension errors are more common and generally far less sinister than you might imagine. One example we have discovered revolves around transfers of property into pension schemes, where lawyers have advised trustees in good faith that Stamp Duty is due because they assume that any property transfer requires this. What we know as tax advisers is that these sorts of transfer are often Stamp Duty exempt thanks to rules relating to connected parties. This is the sort of error that can cost a scheme thousands of pounds but may be recoverable directly from HMRC as a refund if caught in time, meaning that neither the scheme nor the trustees need worry about bearing the cost of such loss.

If you would like to know more about any of the issues raised in this article, please feel free to contact us