You Become a Fiduciary the Moment You Take Office
A pension scheme trustee is a fiduciary. That status attaches on appointment, whether you are a professional trustee with fifteen board seats or an employee who was elected as a member-nominated trustee last month, and it does not scale with experience.
Being a fiduciary means the law holds you to duties of loyalty and good faith that go beyond simply managing someone else's property carefully. Those duties come from centuries of general trust law, and for pension schemes they are then overlaid, and in places overridden, by statute. The Pensions Act 1995 and the Pensions Act 2004 are the two that do most of the work.
This post walks through the core duties, the decision-making standard the courts apply, and where personal liability sits. It is written for trustees and for people preparing for the Award in Pension Trusteeship, where this material makes up a large share of the first learning outcome.
The Duty to Act in Beneficiaries' Best Interests
The central duty is to exercise your powers in the interests of the beneficiaries as a whole.
The leading statement of this in a pensions context is Cowan v Scargill [1985] Ch 270. The case concerned the National Union of Mineworkers' scheme, where union-nominated trustees refused to approve an investment plan for policy reasons unrelated to financial return. The court held that the trustees' paramount duty is to act in the best interests of present and future beneficiaries, and that where the purpose of the trust is to provide financial benefits, "best interests" normally means best financial interests, judged by reference to risk and return.
Two misreadings of that case are worth heading off.
It does not mean trustees must maximise returns without regard to risk. The judgment is about the basis on which the decision is taken, and a reckless pursuit of return is no more defensible than a refusal to invest.
It also does not mean trustees must do whatever most members would prefer. Best interests is an objective standard applied by the trustees, and it is not a popularity contest.
The Duty to Act Impartially
Trustees must hold the balance fairly between different classes and generations of beneficiary. Active members, deferred members and pensioners frequently want different things, and a trustee board cannot simply pick a favourite.
What impartiality does not require is identical treatment. Edge v Pensions Ombudsman [2000] Ch 602 settled this in the Court of Appeal. Trustees of an industrial training board scheme had dealt with a surplus in a way that benefited active members more than other classes. The court held that the duty of impartiality is the ordinary duty to exercise a power fairly and for the purpose for which it was given, taking relevant matters into account and disregarding irrelevant ones. A decision that happens to favour one group over another is not a breach if the process was proper.
That is a useful principle for trustees and a favourite of exam writers, because the intuitive answer ("everyone must be treated the same") is wrong.
The No-Profit and No-Conflict Rules
Two of the strictest rules in the whole of trust law apply to pension trustees.
The no-profit rule says a trustee must not take an unauthorised personal profit from their position. The no-conflict rule, sometimes called the self-dealing rule, says a trustee must not put themselves in a position where their personal interest, or a duty owed to someone else, conflicts or might possibly conflict with the duty owed to the beneficiaries.
Both trace back to Keech v Sandford (1726), and what makes them strict is that honesty is not a defence. A trustee who acts in complete good faith, and where nobody suffers any loss, must still account for an unauthorised profit. The rule exists to remove the temptation rather than to punish the outcome.
Conflicts of Interest in Practice
Modern trustee boards do not manage conflicts by pretending they do not exist. Employer-nominated trustees are usually employees of the sponsor. Professional trustees hold multiple appointments. Member-nominated trustees are scheme members whose own benefits can be affected by a discretionary decision. Conflicts are structural.
Two points define how they are handled.
A conflict is not itself a breach. Holding a conflicting interest is normal. The exposure comes from failing to identify, declare and manage it. Exam questions in this area are frequently built around the assumption that the presence of a conflict is automatically fatal, and it is not.
Your duty runs to the beneficiaries regardless of who nominated you. An employer-nominated trustee does not act for the employer once in office. This is probably the single most heavily tested point in this part of the syllabus, and it is also the one that causes the most difficulty in real boardrooms.
The Pensions Regulator expects a trustee board to have a documented conflicts of interest policy and a maintained register of interests, and to have a process for identifying, evaluating and managing conflicts as they arise, including excluding a conflicted trustee from the relevant discussion and vote where necessary. That expectation flows from the statutory requirement in section 249A of the Pensions Act 2004 for an effective system of governance including internal controls, so it is more than housekeeping.
Resignation is rarely the answer. Declaring, recording, and standing out of the specific decision usually is.
Taking Advice, and Still Deciding Yourself
Trustees are not expected to be actuaries, investment managers or lawyers. They are expected to get proper advice and then apply their own judgement to it.
For investment decisions the requirement is statutory. Under section 36 of the Pensions Act 1995, trustees must obtain and consider proper advice before investing, from a person they reasonably believe is qualified by ability in and practical experience of financial matters and has appropriate knowledge and experience of managing investments for schemes of that kind. General financial advice does not satisfy it.
Outside investment, the expectation is a general one drawn from the duty of care: inform yourself properly, proportionate to the significance and difficulty of the decision, before exercising a discretion.
What advice never does is transfer the decision. A board that rubber-stamps a recommendation without applying its own mind has still failed to exercise the discretion, and the adviser it deferred to holds no fiduciary duty to the members.
How the Courts Review a Trustee Decision
Two doctrines matter here, and the APT expects candidates to be able to apply both.
The rationality standard. Following Braganza v BP Shipping Ltd [2015] UKSC 17, a decision-maker exercising a discretion must take relevant matters into account, disregard irrelevant ones, and must not reach an outcome no reasonable decision-maker could reach. Braganza is not itself a pensions case, and it is examinable because that approach has been applied to the review of pension trustee discretions. Note what the standard reviews: the process and the outer bounds of the outcome, rather than whether the court would have decided the same way.
The proper purpose doctrine. A power must be used for the purpose for which it was given. A decision can fall within the literal wording of a power and still be invalid if the purpose was collateral. The leading modern illustration is British Airways plc v Airways Pension Scheme Trustee Ltd [2018] EWCA Civ 1533, where the trustees used a power to change the index for pension increases, originally intended to deal with the possible discontinuation of the Retail Prices Index, in order to award a one-off above-inflation increase. The Court of Appeal held by a majority that the power had been used for an improper purpose, because the trustees had moved from administering the scheme's benefits into scheme design, which was the employer's function.
The practical consequence of both doctrines is the same: minutes matter. A contemporaneous record of what was considered, what advice was taken and why the board decided as it did is the evidence that defends the decision later.
Powers, and the Duty Not to Fetter Them
Most trustee powers come from the trust deed and rules rather than from statute, which is why there is no universal list. Statute then supplements them, for example through the Trustee Act 2000's default powers where the deed is silent, and restricts them, for example through section 67 of the Pensions Act 1995 on amendments affecting subsisting rights.
One general rule applies to all of them. A trustee cannot fetter a discretion by binding themselves, or a future board, in advance as to how it will be exercised. Agreeing now how you will vote on next year's augmentation request is not efficiency, it is a failure to exercise the discretion at the time it falls to be exercised. A rigid blanket policy applied without genuine consideration of an individual case can have the same effect.
On a related note, the common-law default that trustees must act unanimously does not apply. Section 32 of the Pensions Act 1995 allows decisions by majority unless the scheme provides otherwise, subject to any quorum the trustees set and to giving notice of decision-making occasions so far as reasonably practicable.
Personal Liability, and the Protections Against It
Trustees are personally liable for breach of trust, and that liability is in principle unlimited. Three mechanisms manage the exposure, and it is worth keeping them distinct.
- Exoneration removes or limits liability before it arises, through a clause in the trust deed.
- Indemnity reimburses a trustee after a liability has arisen, from scheme assets, from the employer, or both.
- Trustee liability insurance puts the cost onto an insurer, subject to the policy's limits and exclusions.
Three limits on those mechanisms come up repeatedly.
No exoneration clause, however drafted, can protect a trustee against their own fraud or dishonesty. Section 33 of the Pensions Act 1995 makes liability for breach of the trustees' investment-related obligations non-excludable, so a deed purporting to exclude liability for negligent investment decisions does not work. And a civil penalty imposed personally on a trustee by The Pensions Regulator is treated as falling outside what scheme assets, indemnities or insurance can properly cover, because meeting it from somewhere else would defeat the point of a personal sanction.
There is also a funding dimension that trustees of underfunded DB schemes should keep in view. An indemnity paid from scheme assets reduces the assets available to secure members' benefits. An employer-funded indemnity does not.
Where This Sits in the APT Syllabus
Almost everything in this post falls within the first of PMI's seven learning outcomes, which covers the law relating to trusts and accounts for 18 of the 92 published assessment criteria. On Trustee Prep it maps to trust law and the role of the trustee, and in particular to the units on fiduciary duties, conflicts and decision-making and trustee powers, advisers and protection.
If you are new to the qualification, our guide to the Award in Pension Trusteeship covers the format and the sitting dates, and our post on trustee knowledge and understanding covers the statutory duty that sits behind all of this.
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Trustee Prep is an independent practice platform and is not affiliated with or endorsed by the Pensions Management Institute, the Association of Professional Pension Trustees or The Pensions Regulator. This post is exam revision and general background, and it is not legal advice on any particular scheme or decision.
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