Major reforms to Scottish trust law have culminated in the Trusts and Succession (Scotland) Act 2024, which received royal assent on 30 January 2024.
The reforms have yet to come into force, but their application to Scottish trusts (including pension schemes) is on the horizon. I had the pleasure of presenting to the joint meeting of the Pensions Management Institute and the Society of Pension Professionals on 7 March on these reforms and their application to Scottish pension schemes. Please find below a summary of the key points discussed.
Scottish trust law
Scots Law has its own trustee legislation in the form of the Trusts (Scotland) Act 1921.
The legislation is effectively over 100 years old now and reflecting that the world – and the use of trusts – has moved on substantially since then, a new replacement Trusts and Succession Act was introduced to the Scottish Parliament. This comes on the back of a major trust law reform project undertaken by the Scottish Law Commission.
The new Act will replace the existing trust statutes – the 1921 Act is to be revoked in its entirety – and the idea is to provide a comprehensive framework for dealing with trust law issues and clarify the law in a number of areas.
Being a widescale review of trust law, the issue of trustees and environmental, social, and governance (ESG) investing has, unsurprisingly, come into focus. There is a potential here for Scots Law to expressly deal with ESG investing in the new legislation and to potentially follow a different path from the position of England and Wales.
In brief, the legislation covers a range of areas, including:
the appointment and removal of trustees;
trustee decision making;
powers and duties of trustees;
trustee liabilities, variation of trusts, and so on; and
the signing of deeds where trustees are absent, which now will be easier.
There is a new statutory duty of care for professional and non-professional trustees. This is relevant to trustee exoneration clauses as the Act provides that exoneration cannot be given for a professional trustee when conduct falls below the new standard of care set out in the Act.
New trust law legislation and pensions
So, where do pension trusts fit into this?
One of the main aims of the new legislation is to have a comprehensive framework that can apply to commercial trusts as well as private trusts and clearly pension schemes are part of that.
The Scottish Government, however, has taken the view that pensions trust law is a reserved matter for the Westminster Government rather than a devolved matter for the Scottish Parliament to deal with. This means that the Scottish Parliament can only legislate on trust law as it applies to pensions schemes if Westminster approves this, by what is known as a Section 104 Order made under the Scotland Act 1998.
Without the Westminster Government agreeing to the request of the Scottish Parliament to legislate for Scottish pension trusts, the new Trust Act would not apply to Scottish pension trusts. This situation will, thankfully, be avoided as it understood that the two governments have agreed to work together on the relevant order so that the new Act will apply to Scottish pension trusts.
The new Trusts and Succession (Scotland) Act 2024
So, where are we now?
We have a new Act which has received Royal assent on 30 January 2024.
When it comes into force is a separate matter and will involve a commencement order from the Scottish Government.
The Act specifically excludes pensions and it is up to the UK and Scottish Government, through the relevant orders, to allow the new legislation (when it eventually does come into force) to extend to pension schemes.
Trustees and ESG
Finally, it is worth noting that the Act expressly includes provisions concerning trustees and ESG investing, which brings into play financial factors and non-financial factors and the question of whether non-financial factors can be taken into account when trustees make investment decisions as part of their fiduciary duties.
The Parliamentary Committee tasked with scrutinising the Act when it was at the Bill stage, the Delegated Powers and Law Reform Committee, recommended that the Act was amended to explicitly allow trustees (subject to the terms of the trust deed) to choose to invest in ESG investments, particularly when these might underperform compared to other investments.
This has been followed though in the Act which, in essence, provides that:
where trustees exercise their statutory power of investment under the new Act and not in relation to any other power of investment;
where there are two or more suitable investments being considered, as the trustees may – except where the trust deed provides otherwise – take into account non-financial considerations in determining which investment to make; and
and for this purpose – an appropriate non-financial consideration may include an ethical, social or environmental consideration.
However, the key points to note from the new drafting on the new ESG provisions are:
they only apply to new trusts created after the Act comes into force which will limit their scope;
they are tied to – and supplement – the statutory power of investment which is included in the new Act; and
that statutory power of investment does not, in turn, apply where trustees already have another statutory power of investment.
The latter of these would mean, on the face of it, that all of these new ESG provisions which are tied to the new statutory power of investment would not apply to pension scheme trustees because they already have their own statutory power of investment under the Pensions Act 1995.
So, what do these developments on ESG investing mean?
As things stand, the new ESG provisions will apply to newly created trusts in Scotland generally but will not, based on new drafting, apply to pension schemes, even when the new Act comes into force as applying to pension schemes.
There is some logic to this as UK pensions law already has a comprehensive statutory regime for pension scheme investment in the Pensions Act 1995 and there may be a wish to avoid the new Scottish legislation being out of sync with that.
So, what we have is an interesting development on ESG but as things stand, they won’t apply to pension schemes even where the Act will come into force for pension trustees, to avoid a clash with UK law.
Beyond this, the other non-investment aspects are expected to apply to pension schemes and should assist in the running of schemes. The precise timing of when they will apply is not currently known, although they will be of interest to Scottish pension trustees when they start to have effect. This is, therefore, something for trustees of Scottish pension schemes to keep on their radars.
If we can be of any assistance with these developments, please get in touch.