Transcript The Law Society of Kenya CLE Program

RBA Trustee Training Seminar
The General Role and Responsibilities of
Trustees
Presentation by Nkirote Mworia Njiru
Legal Affairs Department – Retirement Benefits Authority
Trustee Training Seminar
Intercontinental Hotel, 1st February 2008
CONTENT
I The Historical Context and Concept of a
Trust
II Duties of a Trustee
III Specific Duties Under the RB Act
IV Conclusion
HISTORICAL CONTEXT AND
CONCEPT OF A TRUST
History of Pensions – From Gratuity to Deferred Pay
 Before the introduction of occupational pension
schemes, pensions were purely ex-gratia in nature.
 An employer would make some provision for the
retirement of old employees who were too sick to work.
 By the end of 19th century ad hoc discretionary
arrangements had given way to more formal schemes.
 But still largely gratuitous – employer’s contributions
were not seen as part of employees pay but (like
gratuities) still viewed as a reward for long service.
History of Pensions – Legal Forms
 The original legal form of pension schemes was based
on private statute or friendly societies.
 By beginning of the 20th century they increasingly took
the form of a trust.
 In 1921 the trust became the universal basis for private
occupational pension schemes because of the
introduction of tax relief.
 The Finance Act of 1921 gave tax relief to pension
schemes which took the form of an irrevocable trust.
History of Pensions – Social Issues
 The trusts had to take a specific form to qualify for tax relief
thus giving employers less discretion in drafting trust terms.
 Expansion of occupational pensions after World War II led to
greater regulation as what was previously a privilege
became a common term of employment.
 Greater public focus on macro-economic effects of pensions
led to introduction of concepts geared towards preservation
of the pension such as vesting, deferment and portability.
 Greater union involvement in negotiation of pension rights
increased awareness - once pensions could be preserved
they were no longer regarded as ex-gratia reward for long
service but as deferred pay.
Historical Context of the Trust
 Trusts were first used around the 12th - 13th century and
basically started out as a tax avoidance mechanism to avoid
punitive property inheritance laws.
 The trust mechanism is unique in that it separates legal
ownership of trust property from beneficial ownership.
 An early example of a trust arrangement would be where a
wealthy landowner would transfer legal ownership of his
property to a group of trusted friends while retaining the use of it
for the rest of his life.
 The advantages were that if he died there would be no death
duties since the property was not in his name or if his children
were young the trustees would manage the estate until they
reached the age of majority.
 The development of trusts was only possible with the
development of the “Courts of Equity” (Chancery Courts) which
were able to enforce trustees’ obligations and beneficiary rights.
What is a Trust?
“The word TRUST refers to the duty or aggregate
accumulation of obligations that rest upon a person
described as a trustee. The responsibilities are in
relation to property held by him or under his control. He
will be compelled by a court in its equitable jurisdiction
to administer that property in the manner lawfully
prescribed by the trust instrument… As a consequence
the administration will be in such a manner that the
consequential benefits and advantages accrue, not to
the trustee, but to the persons called the beneficiaries.”
Classic Definition of a Trust
The definition of a trust can be broken down as follows :-

“an equitable obligation, binding a person (called a
trustee);

to deal with property over which he has control (called
the trust property);

for the benefit of persons (called the beneficiaries) of
whom he may himself be one.”
Understanding A Trust
 What is the difference between a trust and other legal
concepts?
 Contract – the general rule is that a contract is not enforceable by a person
who is not party to the contract; whereas a trust can be enforced by a
beneficiary who is not necessarily a party to the instrument creating a trust.
 Estates of deceased persons – a personal representative or an executor of a
will or administrator in case of intestacy, is a trustee for creditors and
beneficiaries claiming under the estate of the deceased. But the functions of
personal representative are to wind up the estate, pay debts and apply the
net estate to the beneficiary entitled under will or intestacy. Trustees duty is
to administer a trust on behalf of beneficiaries.
 Agency - a relationship between agent and that of principal is that of creditor
and debtor. In a trust, a trustee has a full title to the trust property, the agent
has not. Agent acts on behalf of principal and subject to his control, trustees
do not. Agency is based on agreement,
Advantages of the Trust Mechanism
 A trust is inexpensive to set up.
 Allows flexibility of terms.
 Establish a separate fund to meet the costs of pensions
thereby increasing the certainty that pensions will in fact be
paid.
 Allow employees to participate in the administration of the
scheme.
 Puts the assets of the pension scheme beyond the reach of
the employer’s creditors.
 Overcomes the problems of privity which can arise when
dependants seek to enforce the pension promise.
The Trust Deed and Rules
 This is the document that creates the trust and can be
considered to be the constitution of the scheme
 It is necessary to obtain professional advice on its
preparation as it is an extremely important document.
 The rules are the operational details of the scheme and
contain everything that a member needs to know about
the scheme. If possible it should be summarized into a
small booklet and distributed to members.
 The Retirement Benefits Act requires that schemes be
established under an irrevocable trust.
The Trust – Central Concepts and Idea

The central concept of a trust is the idea of a trustee as a
fiduciary: one who holds property on behalf of others and
acts in their interests rather than the trustee’s own.

When a trust deed is drafted the intention is to make use of
the concepts of:-

fiduciary relationship; and

the law of trusts (aggregate of statute and case law that has
developed around the long historical use of trusts)

The trust deed therefore does not need to set out everything
that trustees can and cannot do; otherwise it would be too
long and complicated.

Trusts are highly flexible and adaptable to circumstances.
DUTIES OF A TRUSTEE
Duties of Trustees I – Introduction
 When trustees exercise discretionary powers they are
required to exercise them on a “fiduciary” basis.
 In the context of a pension scheme does this means trustees
represent members interests or do they decide between the
interests of the employer and members?
 The answer is neither: trustees must act in the best interests
of beneficiaries, and impartially between all categories of
beneficiaries. The employer is not a beneficiary and the
trustees obligations to the employer are limited unless
specifically stated in the trust deed and rules.
Duties of Trustees II – Fiduciary Duties
 A person in a fiduciary position is not, unless expressly
provided, entitled to make a profit: s/he is not allowed to
put themselves in a position where their personal
interest and their duty as a trustee conflict.
 There are two main fiduciary duties imposed by equity:
 Duty not to profit from the trust
 Duty not to delegate the trust
Duties of Trustees III – Acceptance of the Trust
“On accepting a trust, new trustees are bound to inquire of
what the property consists that is proposed to be handed to
them and what are the trusts, and they should examine all
the relevant documents in order to ascertain that everything
is in order”
 This is important because, as we shall see, trustees duties
are personal in nature and a trustee cannot plead ignorance
of a state of affairs of a scheme.
 If a trustee accepts the office of trustee s/he must discharge
its duties as long as their trusteeship subsists. The law
does not distinguish between active and passive trustees
and a trustee is fully liable to the beneficiaries for any loss
that occurs even where the management has been
delegated to a third party. Trustees are jointly and severally
liable and an aggrieved party may elect to sue one, some or
all of them for redress.
Duties of Trustees IV
1. Duty of Trustees to act unanimously.
 Unless stated otherwise in the trust deed all decisions of the
trustees must be made by all of them. If the rules provide for
a majority decision, then that decision binds the minority.
2. Duties in Relation to Information, Accounts and Audit
 Trustees must not only keep proper accounts and allow the
beneficiary to inspect them, but must also on demand, give
the beneficiary information and explanations as to the
investments and dealings with the trust property.
 The beneficiary is entitled to see all trust documents
because they are trust documents and s/he is a beneficiary.
They are in a sense his own documents.
 This duty of course has practical limits and cannot be
strictly observed at great financial cost to the trust itself.
Duties of Trustees V
3. Duty to Act in the Beneficiaries Best Interests
 It is not enough to act in good faith and with good intentions
if the action taken is not in the beneficiaries best interests.
4. Duty to Exercise a Power in accordance with its purpose
 E.g. power to invest in real estate is not a power to provide
housing for members.
5. Duty to Exercise Power in an Impartial Manner
6. Duty of Good Faith
 i.e. duty to avoid dishonesty.
Duties of Trustees - VI
7. Trustees Standard of Care
The accepted principle is that trustees should use such
due diligence and care in the management of the trust
as an ordinary prudent person of business would use in
the management of his/her own affairs.
8. Trustees Discretion
A discretion must be exercised as a result of an active
mental process – deliberations are key – and a situation
must not be allowed to arise merely as a result of
inaction.
SPECIFIC DUTIES UNDER THE
RETIREMENT BENEFITS ACT
Specific Duties of Trustees Under RB Act I
 SECTION 40 ensure that the scheme fund is managed at
all times in accordance with the RB Act and
Regulations, as well as the scheme rules and any
directions given by the Authority; and take reasonable
care to ensure that the management of the scheme is
carried out in the best interests of the members and
sponsors of the scheme.
Specific Duties of Trustees Under RB Act II
 SECTION 34: keep all proper books and records of account of the income,
expenditure and assets of the scheme fund and within a period of six
months after the end of each financial year, ensure that accounts are
prepared. By implication, this involves:

Developing long-term financial plans for the scheme

Operationalise strategic plans by developing annual budgets and strategies

Record Keeping of all the administrative and financial transactions – requires developing
an accounting system with internal control measures

Enlist services of professionals where necessary but must take full responsibility as the
appointing principal e.g. administrators

Valuation of assets must be carried out by Independent, Registered and Licensed
members of the Institute of Surveyors and Valuers of Kenya in accordance with IAS 16

Account for their stewardship by reporting back to stakeholders on the financial
performance of the fund, giving a true and fair position of the schemes fund.

Appointment of auditors and facilitation of annual audits

Filing of statutory returns with the regulator
Specific Duties of Trustees Under RBA Act IV
 SECTION 37: Trustees must ensure that the scheme has a prudent
investment policy on the investment of its funds so as to maintain
the capital of the scheme and to secure market rates of return on its
investments. The investment policy of a scheme must be
implemented subject to any regulations made for that purpose by the
Minister in consultation with the RBA.
 SECTION 38 No scheme funds can be used to make direct or indirect
loans to any person; or invested contrary to any guidelines
prescribed for that purpose; or invested with any institution with a
view to securing loans at a preferential rate of interest to the
sponsor, trustees, members or the manager of such scheme –
exception is proportion of benefits that may be assigned for the
purpose of securing a mortgage facility on such terms as the
Minister may prescribe.

SECTION 35: Trustees may be required by the RBA to have a
schemes evaluated by an actuary appointed by the trustees with the
approval of the RBA.
CONCLUSION
Practical Issues Trustees
Encounter
 Investment policy: SHOULD BE PREPARED WITH THE
HELP OF AN EXPERT and limits should be set out in the
trust deed in accordance with the guidelines set in the RB
Act.
 Appointment of service providers: should be done after
careful shopping around in the market
 Guidelines on how trustees are appointed and removed
from office.
Practical Issues
 Withholding of members benefits in order to off-set liabilities
the member may have with third parties must be avoided.
 Members withdrawing from the scheme must be paid their
properly computed withdrawal benefits within ninety (90) days
of the effective date of withdrawal or interest is chargeable.
 The trustees must convene an annual general meeting of the
scheme members.
 Payment of death benefits. This is a tricky area as the RBA
gives trustees discretion to deviate from a members express
wishes for good cause and the benefits do not form part of the
estate of a member for the purpose of administration.
Penalties
The general penalty for breach of trust is a fine not
exceeding one hundred thousand shillings or imprisonment
for a term not exceeding one year or both. However some
provisions carry higher sentences e.g. Under Section 34 of
the Act, a Trustee who fails to submit audited accounts
within six months of the financial year shall be liable to a fine
not exceeding five hundred thousand shillings or a term of
imprisonment not exceeding two years or both.
Conclusion

The officers of the Retirement Benefits Authority are
available as a point of reference for you.

The members of the scheme are relying upon you as
trusted friends.

The sponsor of the scheme is giving an opportunity for
you to receive invaluable experience in decision
making.
Thank You
Asante
www.rba.go.ke