May 8, 2019

Pensions Ombudsman finds pensions trustees personally liable for investment losses

The Pensions Ombudsman has found two trustees personally liable to account for over £2.4 million of investment losses to a pension scheme. With exoneration clauses common in trust deed and rules, it is rare for trustees to be personally liable for breaches of duty. The facts are also unusual with the Scheme invested in high risk investments and it is unlikely to be a situation replicated often (if at all), but this case is a reminder that trustees cannot be exonerated for breaches of investment duties.

Fourteen members of the Henry Davison Limited Pension Scheme (the Scheme) had complained to the Pensions Ombudsman that the Trustees, Mr and Mrs Davison, had mismanaged to the Scheme's funds. Unusually, the Pensions Ombudsman held an oral hearing before issuing his final determination.

The complaints centred on the Trustees decision in 2012 to invest £1.3 million in Tivan Fiducaries SA (Tivan), a Swiss based investment manager. Tivan was to invest the funds in contracts for difference with an aim of providing an investment return of 1% plus net per month. By February 2015, a loss of £1.2 million had been incurred, of which £1.1 million related to charges. Tivan went into liquidation in 2016.

In a lengthy determination, the Pensions Ombudsman considered the duties of trustees under statue and common law:

  • Section 33 Pensions Act prevents trustees from excluding their liability for breach of duty of any investment function. This meant that the exoneration clause in the Scheme deed and rules would not protect the Trustees.

  • The Occupational Pension Schemes (Investment) Regulations applied to the Scheme in a restricted form as the Scheme had less than 100 members. However, the Trustees were still required "to have regard to the need for diversification of investments, in so far as appropriate to the circumstances of the scheme". The Ombudsman found the Trustees to be in breach of this requirement by investing all of the funds in a high-risk manner without considering diversification at all.

  • The Trustees had failed to take proper advice in writing as to the suitability of the investments, which is required under section 36 (3) and (4) of the Pensions Act 1995.

  • Investing into high-risk investments without regard for diversification showed a lack of regard for members' best financial interests and so was also a breach of the Trustees common law duty of care and skill. The agreement with Tivan was also onerous for the Trustees: there was no provision as to how assets would be returned to the Trustees or how costs would be settled other than by immediate payment of sums due to Tivan. The Ombudsman concluded that the agreement had not been properly considered and this was also a breach of the Trustees' duty of care and skill.

  • Section 34 (2) - (4) of the Pensions Act 1995 allows trustees to delegate investment decisions to an FCA authorised fund manager. The trustees are then not liable for any acts/defaults of the fund manager provided that they are satisfied that the fund manager has appropriate knowledge and experience and the trustees are monitoring the fund manager. The Ombudsman found that this could not help the Trustees as Tivan was not FCA authorised. In any event, the Trustees had not carried out sufficient due diligence on Tivan before appointing them as manager. Nor was there evidence of any delegation by the Trustees or sufficient monitoring of Titan.

  • The agreements with Tivan said "TBA" in relation to the fees and commission payable under it. The Ombudsman found that a prudent trustee would have insisted on the method of calculating fees and commission to be outlined in the agreement. The failure to document fees and commission clearly amounted to a breach of trust. The Ombudsman also held that fees and commission charges were also part of the "investment function", which meant that the Trustees could not rely on the exoneration clause in the Deed and Rules in relation to losses attributable to fees and commission.

  • The Ombudsman also found that the Trustees were in breach of trust by issuing misleading benefit statements and that Mr Davison "did choose to close his eyes and ears to the need to verify the information that he received from Tivan; this is not the behaviour of an honest person".

The Ombudsman ordered the Trustees to pay £2.4 million, plus interest at 8%, to the Scheme within 28 days of the determination.

Clyde & Co comment

This is an extreme case of Trustees failing in their duties - but the determination highlights the importance for Trustees to undertake proper due diligence and obtain written advice when making investment decisions. It also illustrates that the protection from personal liability comes from following the delegation requirements in the Pensions Act 1995. Trustee liability insurance could also provide protection, although if as in this case, the Ombudsman questions the honesty and good faith of the trustee, it could bring in to play the "good conduct" exclusion often found in such policies.

The full determination is available here.