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2.0 Introduction

This section introduces the subject of pensions trust law. It outlines the reason why the vast majority of pension schemes are set up under trust and how they are governed.

It explains:

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the reasons for setting a pension scheme up under trust

• 

how a trust is set up

• 

the beneficiaries of a pension trust, and 

• 

the legislative framework in the UK affecting pension schemes, and 

details the main provisions of the most recent key Acts of Parliament and European law affecting pension practices and relevant taxation.


Comment

Advantages of the trust framework

One of the main advantages of setting up a pension scheme under trust is that the assets of the trust continue to fall under the auspices of the trustee Act 1925 and are legally separate from the sponsor’s (the Principal Employer’s) assets. That said, the valuable financial advantages of tax relief granted to registered pension schemes are easily put in jeopardy where trustees fail to observe, wittingly or unwittingly, HMRC’s practices, or default on following its requirements.

Trust documentation and principles of the law of trusts 

For as long as the UK remains subject to aspects of EU law, trustees and companies can expect to continue having a difficult and expensive time over interpreting and applying rulings from the European Court affecting their schemes. Unintended failure to observe such rulings could also cause jeopardy.

The message: trustees should ensure that their scheme documentation is up to date at all times and that decisions taken fall within the rules of the trust and the framework of current legislation.

A comprehensive definition of a trust is:

‘A trust is an equitable obligation, binding a person (who is called a Trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called beneficiaries) of whom he himself may be one, and any one of whom may enforce the obligation. Any act or neglect on the part of a trustee which is not authorised or excused by the terms of the trust instrument or by law, is called a breach of trust.’ Underhill’s Law of Trusts

‘Equitable obligation’ means that, although title to trust property is held by the trustees, trust property is held for the benefit of persons called beneficiaries and the principle of ‘equity’ is founded on the principles of ‘natural justice’ and ‘fair conduct’.

How to become familiar with scheme rules – colour-code them!

One suggested way to help a newly appointed trustee navigate his or her way around the trust deed is to suggest that the trustee obtains three coloured marker pens. On every page throughout the rules of the scheme where the wording says ‘the trustee may/shall/will’, this should be marked in blue. Where the wording says ‘Employers may/will/shall’ or ‘Principal Employer may/will/shall’, these should be marked in red. Where the wording says ‘the trustees may, with the consent of the employer’, or ‘the employer may, with the consent of the trustees’, this should be marked in green. Usually the words coloured in red, blue or green will be followed by the powers or discretions the parties will have under the rules.

A key reason to be familiar with scheme rules – Conversance!

It is a statutory requirement that trustees are conversant with their scheme documentation. One of the main items of scheme documentation is the trust deed and rules (sometimes known as the 'definitive deed and rules'). This may also be supplemented by successive deeds known as supplementary deeds or deeds of amendment.

Trustees are expected to know where all original documents are kept and the arrangements made for their custody, safekeeping and access [see 2.2.13 (Note)]
It is also important that the scheme’s documentation is kept up to date. See 2.2.7(Note) for The Pensions Regulator’s advice about updating scheme documentation.













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