Trustees investment duties

The general duty of care

There is a substantial body of case law considering the duties of trustees in relation to investment, much of which remains relevant although the Trustee Act 2000 imposes some statutory duties. The first of these statutory duties is the statutory duty of care. Trustees are required to exercise such care and skill in relation to investments as is reasonable in the circumstances. A higher standard of care is expected from trustees acting in a professional capacity and where the trustee claims to have special knowledge or experience. This is no more than a statutory restatement of the principles which had been established by the cases with a clarification of the position of professional trustees.

The standard investment criteria

The trustee Act 2000 s 4 requires all trustees exercising a power of investment, including trustees exercising express investment powers, to have regard to what are described as the standard investment criteria, (these criteria are not new. They first appeared in the Trustee Investments Act 1961, s 6(1)). There are two such criteria. First, the trustees must have regard to the suitability of the investment concerned, and secondly to the need for diversification. The trustees must have regard to these standard investment criteria both in making investments, and also in periodically reviewing the investments. The responsibilities of trustees in relation to investments are ongoing-they cannot invest funds and then forget them. They must keep the investment portfolio under periodic review.

The need for advice

A further requirement of the Trustee Act 2000 is that trustees must normally take proper advice on investment decisions. The Trustee Investments Act 1961 required trustees always to take advice before making all but a very limited range of investments. This requirement has been changed by the 2000 Act. Trustees can dispense with seeking advice if they reasonably conclude that in all the circumstances it is unnecessary or inappropriate to do so. For instance, the trustees may consider the sums involved to be too small, or they may already have sufficient expertise available to them through fellow trustees or employees of the trust. However, for trustees to dispense with advice requires a conscious decision on the part of the trustees. It would be a breach of trust for trustees to fail to seek advice through oversight, even in a situation where advice was unnecessary, although it is hardly likely in such an instance that any action for breach of trust would be pursued.

Financial considerations

The object of investment is to produce a financial return from trust assets. The trustees are expected to adopt an investment strategy which has regard to the nature and purpose of the trust. This will affect whether the trustees should be maximizing income, maximizing capital growth, or balancing the two, and what balance there should be between the risk and return. Where there are income and capital beneficiaries, the trustees must seek a balance between high income and capital growth. It has been said that in all but the smallest fund, this will require a high proportion of the trust assets to be invested in company shares. Where an income beneficiary would not be liable to tax on certain kinds of investment, however, this also should be considered by the trustees and would legitimately influence their investment decisions. Because trustees must consider how to achieve a fair and proper balance between all the different classes of beneficiary, they will not be in breach of trust simply because their investment policy has resulted in greater erosion of the real capital value of the trust fund than would have been the case with a different investment strategy. Trustees are not under an absolute obligation to ensure that the capital value of the fund is maintained.

Ethical considerations

The extent to which trustees may have regard to ethical considerations was explored by Megarry V-C in Cowan v Scargill, [1984] 2 All ER 750. The National Coal Board pension fund was controlled by both management-appointed and union-appointed trustees. The union-appointed trustees objected to a proposed annual investment plan unless it adopted the policy of withdrawing from overseas investment and from investment in industries in competition with coal. This led to a direct clash between the union-appointed trustees, led by Arthur Scargill-the National Union of Mineworkers General Secretary and a veteran of industrial disputes-and the other trustees, leading to the hearing in court. Eschewing the use of a barrister, Arthur Scargill chose to represent himself in court. Sir Robert Megarry held that the action of the union trustees was unreasonable. The duty of trustees was to optimize the benefits which the beneficiaries would receive. In the vast majority of cases, financial considerations would prevail.

Periodic review of investments

The duty of trustees in relation to investment is a continuing one. They do not discharge their duty merely by giving proper consideration to the appropriateness of an investment at the time it is made or the asset acquired. They must also consider periodically whether the balance of investment is correct, and whether individual investments are retained. This responsibility is specifically imposed by the Trustee Act 2000, s4(2), but would in any event apply on general trust principles. In Bartlett v Barclays Bank Trust Co Ltd, [1980] 1 All ER 139, trustees held controlling shareholding in a property investment company. It was held that they were in breach of trust in failing to review the activities of the company and in permitting the directors to engage in a speculative and inadvisable development scheme.