Sanya Goffe | When prudence isn’t perfect

Trustees of pension funds hold significant responsibilities, carrying rights and obligations to safeguard the financial well-being of plan participants and beneficiaries. Their primary right is the authority to make investment decisions, but this power must be exercised with strict adherence to the pension plan’s terms and relevant laws.

Trustees are tasked with promoting the growth of pension investments, while balancing risk against potential returns.

Beyond simply handling money, trustees are bound by a fiduciary duty, which simply means they have to put plan participants’ interests above all else. This means they can’t slack off; must do their homework, watch out for risks, and be as cautious as they would with their granny’s life savings.

The golden rule? Be prudent. Trustees should approach every decision like it’s their own money at stake — whether that’s researching investment risks or choosing reliable investment managers and ensuring decisions align with participants’ best interests. Those with specialised expertise are held to an even higher standard. Essentially, ‘the more you know, the more you owe’.

The pension investment regulations state that in the performance of their duties, trustees and investment managers must determine whether an investment will provide an adequate return at an acceptable level of risk; consider the effects of expenses on investment returns; conduct due diligence on investments; ensure collateral is satisfactory; and in the event of a conflict of interest, take decisions solely based on the best interest of participants and beneficiaries.

In making these investment choices, trustees can rely on advice from qualified agents, such as investment managers. This reliance is grounded in law, which obligates trustees to seek expert guidance if they lack the necessary expertise. However, it is essential to remember that the ultimate responsibility for investment and administration of the fund rests with the trustees.

Trustees will not be held responsible for investment losses that resulted from a ‘mere error in judgement’. Being prudent does not mean being perfect or a trustee cannot make mistakes.

The courts have demonstrated an understanding that not all risks can be avoided or mitigated, and trustees cannot be expected to have complete foresight. There is no duty to “guarantee against risk of loss” to the fund as a result of investments, or to guarantee an increase in the fund’s value due to investments.

In Alcoa of Australia Retirement Plan Pty Ltd v Frost, the court held that “investments will never be totally risk-free and a trustee is not expected to go on endlessly in pursuit of perfect information to make a perfect decision”. It is possible for a trustee to satisfy the appropriate standard and duties of care, with the result of a loss to the fund. A trustee would not be liable for this loss if prudence can be demonstrated.

Importantly, trustees will only be judged based on the facts and circumstances applicable at the time an action was taken or should have been taken. Actual investment performance, or lack thereof, never in itself equates to a breach of trust by a trustee. Investment in the asset will need to be negligent at the time it is made, having regard to the circumstances prevailing at that time. Additionally, the assessment is done on the overall aggregate investments of the plan.

A trustee does not need to ensure their co-trustee’s honesty, attentiveness, prudence or competence. However, where there is liability and loss, each trustee can be held responsible for the whole problem; think of it like getting stuck with the dinner bill because a friend conveniently ‘forgets’ their wallet. This ‘joint and several’ liability means every trustee has skin in the game, so if one drops the ball, the others may have to pick up the slack.

Joint and several liability continues to apply to a former trustee who remains liable for breaches during their time as trustee, and can extend to new trustees who fail to remedy a breach. It also applies to all trustees regardless of their particular status, whether they are member-nominated trustees or professional corporate trustees.

The share of liability may bear no resemblance whatsoever to the degree of culpability of the particular trustee for the wrongdoing in question. This is illustrated rather dramatically by a 2011 Australian case where a husband and wife were both the trustees and the only two members of their joint pension scheme. The husband then absconded with most of the pension scheme assets, essentially stealing his wife’s pension.

However, the removal of the assets from the scheme resulted in a significant tax charge being levied – over AU$2 million. Despite her innocence, the wife, as pension scheme trustee, was also liable for the tax due under the joint and several principle and was left to foot the entire tax bill because her husband, the trustee at fault, had vanished without a trace.

Trustees have some safety nets, like insurance, indemnities and exemption clauses, that help to keep personal risk at bay, as long as they’re not outright reckless. Pension trustees must navigate complex responsibilities with prudence, diligence, and integrity, knowing they are accountable for the consequences.

With legal protections in place, the role remains both a privilege and a profound responsibility – one that ultimately helps safeguard the future of retirement security for many Jamaicans.

Sanya Goffe is senior partner of Hart Muirhead Fatta Attorneys-at-Law.

smgoffe@hmf.com.jm