Dalriada Trustees Ltd v Faulds & Ors

Under Finance Act 2004, a pension scheme’s assets may be “used to provide” a benefit indirectly. Reciprocal loans between schemes can therefore constitute unauthorised member payments where the scheme’s payment is made to procure a corresponding benefit for its own member. Precise member-to-member matching is unnecessary.

A trustee’s power of investment does not authorise an unsecured personal loan made to procure reciprocal access to pension funds rather than to obtain an investment return. An amendment power cannot alter the basic purpose of a pension scheme, and retrospective amendments cannot validate earlier breaches of trust or rewrite history.

Dalriada Trustees Ltd was appointed by the Pensions Regulator under the Pensions Act 1995 in relation to six registered occupational pension schemes operated through a Pensions Reciprocation Plan. The plan involved reciprocal loans between members of different schemes, intended to give members early access to pension capital.

The claimant sought declarations concerning the validity of the loans, purported amendments to the schemes’ investment and expenses powers, estoppel, and related matters. The central questions were whether the loans were unauthorised member payments under Part 4 of the Finance Act 2004, whether they were authorised investments, and whether later amendments could validate them.

1. Unauthorised payments. The MPVA loans were unauthorised member payments under sections 160(2) and 173 of the Finance Act 2004. Although the payment from Scheme Y was made to a member of Scheme Z, it was made in the sure and certain hope that Scheme Z would make a corresponding payment to Scheme Y’s member. The words “is used to provide” in section 173(1) cover indirect causation. Precise matching between members or loans was immaterial.
2. The expression “other than a payment” in section 173(1) meant a payment from the scheme. Otherwise the provision would produce an incoherent distinction between direct and indirect payments. The member receiving the reciprocal loan was liable to the unauthorised payment charge under section 208(2).
3. Investment power. The loans were outside the schemes’ power of investment. An unsecured personal loan was incapable of being an investment within clause 8.1. In any event, the loans were made to procure reciprocal access to pension capital, not to obtain income or capital gain. Their purpose was disinvestment rather than investment. The court distinguished the question of vires from prudence.
4. Fraud on the power. The relevant purpose of the investment power had to be determined objectively from the trust deeds and rules. Promotional literature and evidence of subjective intention could not alter their meaning. The loans were beyond the scope of the power and were made for an ulterior purpose, constituting a fraud on the power.
5. Amendments. The new clause 8A could not validate the loans prospectively or retrospectively. It altered the basic purpose, or whole substratum, of the pension schemes. Retrospective operation could not be used to rewrite history or validate an amendment which was beyond the amendment power. The amendment concerning expenses could operate prospectively in principle, but could not retrospectively validate commission already paid in breach of trust.
6. The court did not determine the separate argument that the trustees had failed to exercise a real discretion when approving applications, because that issue had not been properly pleaded or evidenced. The parties agreed that the loans were void in equity, that the trustees were not estopped from denying their validity, and that further MPVA payments could not lawfully be made. The precise form of order was reserved.