The trustees of pension schemes may from time to time find that they have to exercise a discretion where they have a direct personal interest in the outcome of the exercise of the discretion e.g. because they are members who benefit from the exercise of the discretion – possibly at the expense of other classes of members. Can a trustee in such a situation take any part in the decision over how to exercise the discretion and still comply with his fiduciary duties to members?
The general rule is that:
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent’s, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict (Lord Herschell in Bray v Ford 1896).
Typically, however, a trust deed will contain a provision authorising the trustees to exercise discretions even where they might benefit from the exercise of the discretion. Do such clauses actually stand up to scrutiny and protect the integrity of the exercise of the discretion?
Academic views on whether such clauses can override the “inflexible rule” mentioned above vary from those who say that a trust instrument may expressly authorise trustees to act in ways benefitting themselves to others who think that there is some doubt in the case law about the effectiveness of such clauses.
It is to be hoped that such clauses do work. If they do not, it will be hard to find beneficiaries or employees who are willing to stand as trustees. It would also undermine the benefit of the member-nominated trustee provisions of the Pensions Act – the Act does not contain a statutory provision allowing interested member trustees to act notwithstanding a personal interest in the outcome of a decision.
We do not see why the Courts should not uphold the validity of such clauses. Apart from academic commentary, there are analogous situations where the cases confirm that a trust deed may provide that a trustee may benefit from his position as a trustee, such as where there is a charging clause in a trust deed allowing a professional trustee to charge for its services.
If trustees are to be asked to exercise a discretionary power in which they have a personal interest, the trustees should seek early legal advice. Rather than relying on an express provision allowing the trustees to act notwithstanding their personal interests, it may be better for a conflicted trustee to stand down or otherwise to manage the conflict. Alternatively, if this is not possible, the trustees might consider going to Court for directions before they take any decision.