UK Pensions Briefing | Corporate trustees: Why might trustees wish to incorporate?

Why replace individual trustees with a corporate trustee?

Liability

Protection for individuals from personal liability

• This is a key advantage of having a corporate trustee. Whereas individual trustees act in their personal capacity and can be sued directly by scheme members, a corporate trustee is a distinct legal entity, capable of suing and being sued in its own name. The liability protection afforded to directors as a result of incorporation is referred to as the ‘corporate veil’. Claims by scheme members are generally brought against the trustee company rather than against the individual trustees in their personal capacity and the courts will only ignore the principle of a company’s separate legal personality and look behind the corporate veil in exceptional circumstances.
• This protection may be particularly relevant now as more defined benefit schemes are considering their “endgame” strategy. As the number of schemes preparing to buy-out and wind-up increases, protection for the trustees from the risk of personal liability after the winding-up process is complete is an important consideration.
• There are exceptions to this general rule and trustee directors can still be personally liable in certain circumstances including, for example, if they breach the statutory duties owed by a director to their company or if a director dishonestly assists in a breach of trust. It should also be noted that the ‘corporate veil’ does not provide protection for any breaches of duty which may have been committed by individual trustees prior to incorporation.

Directors’ & Officers’ (D&O) insurance

• If the corporate trustee is a subsidiary of the sponsoring employer it is usually straightforward to extend any existing D&O insurance to cover the trustee directors.
• If the trustee directors are covered by D&O insurance they will benefit from personal asset protection in the event that the indemnity from the sponsoring employer fails.

Tax issues

• If the trustee company and the sponsoring employer are members of a VAT group this can in certain circumstances provide a VAT advantage.
• Joining the sponsoring employer’s VAT group also reduces the trustees’ VAT compliance costs as only one VAT return needs to be submitted by the representative member for the whole VAT group.
• From June 18, 2025, HMRC has introduced a new policy. Where either of the two following circumstances apply, the scheme’s investment costs will no longer need to be apportioned between the employer and the trustees.
  • The trustees have contracted with the employer to provide a service to the employer of running the pension scheme.
  • The scheme has a corporate trustee which has entered into a VAT group with the employer.

• Under the new policy, the entirety of the investment costs are to be treated as the employer’s. This means that the employer will be able to recover the associated VAT in full (subject to normal VAT recovery rules). Further guidance is due from HMRC in autumn 2025.
• If trustees are considering an asset-backed funding solution it is necessary to have a corporate trustee due to stamp duty land tax issues.

Administration

Execution of documents

• It is much simpler for a corporate trustee to execute deeds. Rather than each individual trustee having to sign, once a matter has been approved by the board of the trustee company, the deed may be signed on its behalf by two directors, a director and the company secretary or a director in the presence of a witness.
• This is a particular advantage if, for example, the trustees are geographically dispersed or if any of the trustees are frequently overseas or otherwise unavailable to sign.
• It also reduces the risk of one individual trustee not executing a deed properly (particularly if it is executed in counterpart) and the deed subsequently being held by a court to be invalid.

Appointment and replacement of trustee directors

• It is much simpler to appoint and remove trustee directors than individual trustees, with no deed of appointment or removal required although the individuals being appointed will need to have been identity verified at Companies House first (see further below).
• Instead, only a member resolution and a Companies House form notifying the change are needed. The latter must be sent to Companies House within 14 days of the appointment or removal.
• In addition, when individual trustees change, notifications must be made to the Pensions Regulator (by updating the online scheme return) and to HMRC if the scheme is contracted-out and the primary contact changes. These notifications are not required when changing trustee directors.
• Member-nominated trustee arrangements can simply be repeated in the trustee company’s articles of association to reflect the policy of appointing member-nominated directors.
• Changes of trustees may be simpler to document or notify under investment management agreements if there is a corporate trustee.

What are the drawbacks?

Liability

Penalties

• The Pensions Regulator’s maximum civil penalties are higher for corporate trustees than for individual trustees, being £50,000 rather than £5,000.

Indemnity protection

• The indemnity protection provided by a group company or by the corporate trustee itself to the directors in connection with their activities as trustees is limited under the Companies Act 2006 (CA 2006). No indemnity may be provided against a fine imposed in criminal proceedings, a penalty payable to a regulatory authority in respect of non-compliance with any regulatory requirement or any liability incurred by a director in defending criminal proceedings in which they are convicted. In contrast, individual trustees can generally be indemnified out of the assets of the scheme, or by the sponsoring employer, free from the restrictions in the CA 2006.
• This disadvantage may be mitigated to a certain degree if the trustee directors are covered by D&O insurance (depending on the terms of the policy).
• Pension scheme indemnity provisions must also be disclosed in the directors’ reports of the trustee company and the sponsoring employer and members may request copies of these reports. Since those directors’ reports will form part of the annual accounts of the trustee company that are filed at Companies House, the existence of the indemnity provisions will be made public.

Administration

Paperwork

• A certain amount of paperwork is required when setting up the trustee company (including articles of association and appointments of directors which must be filed at Companies House).
• Annual confirmation statements must be submitted to Companies House and annual accounts must be prepared, but provided the company is ‘dormant’ (which is usually the case) it will not need to be audited.

• Under the Economic Crime and Corporate Transparency Act 2023, new regulatory requirements being introduced into the CA 2006 mean individual company directors and certain other individuals will need to verify their identity at Companies House. These measures will affect the directors of corporate trustees too. From November 18, 2025, the following rules apply.
  • On incorporation of a new company: the statement of proposed officers must include confirmation that each proposed director (but not a company secretary) has had their identity verified and include their personal IDV code, as received from Companies House.
  • New director appointments: any notification to Companies House of a new appointment of a director on or after November 18, 2025, must include confirmation that the relevant person has had their identity verified and include their personal IDV code.
  • Existing directors: Existing directors will need to have had their identity verified by the time the company files its next annual confirmation statement following November 18, 2025. If an individual is a director of more than one company, the effective deadline for verifying their identity will be linked to the earliest confirmation statement date following November 18, 2025.

Guidance on the new requirements has been published by Companies House. Failure to comply with the new requirements will be a criminal offence punishable by a fine that could be imposed on both the individual director and the trustee company and its officers in default. In addition, the director concerned could be disqualified from acting as a director.

Less transparency

• Individual trustees may be more visible than trustee directors and hence preferred by members.
• However, in practice member nominated trustee arrangements are preserved in the company’s articles.

Summary

The two main advantages of converting to a corporate trustee are increased protection for individual trustees against personal liability and the fact that a corporate trustee is administratively more straightforward, particularly when it comes to the execution of deeds. The main disadvantage is the paperwork involved in setting up the trustee company and the various continuing filing obligations. Whether this disadvantage outweighs the potentially significant advantages largely depends on the experience and resources available to the trustees.