UK: National Bus: High Court Sanctions The Purchase Of Trustee Insurance Cover

Last Updated: 26 June 2008
Article by Mark Howard

As described by Mr Justice Floyd, NBPF Pension Trustees Limited v Warnock-Smith (2008) was "all about the last knockings" of the two former occupational pension schemes of the National Bus Company. The application, made by the scheme trustees, sought the sanction of the High Court to the distribution of the schemes' remaining surplus funds. The trustees also sought approval to purchase run-off and missing beneficiary insurance to avoid the need to retain further reserves.


When National Bus was privatised in the late 1980s its two occupational pension schemes were to be wound up, the benefits bought out and the surplus funds, totalling around £200m, returned to National Bus. However, in 1999 these amounts were recovered by the trustees after actions brought against the Secretary of State (the successor in title to National Bus) following a complaint to the Ombudsman by a former scheme member.

In exercising their discretion to distribute the recovered surplus funds, the trustees decided who was eligible for a share in the funds in accordance with an Eligibility Compromise sanctioned by the Court. The Eligibility Compromise also provided for a reserve fund to cover any unexpected issues that could not be dealt with when distributing the bulk of the fund.

This distribution of the reserve fund, standing at around £21.5m, was the subject of this application.

Reserve fund distribution and trustee insurance

The Court was prepared to sanction the distribution of the reserve fund on the basis that the trustees' proposals for distribution were practical and a proper exercise of their powers.

However, the issue of insurance to protect the trustees against claims that they had not correctly implemented the Eligibility Compromise or from missing beneficiaries gave rise to more debate. It was recognised that there were three classes of potential beneficiaries to consider:

  • Beneficiaries known to them but whom they had not been able to trace, despite their efforts - the "Untraced Beneficiaries";

  • Beneficiaries known to them who were refusing or failing to accept benefits - the "Refusing Beneficiaries"; and

  • Beneficiaries or potential beneficiaries about whom they did not know - the "Unknown Beneficiaries".

The trustees' proposal was to include in the reserve fund to be distributed the assets relating to the Untraced Beneficiaries and Refusing Beneficiaries - this would mean that their right to claim under the Eligibility Compromise would be extinguished entirely. Also, they wished to take out "missing beneficiary" insurance to provide for beneficiaries who might have been overlooked in error, i.e. the Unknown Beneficiaries. Finally, the trustees wished to purchase run-off insurance to protect them against claims for breach of duty in respect of any mistakenly unpaid or underpaid beneficiaries.

The Court was satisfied that substantial efforts had been made to trace the Untraced Beneficiaries and that it would be an appropriate use of the trustees' powers to place the shares of this group in the reserve fund to be distributed, the effect being that the Untraced Beneficiaries would not have a claim. The same applied to the Refusing Beneficiaries.

The question of what to do with the Unknown Beneficiaries caused more of a problem. The Court noted that they had been subject to the same advertising and had been afforded similar time and opportunity to come forward as the Untraced Beneficiaries. On that basis, the Court saw no reason to treat the Unknown Beneficiaries any differently to the Untraced Beneficiaries and believed it proper to add their shares to the reserve too.

Although recognising that run-off insurance was of fairly limited potential application, Floyd J held that, in a fund of this size, it was unreasonable to expect trustees to shoulder the risk of claims against them for innocent mistakes made during the administration of the fund. The insurance was expensive but needed to be considered in the light of the total distributions under the schemes: a one per cent error in distribution could give rise to a claim for several million pounds. Therefore, it was an expense that the trustees could justify.

In Kemble v Hicks (1999), Rimer J had refused to grant the purchase of insurance on the basis that its principal benefit was for the trustees and not any scheme beneficiaries. The facts of the case in hand were different because there were no effective exoneration clauses protecting the trustees from innocent mistakes and the distributions (around £386m over both schemes) and the numbers of claimants involved were substantial, making the prospect of a claim a very real one. Floyd J held that run-off insurance would not just be for the benefit of the trustees, but also the claimants who may have been wrongly paid or underpaid.

The final question which remained unanswered was whether missing beneficiary insurance was necessary now that the Unknown Beneficiaries' right to claim would fall away. The part of missing beneficiary insurance relating to claims from beneficiaries known to the trustees, but mistakenly overlooked, was sanctioned. However, the Court could not agree to the missing beneficiary insurance for claims from Unknown Beneficiaries because, as the Court had directed, these beneficiaries should be excluded from making a claim - to provide insurance in case they did make a claim would be providing insurance for claims that are barred in any event and could not be justified (although the Court then went on to say that it would be acceptable for the insurance to cover Unknown Beneficiaries if there was no increase in the premium!).


This case highlights the Court's willingness to sanction the purchase of trustee run-off insurance, even where its application is thought to be fairly limited, on the basis that trustees should not have to carry the risk of claims that arise on the back of their innocent mistakes. It seems that the cost of insurance, even if considered to be excessive, will not stop the Court from sanctioning its purchase if it is considered in the light of the size of the fund and the related risk of claims arising. What cannot be justified however, is the sanction of insurance where its need has been obviated given that beneficiaries' rights to claim from the fund have been extinguished.

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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