A determination by the Pensions Ombudsman concerning the Barnado Staff Pension Scheme has raised concerns over the practical arrangements which many trustee bodies have in place for exercising discretions given to them by their scheme rules

United Kingdom
Delegation of trustee discretions

Mark Atkinson reconsiders the Pensions Ombudsman's determination in Kennedy v Barnardo Staff Pension Scheme

A determination by the Pensions Ombudsman concerning the Barnado Staff Pension Scheme has raised concerns over the practical arrangements which many trustee bodies have in place for exercising discretions given to them by their scheme rules.

The background to the case

Half of the trustees of the Barnardo Staff Pension Scheme were appointed by the employer and half by active members. The quorum for meetings was one employer trustee and one member trustee. Trustee decisions at a meeting were to be by majority of those present and voting. Where only two trustees were present, unanimity was required. Written resolutions were also possible if notice was given to all trustees and a majority signed.

The trustees had power to delegate any powers, duties and discretions to any person they thought fit.

In May 1994 the acting pensions manager wrote to two of the six trustees informing them of the benefits payable on the death of a scheme member, Mr Kennedy. One was the chairman of trustees (and was an employer trustee) and the other was a member trustee.

The memo to the two trustees set out the facts, recom-mended to whom the benefits should be distributed and required the trustees to indicate their decision. Both trustees signed separate copies of the memo but only one noted his decision, using the word "agreed".

At a trustee meeting two months later the distribution of death benefits was noted. The lump sum had already been paid to the member's widow in line with his expression of wish form.

The Ombudsman received a complaint from the three children of the member's first marriage. They claimed that given their state of dependency on their father (they were all teenagers in full-time education and had relied on his maintenance payments) they should have had a share of the lump sum. They argued that the trustees had not properly ascertained their financial circumstances.

The question whether the trustees had properly delegated their death benefit discretion became an issue in the case. The trustees claimed that their discretion had been properly delegated and that the trustees at the subsequent meeting had effectively ratified the decision. To support this contention the trustees provided minutes of a trustee meeting in 1981 stating that payment of a death benefit lump sum may be made "with the consent of one employer and one member trustee" where there were "no difficulties in establishing the rightful beneficiary ..."

The trustees argued that in the light of the facts provided by the pensions manager the decision by the two trustees was procedurally correct. They also argued that the case had been properly reviewed at the subsequent trustee meeting.

The children essentially argued that it was not a straightforward case and therefore the case did not fall within the 1981 "delegation". Also the decision could not have been made at that next trustee meeting because the lump sum had been paid two months before the meeting.

The determination

The Ombudsman did not accept that the 1981 minute was an effective delegation. He did not explain this conclusion.

He also decided that the memo to the two trustees could not be regarded as a trustee meeting. Neither could it be regarded as a written resolution as under the scheme rules notice would have had to be given to all the trustees, not just to two of them.

There was no documentary evidence that the trustees had intended to exercise their discretion or to ratify an otherwise invalid decision at their meeting in July 1994. Therefore the trustees had not actually made a decision regarding the lump sum benefit. The Ombudsman did not base his determination on the merits of the decision, but on his analysis that the trustees had not followed the right procedures.

The Ombudsman also noted that the trustees had discretion to share the lump sum between a number of beneficiaries; they were not limited to paying the whole amount to only one, as seemed to be implied by the pensions manager's memo.

The Ombudsman directed the trustees to use their best endeavours to recover the invalid lump sum payment made to the widow nearly four years previously. As more than 2 years had elapsed since the member's death, the rules provided that the lump sum now had to be paid to the member's estate. Under the terms of his will as summarised by the Ombudsman, this meant the sum should be held on trust for his three children and his step-daughter.

Useful lessons

The arrangements operated by the Barnado Scheme trustees reflect the manner in which many schemes across the country exercise discretions on lump sum death benefits. Given the sizeable lump sums being paid out in this form and the readiness of disappointed parties to resort to official complaints, certainty in the exercise of discretion is very important. Until the decision of the Ombudsman in this case is clarified, trustees must consider very carefully whether their procedures are unimpeachable.

One puzzle is why the Ombudsman decided that the 1981 minute had not validly effected a delegation. There is no clue in the determination itself. However, there are still a number of important lessons that can be drawn from the case, if only for good practice.

  • It should be made clear which decisions should be made by the full board of trustees and which by a smaller number. The trustees should be able to point to an unambiguous trustee resolution, either signed by all the trustees or passed at a full trustee meeting, which delegates powers to a subcommittee or any other person.

  • In Barnardos, the trustees claimed that they discussed the case at the next trustee meeting, but could offer no evidence of this and the Ombudsman clearly did not believe them. There was nothing in the trustee minutes. Trustees do not need to disclose the reasons they may have for coming to a decision. Nevertheless, there may be circumstances in which it is useful to have a record even if it does not have to be shown to anyone. Even if reasons are not given, a note that a discussion has taken place and a note of the evidence that was considered could be useful.

  • Where there may be competing interests, eg. more than one dependant, it is important that the circumstances of each are considered. In particular, if each is given an opportunity to say why a decision should be made in their favour, the trustees cannot be criticised for failing to take into account relevant considerations.

  • There are two sides to every story. The two trustees had been told by the pensions manager that the member's widow had contracted multiple sclerosis 15 years previously which had impaired her earning ability. The member's children pointed out that her condition had been kept under control during those 15 years, she had not been incapacitated and ran a busy counselling practice.

  • When a lump sum death benefit is to be paid, it does not need to be paid to one person to the exclusion of another. The amount could be split amongst several dependants or paid to a trust. Where, for example, an elderly relative is involved, it may be appropriate to put the sum on trust for him or her to enjoy the interest on the sum, but on death the capital could be paid to other dependants of the deceased.

  • There will always be an element of doubt where it is stated that decisions may be delegated in straight- forward cases. There can always be a difference of opinion as to whether there is more than one rightful claimant. The danger is that the relevant subcommittee may have taken account of all possible claimants and decided that one was a clear choice, but a disappointed beneficiary may still claim that, because there were "difficulties", they were the wrong body to decide the issue, thus rendering the delegated decision invalid.

  • If a decision is to be "ratified" at the next full trustees' meeting, it may not be enough to "note" that something has occurred. If a decision is to be ratified, all the trustees at the meeting should have the necessary information to approve the decision. On the other hand, if a decision has properly been left to two trustees alone, it should not need to be ratified.