The Pension Trust: Fit For Purpose?

Published date01 September 2019
Date01 September 2019
AuthorM. Scott Donald
Modern Law Review
DOI: 10.1111/1468-2230.12438
The Pension Trust: Fit For Purpose?
M. Scott Donald
The law of trusts plays an integral and multi-faceted role in the regulatory scheme shaping the
occupational pensions arena in Australia and the United Kingdom. It facilitates the operation
of private law modalities, such as innovation and competition. However, that openness also
renders members’ interests vulnerable and the lack of transparency and emaciated accountability
mechanisms within trust law undermine the powerful normative force exerted by the language
in which trust doctrine is so often couched. That said, the regulatory regimes buttress, and rely
upon, the protections offered by trust law. The result is a compelling illustration of the nuanced
way in which private law is employed in a modern regulatory state.
That there have not been scandals of an equal dimension to that perpetrated on
Maxwell-owned pension funds owes more to the decency of employers and the
integrity of trustees than to tr ust law.1
Occupational pensions matter. More than 54 million people in the United
Kingdom and Australia are members of occupational pension plans.2Since
1992 in Australia and 2012 in the United Kingdom, private sector employees
have been prog ressively enrolled in an occupational pension arrangement of
some kind. Most of those people expect to rely, at least in part, on their
entitlements to fund their expenditure in retirement, however distant retirement
may be. The vehicle used to safeguard and build those assets while they are
BEc, LLB, LLM, PhD, CFA. Director, Centre for Law, Markets and Regulation, UNSW Law;
External Consultant, Herbert Smith Freehills. The author would like to thank Professors Michael
Bryan, Simone Degeling, Dimity Kingsford Smith and Geraint Thomas for their detailed feedback
on the analysis that underlies this paper, as well as Ally Crowther and the par ticipants in the 2017
Modern Studies in Property Law Publication Workshop hosted by Queen’s College, Cambridge
and the 25th annual Superannuation Researchers Colloquium held at UNSW in 2017. The author
would also like to thank the Australian Prudential Regulation Authority for the support of its Brian
Grey scholarship. The views and opinions expressed in this report are solely those of the author
and do not reflect the views and opinions of the aforementioned, nor UNSW Law, Herbert Smith
Freehills or the Australian Prudential Regulation Authority. Unless otherwise stated all URLs were
last accessed on 18 July 2018.
1 House of Commons Select Committee on Social Security, The Operationof Pension Funds, Second
Report HC 61-II (1991/92).
2 There are approximately 39.2 million in the United Kingdom and 14.8 million in Australia.
Source: Office for National Statistics, Occupational Pension Schemes Survey: UK, 2016,2at
accounts-data/Super-accounts-data-overview/. Note, references here to occupational pension
plans should be taken to connote what are known as ‘superannuation funds’ in Australia.
Although there are variations at the margin (for instance in respect of some of the detailed
rules applying specifically to self-managed superannuation funds in Australia) the terms can be
regarded as synonymous for the purposes of this paper.
C2019 The Author. The Modern Law Review C2019 The Modern Law Review Limited. (2019) 82(5) MLR 800–832
M. Scott Donald
accumulating is therefore vital. It must be protective of contributors’ interests
but operate efficiently. It must also be simultaneously robust and flexible, given
the vicissitudes of markets and long timeframes involved. And ideally it ought
to inspire confidence in those required to rely on it, the most important of
whom are the members.
The trust is the legal architecture of choice for occupational pension schemes
in most of the common law world. There have been scandals, such as the
Maxwell affair that inspired the quote above, but on the whole the frequency
and severity of such events have been lower than that seen in other, similar
domains, such as hedge funds, insurance companies and banks.3There have
also been occasions when background political factors have been the catalyst for
courts examining the trust law foundation of pension funds.4That said, on such
occasions as policy-makers have sought input on whether trusts are the best
foundation for occupational pension schemes, they have been underwhelmed
by the response.5It is unclear whether this reflects inertia, a lack of imagination
on the part of commentators and critics6or a tacit consensus that tr ust lawseems
to work acceptably in practice.7
This article reconsiders the question whether the law of trusts is a suitable
foundation for the administration of occupational pension schemes. The choice
of the two jurisdictions for comparison stems both from the similarities in
the legal systems and the harmonic resonances in the policy background
in the two jurisdictions, including auto-enrolment and the consequences of
a move towards defined contribution plan design. That said, the paper does
not engage directly with the design of the overall retirement incomes policy
within the two jurisdictions nor with the capacity of the court system in either
country to deliver justice on a practical level. Importantly, however, the paper
expressly recognises that the answer to the question of whether the law of trusts
is a suitable foundation must accommodate the fact that the law of trusts does
not operate in a vacuum. Rather, the law of trusts operates symbiotically with
other systems of rules to deliver the sorts of protections and objectives identified
above. The ar ticle therefore describes the way that legislators and regulators
have sought to address, albeit often imperfectly, the blind-spots, limitations
and vulnerabilities of the law of trusts as they pertain to the operation of an
3 Parliament of the Commonwealth of Australia, The structure and operation of the superannuation
industry,Repor t of the ParliamentaryJoint Committee on Corporations and Financial Ser vices (Canberra:
Senate Printing Unit, 2007) [5.68].
4 See for instance Cowan vScargill [1985] 1 Ch 270 (embedded in the Yorkshire coal miners’
Strike) and Crowe vSERF [2003] VSC 316 (embedded in an industrial dispute in the stevedoring
5 See, for instance in Australia, Australian Law Reform Commission, Superannuation (Report No
59, 1992); Super System Review, Clearer Super Choices: Matching Governance Solutions, Preliminary
Report of the Super System Review (December 2009). In the UK, see Report of the Pension Law
Review Committee (the Goode Report): fourth report of the Social Security Committee together with the
proceedings of the Committee (London: HMSO, 1993).
6 D.Paatsch and G. Smith, ‘The Regulation of Australian Superannuation: An Industrial Relations
Law Perspective. Part 1’ (1992) 5 Cor porate and Business Law Journal 131, 149.
7 Productivity Commission, Review of the Superannuation Industry (2001) 6.1. But cf A. Freiburg
‘Bang Bang Maxwell’s Silver Hammer? Superannuation Crime in the 1990s’ (1996) 24 Australian
Business Law Review 217.
C2019 The Author. The Modern Law Review C2019 The Modern Law Review Limited.
(2019) 82(5) MLR 800–832 801
The Pension Trust: Fit for Pur pose?
operational pension scheme. It is the ability of the law of trusts to contribute
effectively to that tapestry of rules that needs to be assessed, not whether the
law of trusts, operating alone, could achieve the same policy objectives.
The article is structured as follows. It first briefly describes the legal str ucture
of occupational pension funds, and confirms that despite their bespoke nature,
the institutions created by the legal relations are indeed properly under stood
as trusts. It then describes the multi-faceted role that the law of trusts plays in
the regulation and operation of occupational pension funds. It finds that there
are four distinctive roles played by the law of trusts in the regulatory scheme
shaping the occupational pensions systems in both countries. It then identifies
two shortcomings of the law of trusts in the context of occupational pension
schemes and compares the way in which the regulatory state in Australia and
in the United Kingdom has attempted to address the shortcomings. Finally,
the article considers the question of whether the law of trusts can be described
as the ‘optimal’ choice of legal structure for pension plans. It concludes that
there is no absolute answer to that question because the answer will depend on
the criteria by which the assessment of optimality is made. The law of trusts
scores quite well on some of the criteria one could posit for such an assessment,
including economic efficiency, f airness and political legitimacy, but less well
on simplicity, transparency and enforceability. However, as already noted, it
is the ability of the law of trusts to contribute in a complementary way to
the broader regulatory scheme that matters. From this perspective, the law of
trusts performs admirably as the regulatory state can, and in many cases does,
provide an apparatus to addressshor tcomings in transparency and enforceability,
in particular.
Although occupational pension plans in Australia and the United Kingdom can
take a variety of legal forms, the largest are most often formally constituted as
trusts.8The challenge comes in understanding precisely what is meant by that
statement. To what extent do the principles and r ules customarily associated
with the law of trusts apply, or do the pr inciples and rules apply only in a
diluted or adapted form?9
8InAustralia,see,Finch vTelstra (2010) 271 ALR 236 at [35]. In the United Kingdom, see
D. Pollard, The Law of Pension Trusts (Oxford: OUP, 2013) [2.3], [2.6]. This is true also in
respect of auto-enrolled members in the United Kingdom, with between 80% and 85% of all
employers using a trust-based arrangement: Pensions Regulator, Automatic enrolment Commentary
and analysis: April 2017-March 2018, 22. Other alternatives include insurance contracts (in
Australia and the United Kingdom) and specially designated bank accounts (‘Retirement Savings
Accounts’ in Australia).
9 Partial analyses of this question abound. See for instance, D. Hayton, ‘Pension Trusts and
Traditional Trusts, Drastically Different Species of Trusts’ [2005] Conveyancer and Property Lawyer
229; S. Charaneka, ‘Legal Darwinism: the Evolution of a NewTrust Species’ (2000) 11 Insurance
Law Journal 1; M. Milner, ‘Pension Trusts: a New Trust Form’ [1997] Conveyancer and Property
Lawyer 89; E. Gillesse, ‘PensionPlans and the Law of Trusts’ (1996) 75 Canadian Bar Review 221.
802 C2019 The Author. The Modern Law Review C2019 The Modern Law Review Limited.
(2019) 82(5) MLR 800–832

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