No more magic wand on pension advice

ADVISERS could find themselves more exposed to litigation from pension scheme and other trustees following a Supreme Court ruling which limits the scope for the courts to unwind decisions taken on the basis of professional advice.

Previously trustees could seek the help of the courts to “void” decisions that had unintended consequences, and this would be granted in appropriate cases even where the decision was taken on the basis of professional advice. In the pension context, this principle was typically brought into play where trustees had made amendments to the benefit structure or had otherwise exercised their discretion in a manner they later came to regret.

However, following a decision by the Supreme Court (Futter v HMRC and Pitt v HMRC), which upheld the Court of Appeal’s earlier decision the power of the court to reverse or void such decisions has been substantially limited.

The specific point before the Supreme Court was the limitations of the court’s power to intervene where the decision in question had been made by trustees based on advice they had received. This is a key issue in the pension scheme context, where trustees will typically take decisions with the benefit of expert advice.

The two cases heard by the Court concerned tax and private trusts but the principles are relevant to those who advise trustees of any sort of trust, from small family trusts through to large occupational pension schemes.

The first part of the ruling concerned the so-called Hastings-Bass rule. Hastings-Bass was widely understood to have set the precedent for enabling a Court to intervene and set aside a decision made by trustees if it could be shown they would not (or might not) have made that decision had they taken into account all the right considerations.

This rule provided a useful tool enabling trustees to unwind decisions where they acted on incorrect or incomplete advice: it gave them the opportunity to ask the court to repair any damage by reversing the decision – generally a happier outcome for trustees, beneficiaries and advisers than leaving no remedy other than a possible claim against whoever gave the advice.

Indeed, it was common for advisers to work with their trustee clients in going to Court to have decisions set aside.

This latest ruling from the Supreme Court upheld an earlier ruling by the Court of Appeal that severely limited the scope for the Court to set trustees’ decisions aside. The effect of the ruling is to clarify that the Court will only intervene where it is established that the trustees had themselves acted in breach of their duty as trustees.

Crucially, the Supreme Court added that trustees will not generally be in breach of duty where they acted on professional advice, even if that advice turns out to be incomplete or wrong – unless the trustees had exceeded their powers or acted contrary to the law. This is a clear narrowing of the scope for court intervention, which in practice will shift the spotlight from putting the problem right to exploring whether trustees can seek redress from their advisers instead.

However, advice that turns out to be incomplete or wrong will not necessarily translate into a good claim. Any trustees looking to bring such a claim would have to establish that their advisers have been negligent and that this caused a type of loss which is recoverable by the trustees – in many cases this will be far from straightforward.

The Supreme Court recognised that in practice it will be rare for trustees to have so strong a claim that they can be confident of recovering their beneficiaries’ loss in full. Claims by beneficiaries will also face significant hurdles, not least if advisers have made it clear in their terms of appointment that they owe their duties to no-one other than their trustee client.

As well as dealing with Hastings-Bass, the Supreme Court also looked at an entirely separate area of law, namely its jurisdiction to reverse a voluntary transaction (such as a gift or the creation of a trust) on the grounds of equitable mistake.

The Supreme Court rejected HMRC’s argument in favour of a blanket rule that relief cannot be granted where the mistake relates exclusively to tax. It stressed that each case must be assessed closely on its facts to determine whether it would be unjust to leave the mistake uncorrected.

Future cases will no doubt tease out how far the equitable mistake jurisdiction might stretch, as trustees and advisers who find the Hastings-Bass door closed look to test whether it provides them with an alternative way of turning back.

Stuart Pickford is partner and joint head of pension litigation at Mayer Brown International.

Related reading