"The judgment provides insight into the duties of pension trustees and fundamentally, in addressing liability, how those duties will be judged."
"The Court recognised that it is common practice for senior executives of a company to be appointed on the board of a corporate pension trustee. Such persons may experience a conflict of interest between their role on the company board and their role as trustee. Trustee decisions which need to be made for the benefit of the members of a scheme may not align with the interests of the company."
"Where trustees are faced with competing interests… the trustees may wish to apply to the Royal Court for directions."

The art of decision making by pension trustees: clarity provided by the Element Six Pension case

01 May 2014

On 4 February 2014 the Commercial Court in Ireland (the "Court") gave its judgment in Greene and Others v Coady & Others [2014] IEHC 38, otherwise known as the "Element Six" case. The judgment provides insight into the duties of pension trustees and fundamentally, in addressing liability, how those duties will be judged. The judgment also highlights the importance of pension trustees taking appropriate professional advice at all material times.

The case is of particular relevance to trustees of defined benefit schemes (namely a scheme whereby the benefits under the scheme are calculated by reference to the members' salaries). However, the principles derived from the case may well be relevant for trustees and employers of other types of pension schemes. Specifically, how much weight can the trustees give to the employer's circumstances in making decisions.

Although an Irish case, it may be of persuasive authority in Jersey. The Royal Court of Jersey (the "Royal Court") will adopt a comparative law approach, which means that where there is no Jersey precedent, the Royal Court will look to the closest jurisdiction on the issues, mostly French or English law, depending on the subject. As the case involves a pension scheme, which is held under a trust structure, the Royal Court is most likely to refer to cases in common law jurisdictions on trusts where there are no direct Jersey cases on the issue. Indeed, the paucity of Jersey pension precedent makes this an important case.

The facts
The plaintiffs in the case were the beneficiaries of the defined benefit scheme of Element Six Limited (the "Scheme") such company being part of the De Beers worldwide group with a plant in Shannon, Ireland involved in the finishing and distribution of raw industrial diamonds. The defendants in the case were the trustees of the Scheme.

The Scheme had a funding deficit of over €100 million on an on-going basis. Element Six Limited, as the employer, had entered into a funding arrangement whereby it would pay €10.725 million into the Scheme from 2009 until 2020. The employer made an offer to the trustees to close the Scheme from the end of 2011. The offer comprised a cash injection of €23.1 million to the Scheme (with €14 million to a separate defined contribution scheme). The trustees obtained advice that, if they accepted the offer, following payment of the offer the employer would remain solvent and therefore the payment would not be subject to an insolvency claw back claim. However, if the offer was not accepted and the employer subsequently went into liquidation, the trustees would be at real risk of failing to recover the funding deficit as their claim would rank alongside all other unsecured claims.

The plaintiffs (comprising 128 members) alleged that the trustees' acceptance of the employer's offer was a breach of the trustees' duties and that the trustees should have made a contribution demand to the employer in the sum of €129.2 million, representing the outstanding amounts of the contribution schedule. It was alleged that the failure to make such a contribution demand was a wilful default by the trustees.

The plaintiffs further claimed that the trustees' decision to accept the employer's offer:

  • was impaired by conflicts of interests - the board of the corporate trustee was made up of 3 members from company management and 3 members from the company's operations side. The vote had been split on the question of whether to accept the employer's offer, with the three management trustees voting in favour, and the three operational trustees voting against. The employer-nominated chairman then exercised his casting vote in favour of accepting the offer;
  • took into account an irrelevant matter by considering the potential threat that a contribution demand might pose to the future of the employer’s operations; 
  • was a decision that no reasonable body of properly informed trustees could have taken.

The Court dismissed the plaintiff's claims and found in favour of the trustees. In reaching its decision, the Court made some interesting findings, which are potentially equally relevant for trustees of Jersey pension schemes.

Where there is a conflict of interest - when will a trustee decision stand or fall?
The Court recognised that it is common practice for senior executives of a company to be appointed on the board of a corporate pension trustee. Such persons may experience a conflict of interest between their role on the company board and their role as trustee. Trustee decisions which need to be made for the benefit of the members of a scheme may not align with the interests of the company.

It is also possible that trustees will be subject to a conflict of interest where they act as trustees and are also members of the Scheme in their personal capacities.

In the current case, the Court found that the trustees at all times considered the relevant materials and were not influenced by any personal interest which they had. Therefore, objectively, the decisions they took were not tainted by conflict.

Of particular relevance, the Court held that trustees can be exonerated from conflicts by way of an exoneration clause in the trust deed. In this case, an exoneration clause was included in the trust deed. This rule is subject to an exception. If as a matter of fact, the conflict of interest makes it impossible for trustees to act in good faith and independently for the good of the beneficiaries, then their decisions cannot stand. The duty to act in good faith is the least that beneficiaries and employers are entitled to expect of the operation of the trust.

Key message: It is important that conflicts are identified and managed as soon as possible so that trustees can make their decisions in good faith and independently for the good of the beneficiaries, as otherwise their decisions could be challenged.

How should trustees make decisions?
The Court clarified that in making any decision as to the liability of trustees "it is not for the Court to be cleverer or better informed or more astute or more enquiring or better in its judgment than the trustees". If the trustees take all relevant factors into account, exclude irrelevant matters and direct themselves properly in law and in interpreting the provisions of a trust deed and rules, the Court would be unlikely to challenge the trustees' decision.

The Court referred to a line of English authorities concluding that it must remain within the ambit of the powers of trustees to weigh one factor more heavily and another less. To otherwise analyse a decision of the trustees would be for the Court to substitute its own judgment.

Once the trustees have considered what is relevant and considered how all the competing factors are to be weighted, it is not the task of a court to re-weigh the factors with the view that doing so might yield a different outcome. Therefore, a court would not interfere with trustees' decisions unless they are plainly unreasonable.

In this case, the trustees sought expert advice and on the back of such advice, the trustees decided to accept the employer's offer of €23.1 million.

Key message: Trustees should consider all relevant factors in reaching decisions and exclude all irrelevant factors. Where matters are uncertain, and where there are risks involved, it would be prudent to seek professional advice. For example, in this case, the trustees were able to show that the expert advice they sought assisted them in their decision making, which gave the Court comfort that they reached a proper and reasonable decision.

Is there a duty on trustees to apply to court for directions?
The Court concluded that whilst the trustees clearly had the option to go to Court for directions, for liability to arise the situation must be that the trustees were unable properly to make the decision. Such a situation might arise where the conflict of interest was such as, on a matter of fact and not of mere theory, to cripple or undermine the independent judgement of the trustees. Then the trustees would be unable to fulfil their basic duty of care and fidelity to the trust because, as a matter of honesty and good faith, they would be unable to exercise independent judgement on the issue in question.

However, where the decision was merely difficult to decide and where the trustees retained the ability to act in good faith and honestly, a failure to apply to the Court cannot undermine the decision of trustees unless that failure was a decision which no reasonable body of trustees could have made.

On the facts, and noting the legal advice the trustees had received on the issue, the Court concluded that it was reasonable for the trustees not to apply to Court for directions.

Key message: The trustees of a Jersey trust can apply to the Royal Court either to bless a momentous decision for a trust or for directions concerning the manner in which the trustees should act in connection with any matter concerning a trust. Where trustees are faced with competing interests such as in the present case, the trustees may wish to apply to the Royal Court for directions. However, it is important to note that the Royal Court would not exercise the decision for the trustee, but would simply consider whether the trustees' decision is reasonable. If the Royal Court approves the trustees' decision, the decision would ordinarily be safe from challenge by beneficiaries and employer. If the conflict of interest is material such that the trustees cannot exercise their powers or discretion in accordance with their duties it may be possible for the trustees to surrender their discretion to the Royal Court.

Were the trustees in wilful default of their duties for failing to make a contribution demand?
The plaintiff beneficiaries argued that the decision not to serve a contribution demand amounted to a default and that since the decision was deliberate it constituted a wilful default, which is a term which bears similarity to "wilful misconduct" as commonly appears in Jersey trust deeds.

The Court concluded that for the trustees to be liable for wilful default, the plaintiff beneficiaries must show more than that a decision not to make a contribution demand was wilful (i.e. conscious), and that a default liability only arises where that default can truly be characterised as a conscious breach of duty or a reckless breach of duty.

Key message: The question of wilful default was relevant to the trustees' exculpation clause in the trust deed which provided that the trustees could not exempt themselves from fraud, bad faith and wilful default.

Under Article 30(10) of the Trusts (Jersey) Law 1984, as amended, nothing in the terms of a Jersey trust shall relieve a trustee from liability for breach of trust arising from the trustee's own fraud, wilful misconduct or gross negligence. There is little case law in Jersey on the meaning of wilful misconduct which, whilst not identical to wilful default, clearly has similarities. The decision and review of authorities in the current case on wilful default and exculpation clauses generally may well be persuasive in the Royal Court.

Interpretation of pension deeds
The Court in this case held that pension scheme documentation should be interpreted using the principles set out in Armitage v Staveley Industries Plc [2005] EWCA Civ 792. The most relevant principles are:

  • the words in the document must be interpreted in light of the background. The background includes the rules of the scheme and any limits on the amount of benefits that can be paid out for tax purposes;
  • the interpretation must be one that is practical and purposive, rather than detached and literal;
  • if more than one interpretation is possible, the correct choice may depend on the practical consequences of choosing one interpretation rather than another;
  • if detailed semantic and syntactical analysis of words in a contract leads to a conclusion that flouts business common sense, it must be made to yield to business common sense; and
  • the ultimate question is what meaning would be conveyed to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the date of the contract.

Key message: Trustees should be careful when interpreting pension documents. Pension documents are often riddled with jargon and sometimes even words that are seemingly comprehensible may have special meanings in a pensions context. It is important that trustees seek legal advice when interpreting pension documents in respect of major decisions affecting the scheme, to ensure that their decisions are based on the correct interpretation of the pension documents.

Conclusion
The judgment provides important guidance for trustees of pension schemes as to the principles against which trustee decision making procedures when dealing with sponsoring employers will be judged.