Duties of the actuary and trustees

United Kingdom

Mark Grant considers the impact of a recent Ombudsman determination on the duties of trustees and actuaries

The Pensions Ombudsman recently considered the duties of trustees and actuaries and the relationship between them in the context of a winding up . He decided that both have an obligation to be proactive in seeking or giving advice (as appropriate) where they could reasonably anticipate problems.

Facts
In February 1991 a professional independent trustee was appointed to the Minworth scheme. In April 1991, the trustees resolved to transfer the scheme assets into cash. The employer went into administrative receivership in June 1991 and the existing independent trustee was appointed as independent trustee for the purposes of section 119 Pension Schemes Act. The trustees then resolved to wind up the scheme.

In 1993, the actuary carried out a valuation of the scheme that showed it was in surplus. The actuary pointed out that the assets were just sufficient to secure benefits and explained that buy-out costs were linked to gilts. The administrative receiver wrote to the independent trustee expressing concern and querying whether the trustees had considered matching assets with liabilities. The actuary was asked to comment and said that as things stood there was no point as the winding up was nearly completed. However, the winding up was delayed and the scheme went into deficit.

Jurisdiction over actuaries
The Ombudsman confirmed that actuaries do fall within his jurisdiction over “administrators”. The legislation defines this term as any person concerned with the administration of a scheme. He also held that maladministration will occur where an actuary fails to exercise due professional skill in discharging his actuarial functions. This is consistent with a number of previous Ombudsman rulings but is the first time a major award has been made against a firm of actuaries for failing to perform their actuarial duties adequately.

Investment duties
The complainant alleged that leaving the scheme assets in cash throughout the winding up of the scheme amounted to maladministration by both the actuary and the trustees. This raised the question of who was responsible for the investment of the assets and to what extent?

The Ombudsman’s view was that primary responsibility lay with the trustees. However, the independent trustee claimed that they were entitled to rely on the actuary who had a duty to give “ongoing strategic investment advice”. The Ombudsman decided that although actuarial guidance note GN9 requires actuaries to comment if they consider a scheme’s investment policy to be inappropriate, it applies “only to the production of actuarial reports and not general duties of an actuary” and did not shift investment responsibility away from the trustees.

Even though the independent trustee professed not to have any actuarial expertise, it had a duty to take appropriate advice. The duty of care on professional trustees is higher than that of ordinary trustees and there were enough references to asset/liability matching for the independent trustee to have been alerted to the need for further advice. In addition, although the independent trustee had been advised that the scheme was likely to wind up in surplus, this did not excuse it from a duty to “keep the investment under review and maximise the assets for the benefit of the members”.

The actuary did have “a responsibility at least to mention” to the trustees that, because of delays in the winding up, their initial advice might no longer be valid.

Transfers
The actuary should also have advised the trustees that, because of the worsening financial position of the scheme, the continued payment of transfers might adversely affect the interests of the remaining members. Failure to do so was maladministration as the actuary was clearly responsible for the calculation and payment of transfers.

Augmenting benefits
The trustees paid an enhanced transfer payment to one member. The Ombudsman decided that in doing so they were in breach of their duty to be fair between members. Although the member claimed to be legally entitled to the enhancement, there was no evidence that the trustees had sought any legal advice on the claim or to negotiate with him. The independent trustee claimed that the actuary should have told it of the effect that the augmentation would have on the scheme. The Ombudsman agreed and said that while this did not absolve the independent trustee of its responsibilities, the actuary “should have been aware of the full picture” and warned the independent trustee.

Verification of information
The actuary wrote to the scheme administrator employed by the employer, asking her to confirm that the actuary’s list of pensioners was correct. She did not respond and subsequently produced a different list including 2 additional pensioners. The actuary did not notice this. In 1995 it was discovered that 3 pensioners had not been included in the 1993 valuation.

In principle, the actuary was entitled to rely on the information supplied by the scheme administrator. However, as the actuary was clearly aware of the difficulties in obtaining “prompt and accurate” data from her, they should have been on notice to check the data and satisfy themselves it was correct. The actuary had therefore failed to “exercise due skill and care in checking the information they relied upon”.

The independent trustee also alleged that the actuary was in breach of the requirements of GN9 in failing to mention the unreliability of the data in their valuation. The Ombudsman held this was beyond his jurisdiction but he would refer the question to the Institute or Faculty of Actuaries.

Exoneration clauses
The scheme contained exoneration provisions that protected the trustees except where loss was caused as a result of “wilful and individual fraud or default on the part of the trustee”. The independent trustee was not precluded from relying on the exoneration clause as a professional trustee, although it would in the Ombudsman’s opinion be liable for breach of trust if “loss [was] caused to the trust fund because it neglects to exercise the special care and skill which it professes to have”.

Wilful default was determined to include a trustee who “consciously takes a risk that loss will result, or is recklessly indifferent”, so the question was whether the independent trustee knew it was in breach of its duties or was recklessly indifferent.

The Ombudsman decided that the independent trustee was recklessly indifferent and had no “acceptable excuse for failing to undertake its duties properly”. It should have been aware of its basic responsibilities in respect of investment. The failure to review investments was “something which a reasonably prudent professional trustee would have been aware would place the Scheme at risk”. In addition, “a reasonably prudent professional trustee would be aware that paying an enhanced transfer in respect of one member whilst the Scheme was being wound up might well put other benefits at risk”. In failing to take into account these risks, it acted with reckless indifference and could not therefore rely on the exoneration clause.

Directions
The Ombudsman made the following directions:

  • Independent trustee to pay to the scheme £66,563.14 (the amount of the disputed element of the augmented transfer payment) plus the investment return it would have earned in the scheme investment manager’s fixed interest fund to the date of payment.
  • Cash equivalents should only have been paid out at 75%. Therefore the actuary to pay to the scheme 25% of the total cash equivalents in excess of GMP paid on or after 15 December 1993, plus notional investment return.
  • Independent trustee to pay to the scheme an amount equal to the difference between the actual investment return earned from 1 May 1993 and the return that would have been earned in the scheme investment manager’s fixed interest fund over the same period, less the amount paid by the actuary above.

Practical effects
This decision illustrates the importance of ensuring that trustees, particularly professional ones, are aware of and consider exercising their powers under the scheme where necessary. The fact that a scheme may be winding up does not change this. It is no excuse to argue that the actuary should have been more proactive. However, actuaries should also beware as the actuary shared some of the blame by failing to review his previous advice.

The ruling also highlights the need for trustees to agree with advisers (and then to document) precisely who is responsible for what and to ensure that any delegations remain appropriate as circumstances change. This avoids the possibility that anyone might be confused about where responsibility lies.

Finally, trustees must be wary about giving in too easily to claims by members, especially where there is no solvent employer. A proper evaluation of the merits of the case and the costs of resolving it must be considered.