The Ombudsman has upheld a complaint against the member trustees and professional trustees of a SSAS in relation to the distribution of benefits following a member's death (Ms E PO-22369). The Ombudsman found that the member trustees had failed to manage their conflict of interest and had reached a perverse decision. He also found that that the professional trustee had failed to put in place a proper system for managing conflicts of interest and to guide the managing trustees in managing their own conflict of interest.
The original members of the SSAS were Mr and Mrs A and Mr SD. Mr SD had known Mr A for approximately 30 years, but was not related to him. The scheme rules provided for a member's fund to be held on discretionary trusts following a member's death. On 1 November 2017, shortly after a terminal cancer diagnosis, Mr SD completed a nomination form requesting that his share of fund should be used to pay £25,000 to his estate with the remaining balance paid to his sister, Ms E. A previous nomination form completed in 2015 when Mr SD joined the had nominated Mr A and Ms E to receive a 50% share each. When submitting the 2017 form, Mr SD said he had been unaware of the 2015 nomination.
Mr SD died on 23 November 2017. Mr and Mrs A did not accept that the November 2017 nomination was valid, alleging that Mr SD lacked capacity at the time when the nomination was made. In November 2019, Mr and Mrs A as member trustees took the decision that Mr SD's fund should be split as follows: £25,000 to Mr SD's estate; £161,000 to Ms E; balance of £112,599.90 to Mr A.
Ombudsman decision re conflicts of interest
The Ombudsman upheld a complaint from Ms E against the member trustees and professional trustee. Section 249A of the Pensions Act 2004 requires trustees to establish and operate "an effective system of governance including internal controls" and the Pensions Regulator's guidance makes clear that this includes processes to identify and manage conflicts of interest. The Ombudsman considered that the trustees had failed to fulfil that requirement. It appeared that the professional trustee had neither identified the clear conflicts of interest of Mr and Mrs A as member trustees nor taken any steps to manage them or guide the member trustees in managing them. However, even without the professional trustee's guidance, Mr and Mrs A should have identified and taken steps to manage their conflicts of interest.
Under the scheme rules, Mr A was not an eligible beneficiary unless he had been named on a nomination form, so the question of whether the 2017 nomination form replaced the 2015 one was key. The Ombudsman found that the member trustees' starting point had been that Mr SD lacked capacity to make the 2017 nomination when, in the absence of conclusive evidence otherwise, their starting point should have been that Mr SD did have capacity. The Ombudsman found that this was a perverse decision.
Where the Ombudsman finds that a decision has been improperly made, the Ombudsman will normally ask the trustees to make their decision afresh. However, the Ombudsman considered that in the case in question, the member trustees' conflict of interest would mean they would be unable to make a new decision with any degree of impartiality. The Ombudsman therefore concluded that he should determine himself the distribution that a reasonable trustee would have made. He determined that the remaining balance of Mr SD's fund should be paid to Mrs E rather than allocated to Mr A. The Ombudsman awarded simple interest at a rate of 8% on the relevant amount. He also ordered the professional trustee to pay £2000 and the member trustees £1000 to Mrs E in respect of the distress and inconvenience caused to her.
Could the trustees rely on the indemnity under the SSAS's trust deed and rules?
The Ombudsman considered the case law regarding what amounts to "dishonesty" for the purpose of deciding whether a trustee is prevented from relying on an indemnity provision under the trust deed. The Ombudsman said that a professional trustee's conduct will fall within the definition of dishonesty if a trustee commits a deliberate breach of trust and is recklessly indifferent as to whether this is contrary to the interests of the trust's beneficiaries. The Ombudsman found that by failing to seek legal advice on the proposed distribution of the lump sum in 2019, the professional trustee had been recklessly indifferent to the interests of Ms E as a beneficiary. He found that the member trustees' conduct fell within the relevant definition of dishonesty given their failure to manage their conflict of interest when they stood to benefit financially. The Ombudsman concluded that neither the professional trustee nor the managing trustees could rely on the indemnity under the scheme's trust deed.
This case shows that the Ombudsman does not regard it as acceptable for a professional trustee to act as a passive bystander where member trustees have an obvious conflict of interest which risks prejudicing the interests of other beneficiaries. Even if a scheme rule provides for a decision to be made by the member trustees alone, the Ombudsman will expect a professional trustee to guide the member trustees in managing conflicts of interest, and to take legal advice if there are concerns that member trustees are not acting in accordance with their duties and that this is adversely impacting other beneficiaries. The case also shows that a professional trustee that fails to act in such circumstances may not be able to rely on an indemnity under the scheme's trust deed.