UK: Autumn Case Law Update – 2013

Last Updated: 21 November 2013
Article by Michael Jones


The last few months have seen a high number of important decisions from the courts and Pensions Ombudsman, including the settlement of the Procter & Gamble case and the end of the Seldon litigation. We hope you find this one-off round up of these recent decisions and their implications from the Charles Russell pensions team useful.

Case Law Update

Continuing uncertainty re transfers of early retirement rights: Procter & Gamble appeal settles out of court

The High Court's decision in Procter and Gamble v SCA caused some turmoil in the pensions industry in the context of any early retirement or redundancy rights under an occupational pension scheme that may transfer under TUPE. The case left many questions unanswered by the court. It was the first decision that considered the impact of the Beckmann and Martin European Court decisions, and it was hoped that an appeal would clarify some of the outstanding issues, such as what happens when the right to early retirement is subject to trustee consent. Unfortunately for the pensions industry at large the case has now settled out of court. We will have to wait for a future High Court case in order to obtain further judicial comment on the outstanding question as to the extent of any right to pension or early retirement / redundancy that may transfer under TUPE, and how to calculate any risks arising there from.

Deduction of VAT paid on management services provided to pension funds

ECJ has held that employers can recover VAT paid on the management and operation of a legally separate pension fund, provided that there is a "direct and immediate link with the [employer's] economic activities as a whole", so that there is a link between the costs in question and the output transaction giving rise to a right of deduction. In this case, the Dutch employer was required by law to establish a pension scheme, and for the pension fund to be separate from PPG for legal purposes; it could not be part of the corporate group. If the costs incurred on the operation and management of the fund were part of PPG's general costs (which was for the national courts to decide), and the costs are attributable to activities giving rise to a right of deduction, the VAT could be reclaimed. The ECJ also confirmed that a pension fund of this nature cannot be classified for VAT purposes as a "special investment fund".

Following the Wheels decision in which the ECJ had held that DB occupational pension schemes do not fall within the VAT exemption for "special exemption funds", the decision in PPG Holdings BV may provide some good news to employers who incur management and investment costs for segregated investment mandates in respect of employee pension funds, if the employer has submitted historic claims for overpayment of VAT. The question of what may constitute a "direct and immediate link" is to be established by the national courts in the future. Any commentary/guidance which HMRC may issue will also be critical when assessing the relevance of the decision to UK schemes. For the time being, employers/trustees should consider whether their pension arrangements may benefit from the decision and, if they have not done so already, employers should consider whether to submit a protective claim for any VAT on pension management or investment charges paid but not recovered.

High Court reinforces debt due under a s75 actuarial certificate

The decision of the High Court in late July in Bestrustees plc v Kaupthing Singer & Friedlander Ltd emphasises the difficulty in successfully challenging a scheme actuary's s75 employer debt certificate. The trustee had paid £2 million into the pension bank account with the employer bank in October 2008. A few days later the account was frozen when the employer entered administration.

The scheme actuary certified the s75 debt in April 2012, based on the report and financial statements for the period up to the administration which attributed no value to the £2 million held on trust in the bank account, because at that time the trustee had been unable to confirm the likely level of recovery from that bank account pending legal proceedings brought by the administrators. Those legal proceedings were not finally determined until May 2010, and they confirmed that all money in the trust account was held on trust. So the pension trustee's proof of debt, filed in 2012, did not take into account the £2 million held on trust. The administrators deducted £2 million from the trustee's proof of debt on the basis that the same amount had been paid to the scheme out of the bank account. The trustee applied to the Court to reverse the administrator's decision.

The Court agreed with the trustee that, as at the date of the audited accounts used for the purposes of the s75 certification, the £2 million held in the trust account had no value because of the uncertainty arising from the issues in the pending litigation.

Whilst the case is fact-specific, it confirms the overriding significance of the actuary's s75 certification. It emphasises that the scheme assets and liabilities are to be calculated at the point of insolvency, and that later changes to the value of assets/liabilities are irrelevant.

Loss of death in service benefit recoverable by deceased former employee's estate on death soon after dismissal

Mr Fox died a short while after being dismissed on grounds of capability by BA, so his dependents did not receive the death in service benefit of £85,000 that would have been payable had Mr Fox been employed at the time of his death. His father brought a claim on his behalf for unfair dismissal and discrimination, and the Court of Appeal considered the question of what loss could be claimed if the dismissal was proven to be unfair or discriminatory.

BA argued that at the date of his death, Mr Fox could not have maintained a claim for the loss of death in service benefit because it was payable to third parties. The Court of Appeal rejected this argument, finding that death in service benefits form part of an employee's contractual remuneration. Under normal circumstances, the loss would simply have been the amount that would be required to put alternative insurance in place. However, since Mr Fox had died so soon after being dismissed, it is virtually certain that he would still have been employed had he not been dismissed and so his dependents would have been entitled to the full death in service benefit. Whilst the question of liability has been sent back for the Employment Tribunal to consider, if this is established then the loss should be calculated as the whole amount of the death benefit, less the amount of any employee pension contributions.

Whilst this case is also fact-specific, it does mean that in those rare cases of death shortly after dismissal/leaving service, consideration should be given to providing the benefit the member would have received if they had remained in service.

Employers may now choose to launch High Court proceedings to avoid IDRP and the Ombudsman

Employers who would prefer to avoid a protracted internal dispute resolution procedure ("IDRP") and Pensions Ombudsman investigation may now elect to issue court proceedings, following the High Court decision in Pell Frischmann Consultants Ltd and others v Prabhu and others.

In this case, the employer decided to launch High Court proceedings around the terms of a letter sent to a member in 1991 regarding a benefit augmentation. The employer was clear and open that its motivation was to put the claim outside the scope of the Pensions Ombudsman, and that it intended to recover its costs if successful, and have evidence tested by crossexamination, both of which were unlikely if the matter was investigated by the Ombudsman.

The Court considered whether to strike out the court proceedings as an abuse of process, but decided that this was not an attempt to obtain something not properly available to the employer in the course of properly conducted proceedings. The Court held that simply because the employer wished to ensure that the respondent could not complain to the Ombudsman, this did not necessarily amount to an abuse of process: "motive and intention is irrelevant except where malice is an issue". The Court conceded that it might have been more appropriate to wait until the IDRP had concluded, but found that the procedure does not bind employers.

This decision will affect the member more than the employer, as the member is prevented from pursuing his claim in the timely and cost-effective manner provided by the Ombudsman, and is also now at risk of the employer's costs. The decision circumvents the policy reason for the existence of the IDRP and Ombudsman, and could in some cases create a race between the employer and the member, with the member rushing to get to the Ombudsman before the employer launches High Court proceedings. The outcome is helpful to employers and highly unsatisfactory from a member and public policy point of view.

Age discrimination – previous mandatory retirement age found to be appropriate and reasonably necessary

The final decision in the long-running age discrimination case of Seldon v Clarkson Wright & Jakes has now been issued.

Discrimination on the grounds of age may not arise if a defence of objective justification succeeds; that is, if the reluctant act can be shown to be a proportionate means of achieving a legitimate aim. In very brief terms, the Supreme Court had previously held in April 2012 that a law firm's use of a compulsory retirement age in the partnership agreement could be objectively justified and did not necessarily amount to direct discrimination on the grounds of age. The Supreme Court had found that the law firm had identified three legitimate aims for its decision to remove the claimant from its partnership at age 65: (1) staff retention, in being able to offer partnership to high performers; (2) workforce planning in general, by allowing the firm to know in advance when partners would retire; and (3) maintaining a collegiate atmosphere by limiting the bad feeling caused by performance management of older partners.

The Supreme Court had remitted to the Employment Tribunal the question of whether the use of a mandatory retirement age was justified. The Employment Tribunal has now issued its determination, confirming that on the facts of the case – and the basis of the staff retention and workforce planning arguments - the law firm was objectively justified in retaining the mandatory retirement age at the time of Mr Seldon's retirement in 2006, and this did not amount to direct discrimination.

Barring an appeal, this should be the end of the Seldon litigation. Whilst this decision is now largely of historical significance since the abolition of the default retirement age in 1 October 2011, it may be relevant to any employers facing age discrimination claims in relation to the previous mandatory retirement age. In our view, a different outcome may well have arisen had Mr Seldon reached retirement age after the abolition of the statutory default retirement age on 1 October 2011. It is also notable that both the Employment Tribunal and the Supreme Court acknowledged that all partners – including Mr Seldon – were in an equal bargaining position when they had consented to the revised partnership deed in 2005 which had included reference to a normal retirement age of 65.

An update on the Regulator's contribution notice case in relation to the Desmond & Sons scheme

Desmonds, a Northern Irish clothing company, went into liquidation in 2004. The Pensions Regulator issued a Contribution Notice against two directors of the sole participating employer in 2010, requiring the two directors to personally contribute £1 million to the scheme between them. Whilst the main court proceedings remain ongoing, Desmonds had sought permission to apply for judicial review of the Regulator's process which had led to the imposition of the Contribution Notice.

The Northern Irish High Court rejected the application for judicial review on the ground that too much time had elapsed; allowing an application after such a length of time would undermine public confidence in pensions regulation, since it would be unfair to let the members' interests be prejudiced by delayed "public law attacks". The Court of Appeal will now rule on the liability of a further individual under the Contribution Notice, and the Upper Tribunal will consider the Regulator's application to review (increase) the amount of the contribution notice. These decisions are expected soon.

Scheme sanction: ignorance is no defence

In the case of Willey v Revenue & Customs, the First Tier Tribunal (Tax) has rejected an appeal by a scheme administrator against a £15,000 scheme sanction charge levied against him as a result of an unauthorised payment made to one of the scheme's members. The payment did not come within the definition of an "authorised employer loan" but was made without the knowledge of the administrator.

The administrator in this case had effectively argued ignorance of the scheme sanction charge regime in relation to the payment, which was made shortly after the finance Act 2004 tax regime came into force in 2006. The Tribunal accepted that the administrator took steps to remedy the situation as soon as practicable, that the loan was made shortly after the governing legislation came into force, that the administrator would have taken steps to stop the loan going ahead if he had known about it in advance, and that the loan was eventually repaid with interest so that the scheme suffered no loss. Notwithstanding this, the Tribunal felt it was just and equitable for the scheme sanction charge to apply because the administrator had failed to ensure a system was put in place to detect and stop unauthorised payments.

This case shows that the Courts will take a strict view of unauthorised payments; the legislation is highly prescriptive so that HMRC's hands are tied and a charge is either payable or it is not – no discretion applies. The scheme administrator for HMRC purposes should be aware of the onerous nature of their duties in relation to reporting and authorised of payments.

Before the Ombudsman

The Ombudsman has also issued a few interesting recent determinations, which we highlight below.

Position of directors in insolvency: Mr David Bridge v Elton Games Limited and Mr T Whittaker

Mr Bridge was employed by Elton Games Limited and was a member of its stakeholder pension scheme.

His pension contributions were deducted from his salary by his employer but were not paid into the scheme for a period of 26 months. Upon the employer's liquidation, Mr Bridge sought to recover these from both the company and its directors. The Ombudsman upheld the claim against the employer, but not the directors. He found that the member ranks as an unsecured creditor of the company in a voluntary liquidation but has no personal claim against a director of that company unless he or she carries out specific acts of administration in relation to the scheme which they would not normally have done as a director.

Incorrect benefit quotation: Mrs J Robbins v Citigroup Group Global Markes Limited and Gallagher Benefits Consulting Limited

In this case the Ombudsman found that a deferred member of the Citifinancial (AVCO) UK Pension and Life Assurance Scheme who took her benefits 7 months early and stopped looking for alternative employment on the basis of an incorrect benefits quotation was deprived of the chance to earn over £10,000 in the period between her actual retirement and her normal retirement age of 60 ("NRA").

The Deputy Pensions Ombudsman ("DPO") held that the issuing of an incorrect quote on which the member had relied amounted to maladministration, and that had she not been given the quote she would not have retired early. The DPO ordered that the scheme was to pay the member her full pension going forwards, as if she had retired at NRA, with any increases. When estimating her past losses, the DPI included the pro rata average salary of those jobs which the member had secured interviews for in the run up to her retirement, albeit without job offers. These indicated she had a "reasonable prospect of securing a role" before NRA. (In practice, no award for past losses was made as the lost pension payments and earnings were broadly offset by the early monthly pension payments the member had received).

RPI v CPI: Kemmish v Victrex

Dr Kemmish had joined a new DB scheme upon a management buy out. He complained that he was told that the scheme would always revalue deferred pensions by reference to RPI, mirroring his previous scheme. The trustees had decided to change this to CPI in accordance with scheme amendment powers.

The Ombudsman dismissed his complaint because "contemporaneous documentation clearly contemplates that there would be some differences" between the old and new schemes, and that even if Dr Kemmish believed that the rate would always be RPI in the old scheme, it was unlikely that he would have done anything differently. This shows that phrases such as "almost identical" may be interpreted widely by the Ombudsman.

Incapacity and the risk of medical treatment: Hayes v NHS Pensions

The DPO has upheld a complaint by a member of the NHS pension scheme who was refused an ill-health early retirement pension because NHS Pensions considered that the risks of "appropriate medical treatment" were acceptable and incapacity was not therefore permanent. The DPO held that NHS Pensions misinterpreted the regulations; it was irrelevant that they considered the risk of "appropriate medical treatment" to be acceptable, what was required was consideration of whether the member's refusal to undertake a particular treatment was reasonable. In addition, NHS Pensions had failed to give sufficient reasons for its refusal. While there was no strict authority for it to do so, the Deputy Ombudsman noted a "trend" towards decision makers being required to give detailed reasoning for their decisions. The DPO remitted the case back to NHS Pensions to reconsider rather than overturn their decision; the member was awarded £250 for the stress caused by its failure to consider his eligibility in a proper fashion.

The case is another example of the Ombudsman's insistence that decision makers should give reasons when refusing the award of an ill-health pension: reasons should be given and be "in plain and simple language". The case also highlights the extent to which it may be appropriate for a member to pursue all available treatment avenues – an issue which is more relevant to the payment of incapacity pensions from public sector schemes (or broadly comparable schemes following a transfer to the private sector). Such considerations are not relevant in the private sector at present.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michael Jones
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