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Individual trustees at more risk of legal action

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  • Individual trustees at more risk of legal action

UK - A recent legal judgement could mean individual trustees are more at risk of legal action from scheme members than corporate trustees, Wragge & Co has warned.

The law firm suggested the current economic conditions are prompting more pension trustees to review their own personal liability positions, as it warned while good scheme governance reduces the risk of claims "even the very best governed schemes" can experience a claim from members.

In an analysis it revealed since the 2008 decision in Gregson V HAE Trustees Limited, corporate trustees are "safer from direct liability" than individually appointed trustees.

Previously, the general rule was both corporate and individual trustees are "personally liable" to beneficiaries, such as scheme members, for their actions. However because a corporate trustee, unlike the directors, is not likely to have assets of its own to pay damages if a member wanted to sue a director it has to make a "'dog leg' claim".

This where the member claims the director breached its duty to the corporate trustee, and the trustee's right to sue the director for that breach is 'trust property' so therefore members of the pensions scheme can also sue.  

Wragge & Co said while this "'dog-leg' mechanism for a claim has been looking a bit weak and sickly in recent years", the decision in Gregson v HAE Trustees Limited "weakened its position yet further and all but effectively killed it".

In this case, the court stated the use of a corporate trustee separated directors from the beneficiaries, and because the 'dog leg' mechanism would cut through the corporate veil it could not be allowed.

Although this case specifically related to a private trust, not a pension, Wragge & Co said it means "a director of a corporate trustee is almost certainly safe from direct attack by a beneficiary" as the language used by the court "makes it seem unlikely a dog-leg claim could ever succeed".

That said, it admitted the director is not immune as the corporate trustee still has a claim against them for breach of duty and could sue them to recover assets for the pension fund, but despite this it suggested trustee boards composed of individual trustees might want to consider incorporating it so they "sleep better at night".

The analysis of trustee liability follows comments from both the government and the financial regulator suggesting that trustees and institutional investors need to improve governance, as they were partly responsible for the financial crisis. (See earlier IPE articles: Myners wants legal governance duty for managers and FSA attacks investors for not doing enough)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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