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Lord Lucas moved Amendment No. 60:

Page 14, line 24, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

The Earl of Buckinghamshire moved Amendment No. 61:

Before Clause 27, insert the following new clause:

("Trustees may keep benefits

. A trustee of a trust scheme shall not be required to forego or account to the trustees or any beneficiary of the scheme for any benefit that may be payable to him or any other person—
(a) by virtue of his membership of the scheme, and
(b) by reason of any decision regarding the exercise of a power or discretion conferred on the trustees (including a decision to exercise or refrain from exercising a power to reduce benefits),
if the trustee did not take part in making that decision or the actuary certifies in writing that in his opinion it is fair and reasonable for the benefit to be paid.").

The noble Earl said: My Lords, the amendment is designed to remove a legal difficulty to which attention was drawn last year in the so-called Drexel case. The judge in that case pointed out that it is a long-established principle of trust law that trustees cannot derive personal

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benefit from their decisions as trustees. He thought that there was therefore a danger that those trustees of a pension scheme who were also members and beneficiaries may not be able to have the same benefits as other members; for example, if trustees awarded additional benefits out of surplus, something which concerned the Drexel case.

In Committee, the noble Lord, Lord Haskel, moved an amendment which was later withdrawn, which made it clear that trustees had the power to make amendments to the scheme even though one or more members were trustees. My amendment is slightly different. It assumes that the trustees may or may not already have sufficient power to amend the scheme, and deals directly with the question of whether, when such an amendment is made, the trustees who are members of the scheme can benefit from it.

As noble Lords are well aware, some trust documents allow for trustees to benefit from benefit improvements in schemes of which they are members, but others are silent or ambiguous. My amendment would make it clear that such a trustee could benefit provided that he took no part in the decision, or, if he did take part in the decision, the actuary certified that in his opinion any benefit improvements were reasonable and fair to be paid.

In his reply in Committee, my noble friend the Minister indicated that he believed that the present legal situation, as developed in case law, was satisfactory. I believe that that statement may have been made a little too easily. I should like him to reconsider the views that he expressed in Committee.

I conclude by reminding your Lordships of what was said by the judge in the Drexel case. He stated:

    "When the legislature considers how far and in what terms to embody the report of Professor Goode and his colleagues into law or otherwise to reform the law in this area, I commend to it consideration of the creation of a clear exception to the so-called 'general rule of equity' so that in appropriate cases the administration of pension trusts by trustee-beneficiaries might safely proceed without expense and delay of proceedings".

My amendment makes clear that the member trustees would be able to proceed safely. It is an important amendment. I believe that the arguments made in Committee were too lightly dismissed. I look forward to hearing my noble friend's views. I beg to move.

8 p.m.

Lord Ezra: My Lords, I support the amendment. The issue needs to be clarified. Throughout the Bill we have talked repeatedly about the need for balance, and a subject of anxiety is the position of trustees. Of course, trustees must properly perform their duties but in this case they could be vulnerable if the law were not clarified. Naturally, member trustees are potential beneficiaries of any improvements that are introduced in the schemes of which they form members. Therefore, I hope that the Government will accept the arguments so effectively put forward by the noble Earl.

Lord Haskel: My Lords, I too support the amendment, which is similar to an amendment I tabled in Committee. The noble Earl has improved upon it and

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his amendment deals with some of the comments that were made in Committee by the Minister. I am sure that it will be easier for the Minister to accept.

Lord Mackay of Ardbrecknish: My Lords, the amendment seeks to address the issues brought up by the recent case of Manning v. Drexel Burnham Lambert Holdings Limited. The issue concerns a matter of trust law, commonly referred to as the "general rule of equity" whereby a person in a fiduciary position should not put himself in a position where his interest and his duty conflict. Very briefly, the question is whether it is necessary to legislate in the Pensions Bill in order to make clear that trustees who are also scheme members are not prevented from taking decisions simply because they, among others, may benefit from decisions in which they take part.

This matter has been brought into focus by our proposed legislation on member-nominated trustees. But it is not applicable only to them. It is relevant for all member trustees regardless of who nominates them. We have heard today from the noble Baroness, Lady Hollis, that there are already many pension schemes which have member trustees. These schemes operate very successfully and make decisions without recourse to the courts, despite the fact that their trustees are potential beneficiaries. I said in Committee that if there were any grounds for thinking that recent judgments in the Drexel case and the earlier Makin case cast serious doubt on the validity of trust boards containing trustees who are also scheme members, we would ourselves have introduced an appropriate amendment. I reiterate that.

Both the Drexel and Makin cases had particular features which rarely arise in schemes. In both cases, the sponsoring employer was insolvent and the scheme was winding up with a large surplus. The trustees in both the Makin and Drexel cases had discretion to distribute surplus funds. These cases are atypical. First, it is unusual for trustees to have such a discretion in a modern trust deed, and, secondly, both arose before the Social Security Act 1992, which requires an independent trustee to be appointed if the sponsoring employer becomes insolvent. The difficulties may not have arisen if there had been an independent trustee.

This amendment would give trustees two options when taking decisions on matters in which they might be faced with a conflict of interests. The first is for the trustee to decline to take part in the decision. This is already a route which trustees can take if they believe that they have an irreconcilable conflict of interest. I must say, however, that in many schemes this option would not be practical because all, or most of, the trustees would also be scheme members and if they all withdrew there would be no one left to take the decision.

Secondly, the amendment suggests that, as an alternative, the actuary could certify that it is fair and reasonable for the benefit to be paid. I do not consider that this is part of an actuary's role. To my mind, it puts him in a position where he has to make a qualitative judgment about a decision made by a trustee, in effect, to act as a kind of independent trustee but without the fiduciary responsibilities. As I see it, the actuary's role

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is to advise trustees on decisions of fact on scheme funding matters. With all respect to actuaries, that is not a decision for them.

My noble friend has clearly tabled his amendment with very good intentions in order to ensure that member trustees are free to participate fully in decisions of the trust board. We are confident that in fact they can and that there is no threat to the position of member trustees, providing that they act in good faith and consider the interests of all scheme members. There is a general acceptance that decisions in which member trustees participate should not be invalidated simply because they, among others of their class, could benefit.

We have considered all the issues very carefully. However, we believe that it is unnecessary and possibly unwise to legislate in this Bill. Our concern is that, by specifying the position for member trustees, not just member-nominated trustees, we might prejudice the interests of scheme members generally. And, after all, that is the purpose of the general rule of equity, which this amendment is seeking to override. The courts can enforce and develop that rule in a way that legislation cannot and we believe it would be unwise to do anything that might endanger this. I have explained the matter at length but I believe that it is important. I hope that I have reassured my noble friend that his fears are unjustified. I hope that he is now able to withdraw his amendment.

The Earl of Buckinghamshire: My Lords, I thank the noble Lords, Lord Ezra and Lord Haskel, for their support. I listened with great interest to what my noble friend the Minister said. I am aware of the unique features of the Drexel case. I am sure that in summing up the learned judge was aware of the uniqueness of the case but felt obliged to widen the scope of his comments.

I commented on the actuary certifying that it was fair and reasonable and I believe that my noble friend the Minister said that it was a qualitative judgment. In fact, it is a quantitative judgment introduced to make sure that trustees, on the direction of the company, do not unfairly award themselves improvements in benefits to the detriment of other beneficiaries. Therefore, the actuary has a role to play in this matter.

It is interesting to believe that every single trust deed and rule of the 150,000 schemes that now exist states that the trustees can make benefit improvements of which they will be the beneficiaries. I suspect that many trust deeds and rules do not have that power. The amendment, even though it may be deficient in some areas, would provide that those trust deeds and rules are dealt with in this legislation. One cannot amend trust deeds and rules in isolation because one cannot alter the balance of powers in such a way within the trust document.

I am not a lawyer—and perhaps a lawyer will correct me—but it is my understanding that the balance of powers issue must be treated with great care. The amendment would have gone some way towards dealing with that. I am disappointed by my noble friend's reply and I do not agree with all that he has said. But on that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Clause 27 [Decisions by majority]:

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