One of life’s mysteries for pension lawyers is why individuals are willing to risk their personal assets by acting as trustees in their own name. Directors of trustee companies have greater protection. Why shouldn’t those volunteering for the (sometimes thankless) task of trusteeship have the best package of protection available?

The legislative burden on trustees continues to grow, new risks emerge (cyber security, anyone?) and the Pensions Regulator’s 21st Century Trusteeship and Governance campaign seeks to improve stewardship.

It is no surprise that trustees can feel vulnerable. Yet it is vital they feel supported and able to focus on the job in hand. A confident trustee board is better equipped to make the difficult decisions involved in running a pension scheme.

A trustee is personally liable for their actions. Admittedly it is rare to face the kind of claim that would lead to personal liability, but it can happen and trustee protection is part of the journey to buyout. And the risk doesn’t die with you – a trustee’s personal representatives step into his or her shoes.

The risk can be managed by an appropriate package of protections, including exoneration clauses, indemnities, insurance and liability caps in contracts. However, care needs to be taken to avoid gaps in coverage. Perhaps it is therefore unsurprising that vacancies on the trustee board can sometime be difficult to fill.

Directors of a corporate trustee, on the other hand, can benefit from additional shelter from liability. It is the company that is liable to members and third parties, and the directors sit behind this ‘corporate veil’.

In limited circumstances beneficiaries might be able to sue trustee directors (a so-called “dog-leg” claim). A successful claim tends to require an element of fraud or dishonesty on the part of the director and so a director properly executing his or her duties might consider this pretty low risk.

That is not to say that trustee directors can sit back and relax. The company must operate as a trustee and there are director’s duties and company law restrictions around exoneration clauses, indemnities and conflicts of interest to consider. However, the corporate veil can be comforting.

Other advantages

Putting trustee liability to one side, there are other advantages to using a corporate trustee. When a trustee director leaves or joins the board you don’t need to record this by deed. Nor do you need to amend the scheme return, update the data protection register or start thinking about novating third party contracts (e.g. administration or investment contracts) because the trustee (i.e. the company) has not changed.

Establishing a trustee company is also an opportunity to re-evaluate trustee governance and the balance of powers with the employer. You can entrench voting rights in the company articles and/or establish a company independent from the sponsor (e.g. a company limited by guarantee). The trustee company can also sign deeds with just one (witnessed) signature – handy for tight deadlines!

Setting up a new company is a well-trodden path and relatively inexpensive. However, as with most things in pensions, there are certain pitfalls to avoid.

Care should be taken to ensure the scheme rules permit the appointment of a sole trustee and that the outgoing trustees are properly discharged (even if being re-appointed as directors). When the company is appointed various notifications will be required e.g. updating Exchange, the data protection register and HMRC and there will be some ongoing Companies House requirements.

But all-in-all, a well-managed conversion to a corporate trustee can streamline scheme business and enhance trustee protections. It can be a “win-win” for sponsors, trustees and members.

Anna Copestake, Senior Associate

This article was published in Professional Pensions