To say that private trust law has no role to play in Occupational trust fund for beneficiaries to a certain extent cannot be true. Trust law is still relevant to a degree, but we need to supplement conventional concepts of trust law to understand the status of the beneficiary under the OPT.
The basic principle that that underpins a private trust also exists in an occupational trust fund. A private trust revolves around a model of a settlor, trustee and beneficiary. This structure is also reflected in pension funds but in a different form than private trusts. What is important in this essay is the role of the beneficiaries within the two contexts.
There is a quite distinct difference in the role of beneficiaries. The beneficiaries under a private trust are volunteers. Most of the benefits are in the form of gifts. They have little or no role to play in the in the management of the company although in exceptional cases the beneficiary can be a trustee in avoiding tax declarations.
The beneficiaries also under a private trust only owe equitable property rights in the trust fund. The trustees owe equitable obligations to the beneficiaries to obey the terms of the trust. In other words they are rights in rem and rights in personam.
The trustees therefore do have a fiduciary duty to perform in exercising their duties.
This was consolidated in the case Westdeutsche Landesbank v Islington. In this case, Lord Wilkinson stated that “once a trust is established, as from the date of establishment the beneficiary has in equity, a propriety interest in the trust property which propriety interest will be enforceable in equity against any other subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice”.
In an Occupational Pension Trust Fund, the beneficiaries are not volunteers and do not receive gifts as they are in a contractual relationship with their employers. In this situation a fund is set where contributions in the form of money are paid in by the employer and employees for their own benefit at a later stage in the form of remuneration packages. Therefore most benefits under pension funds are earned by the service of employees.
It is recognised judicially that even when an employer pays money into the scheme in respect of the employees, is not a gift. These payments or contributions are referred to as deferred remunerations under the employee’s contracts of service. There is a controversy about whether actually the employer is a settlor. Most books express this situation as the only one settlor but this is not the case in OPT because both the employer and the employees are contributors to the fund. The beneficiaries therefore occupy a position both as a settlor and a beneficiary. This is therefore the clear cut distinction as they are not volunteers but equal contributors to the fund from their direct earnings as stipulated in their contracts of employment.
There is trusteeship both in the private trust and OPT. A trust is an institution used as a vehicle to protect the property and rights of beneficiaries. They also protect the beneficiaries from fraud. In this instance the employer has the right to consult with the
employees and trustees and the decisions taken must be in the interest of the beneficiaries.
The trust is also used as a framework to protect beneficiaries from insolvency in a private trust. Unlike the OPT the trust cannot protect the employees due to their contractual relationship with their employers. Their contractual relationships are weak when it comes to the protection of assets in insolvency situations.
Member Not A Volunteer
It has been stated earlier that under an OPT a member is not a volunteer due to their contractual relationship. The members are considered to be under the principles of trust law as beneficiaries due to their financial contributions. Courts have taken this into consideration when giving decisions especially when it comes to equitable rights of the beneficiaries and this was established by Lord Werner J ‘s comments in Mettoy v Pension Trustees Ltd v Evans when he said:
“The [members’] rights have contractual and commercial origins. They are derived from the contracts of employment of the members. The benefits… have been earned by the service of the members under those contracts and, where the scheme is contributory, pro tanto by their contributions.”
This concept of a member not being a volunteer was further discussed under the OPT scheme with reference to surpluses of a trust fund. In Mettoy v Pension Trustees Ltd v Evans the company went into insolvency. It was contended on behalf of the creditors that the company do not owe an obligation to the beneficiaries but to their creditors. Lord Werner J held that the fact that the beneficiaries contributed to the scheme were not volunteers and have a right to the surpluses of the fund. He remarked by saying:
“Those rights have been earned by the service of the members under those contracts as well by their contributions. I do not mean by that that, on some defaults by the trustees, a member would have an alternative right of action against the employer in contract for payment of the benefits due to him under the scheme. I mean only that, in construing the trust instrument, one must bear in mind as an important part of the background, the origin of the beneficiaries’ rights under it.”
The decision in this case established that even though the company only owes fiduciary duties to the beneficiaries the beneficiaries also have acquired rights in the surpluses of the trust fund as well.
This argument was again put forward in the case Davis and Another v Richards & Wallington Industries Ltd and otherswhere it was stated:
“So in my opinion, the obligation to execute the definite deed could have been enforced also by the beneficiaries, the employees. In my opinion, this maxim can and should be applied in the present case.”
It was again established that the beneficiaries due to their contributions have equitable rights in the fund including the surpluses. It was also conceded that members of a fund can have some property rights and should not only merely be restricted to a contractual relationship. Therefore the fiduciary duties have to be exercised in such a way to maintain the good relationship between the employers and the employees in the interest of the company. This was lamented in the Imperial Group Pension Trust Ltd. And others v Imperial Tobacco Ltd. and others where it was clearly stated:
“The power of the company to give or withhold its consent under [a clause of the trust deed], though not fiduciary power, was that was subject to an applied obligation that it would not be exercised so as seriously to damage the relationship of confidence between the employer and the employees and the ex-employees…”
The Nature Of The Beneficiaries Under OPT
In the private trust law the members have a right in property and equitable under the rules of the trust. Under the OPT the beneficiaries fall short over property and equitable rights because of the contractual nature and agreement between the employer and the employees.
Case law shows that there are conflicts regarding the nature of the beneficiaries in pension schemes. The courts initially had inclined to hear the claims of beneficiaries of OPTs depending on particular sets of facts but these were later contended in the Re Imperial Foods where it was held that the members of the schemes were not entitled to surpluses and therefore no rights to surpluses. But in the case Stannard v Fisons Pension Trust it was upheld that the members’ “positions and expectations” were to be considered. This line of thinking was taken up in London Regional Transport v Hatt which involved a merger of two pension schemes where the rights of the employer and the employees were questioned. As far as the members’ rights were concerned it was held that “the expectations which members might legitimately harbour that discretions will be exercised in their favour where no such of breach of duty of good faith by the employer or abuse of fiduciary power is involved in the non exercise of the power.” The court came to the conclusion that the members have a right to the surpluses of the pension funds due to their expectations of having a share of the funds. The employer is entitled to the benefits of the surpluses as in Keech v Sandford and Boardman v Phipps. The employee’s rights are only procedural. The employer has then the duty in good faith to use his discretion as to the surpluses in the pension funds.
There are no further requirements to consider the status of the beneficiaries under the trust beyond the efficient running of the trust and the satisfaction of the members and the acquired rights under the scheme. This issue was considered in the National Grid plc v Laws where Walker J held that the employer is within its rights when “looking after its own financial interests, even where they conflict with those of the members and pensioners”.
The Position Of The Employer
The position of the employer with reference to traditional trusts will be that of a settlor. As emphasised in Mofatt 670
“Remember that in the classic trust law theory, the employer is the settlor. As such, it may reserve certain conditions to itself when setting up the trust. In Opt terms this equates to the retention of powers within the trust deed to, for example give or refuse consent to increases in pensions in payment, or to wind up the scheme, or to modify its terms”.
With references to surpluses in pension funds, the employer can be the title holder. He has the right to dispose of them in good faith to the employees or to retain them. The employer holds only fiduciary duties to the employees because of the contractual relation between them. This issue was considered by Lord Browne-Wilkinson in the case Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd where he rejected fiduciary responsibility over contractual rights.
The Imperial Tobacco Company (ITC) became a target for a take-over by the firm Hanson, an asset stripper. ITC was very much interested in the huge surpluses that had been invested in the trust fund but ITC was not a trustee under the scheme. Hanson’s main objective was to gain access to the cash funds derived from the surpluses.
Lord Brown- Wilkinson held that the employer owes no fiduciary duty to the employees but rather a contractual agreement based on the terms of the pension rules of the scheme as related to surpluses taken into consideration his duty of working in good faith for the interest of the company. The employer also holds this duty to them individually as established in the case Milhenstedt v Barclays Bank international Ltd.
The significance of this case was that the employer was entitled to foster its own self interest and the trust will adhere to the rules established in Keech v Sandford and Bowman v Phipps with regards to conflict of interest. It could therefore be ascertain that the employer has the right to wind up or renegotiate the terms of the contractual agreement.
Trustees Under OPTS Relevance To The Status Of The Beneficiaries
With reference to Moffat reiterated by saying:
“The trustees of OPT are in principle subject to the same kinds of duties as trustees of other types trust. They are fiduciaries and so must act with undivided loyalty in the best interests of the beneficiaries; they must administer the scheme in accordance with the terms of the trust deed. Moreover, any powers granted to them must be used for the purpose for which the power is granted and not for any other collateral reason”
The trustees in OPT owe obligations both to employees and the employer in dealing with investment and other managerial obligations. They are typically made partly of directors and the other as members of the company. Therefore the general trustee duties that are applied in ordinary trust rules are also applicable in OPT.
With reference to investments the trustee’s powers are regulated by statutory codes within the confines of ordinary trust law. Their powers of investment are regulated by the terms of the trust scheme and cannot be held accountable of duties or liabilities provided they have acted within the powers of their mandate. Therefore the manner in which the funds are invested is very important. The Pension Act 1995 outlines principles by which investments should be done. Provisions are given to what types of investment professionals are to be used by trustees. Section 34(1) of the Pension Act shows the general powers of investment and the absolute owner position.
The normal law of trust would prevent trustees from ownership and drawing benefits from the scheme because the rule of a trust is that trustees should not benefit from a trust they are trustees of. In OPTs the trustees are entitled to treat the fund as if it were their bonafide entitlement as compared to an ordinary private trust. The trustee is obliged to comply with the terms of the trust and their limits of denying any beneficiary. This difference is a result of policy grounds. The OPTs are regulated by professionals or hired professionals and should be giving a broader scope and freedoms for operations than the private trust.
Another fundamental difference between the OPT and the Private trust is the Risk factor. OPTs are regarded because of their commercial nature of investments. Trustees are allowed to take risks as long as it is in the interest of the scheme and cannot be held accountable for any loss. In private trust, trustees will be required to obtain maximum returns with little or no risks. In the case of breach of fiduciary duties like misuse of funds, the trustees are not personally responsible and they could be brought before courts for remedies. This is in contrast to private trusts where trustees are personally liable and can be brought before courts for remedies or for compensation. This concept of trusteeship therefore in the private trust cannot be an ideal model to deal with OPT’s which are commercial institutions of the 21st century when it comes to controlling by the beneficiaries. In a private trust the rights of beneficiaries are enforceable through normal trust laws with regards to the expectations of trustees but in OPT’s the trustees have a sensitive position where in they are controlled both by trustees of the fund and by the pension regulators. The breach of a malfeasant trustee will be difficult to bring action them mostly because of the size of the company and because of the limitations of the law as they obligations to the company.
If the principles of trust law are applied to OPT with regards to equitable interests in pension funds, then it will be proper to say that beneficiaries under an OPT scheme are understood to be the members of the scheme. Benefits will have to be paid in accordance with the rules set up by the scheme when they reach pensionable age. It is also possible in OPT to nominate members other than members of the scheme to be beneficiaries in instances of death under the schemes. In this regard then the class of beneficiaries will extend beyond the original members.
However there are rules now in OPTS which provide for trustees to act in such a manner if it is in the interest of the beneficiaries and the members as a whole. A regulatory structure for OPT was introduced by the Pensions Act 1995 and buttressed by the Pension Act 2004 to these reasons. Another development to ensure the level of regulating pension funds was the introduction of independent trustees known as member-nominated trustees to the boards of OPT schemes enacted in ss16 of the Pension Act 1995 and as adjusted by ss241 of the Pension Act 2004. The beneficiary principle requires that there must be somebody acting as beneficiaries who can control the activities of trustees by bringing them to court in the case of inappropriate matters and behaviours.
It is therefore evident that the private trust and OPTs laws in the light of the rights beneficiaries can be seen to have shared the same form and structure but that there are differences in their execution with references to employer and trustee roles. Marked differences further emerged with the introduction of statutory regulations of the Pension Act 2005 and the Pension Act 2004.
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