UK: The Pensions Ombudsman Gets Tough

Last Updated: 30 September 2009
Article by Mark Howard

The last year has seen a number of Pensions Ombudsman determinations where trustees have been ordered to reimburse the scheme for a breach of trust.

The role of a pension scheme trustee has always been an onerous one. Trustees can be personally liable for any loss to the scheme. Many schemes are run by corporate trustees which are a subsidiary of the principal employer. This is often done to provide an extra layer of protection for the individual directors who take the decisions about the scheme.

The Pensions Ombudsman has power to investigate claims of maladministration and disputes of law between pension scheme members and trustees. The Ombudsman has power to give directions - which are enforceable in the County Court - and binding on the parties to the complaint.

The perils of professional qualification

In Kemp v Sims, Kemp persuaded his co-trustees to pay a demutualisation payment of around £87,000 received from Scottish Widows to the sponsoring employer. The Ombudsman held this was a breach of trust as there was no power to return funds to the employer. The trustees sought to be excused under section 61 of the Trustee Act 1925 which protects a trustee from personal liability provided he/she has "acted honestly and reasonably and ought fairly to be excused for the breach of trust". The Ombudsman found that the co-trustees had acted honestly and, bearing in mind that Kemp was the main point of contact for the scheme, had not acted unreasonably in relying on the information provided by Kemp. They were granted relief under section 61. However, Kemp was a solicitor and should have known that he could not have paid the cheque over to the sponsoring employer. He was therefore not relieved of his liability under section 61 and ordered to pay £87,000 plus interest to the scheme. Kemp appealed to the High Court, but the decision was upheld.

The perils of a "loan" to the sponsoring employer

The sponsoring employer of the Greenup & Thompson Limited Pension Scheme had been in financial difficulties when it was purchased in May 2000 by Mr and Mrs Payne. In July 2000, the trustees approved a short term loan of £150,000 to the sponsoring employer. The sponsoring employer subsequently became insolvent. It was (and still is) a criminal offence under section 40 of the Pensions Act 1995 for trustees to agree to lend to the employer. However, even ignoring the illegality of the loan, the Ombudsman found that the trustees had acted in breach of trust.

At the time of the loan, the sponsoring employer already owed the scheme unpaid contributions and an earlier (lawful) loan. Despite the loan being made to shore up the company's finances, there was no discussion as to whether security should be obtained. The duty of trustees is to "take such care as an ordinary prudent man would take if he were minded to [make an investment] for the benefit of other people for whom he felt bound to provide". The Ombudsman decided that a prudent trustee would not have agreed to such a risky investment and all the trustees were in breach of trust. This included the Paynes, who had attended the trustees meeting in their capacity as directors of the sponsoring employer, and took no part in the trustees' decision making. The Ombudsman considered their unique insight into the company's finances should have made it apparent to them that investing in the company was a high risk strategy. The member nominated trustees were also in breach of trust as they should have been aware of the outstanding contributions and existing loan and that the new loan was to be unsecured and this should have alerted them to it being high risk.

The scheme contained a clause exonerating the trustees from all liability except for loss caused by wilful default or neglect. However, section 33 of the Pensions Act 1995 renders void any attempt to limit trustees' investment duties so the trustees could not rely on this protection. The trustees were ordered to pay £130,000 of outstanding loans.

Poor investment decisions?

The Asheridge Limited Discretionary Pension Scheme had first invested in a property in Florida in 1983. The Ombudsman found this to be a poor decision with hindsight, but not a breach of trust. The property was sold, but despite the poor returns which had been achieved, the proceeds were reinvested in a second property in Florida. No rent was received or the second property. The Ombudsman held this investment was a breach of trust, finding that the investment decision was improperly based on the benefit of the property to the owners of the sponsoring company. In addition - and despite warnings from the actuary that the loans were unlawful - the trustees made a succession of loans to the sponsoring employer during the early 1990s. No interest was sought on the loans. As the investment decisions pre-dated the Pensions Act 1995, the Ombudsman had to consider the exoneration clause, which protected trustees except for breaches of trust knowingly committed. The Ombudsman found that three of the trustees had knowingly committed a breach of trust and were liable for losses of £421,000 plus interest.

Conflicts of interest

Finally, in the ES Group Pension Scheme case, the Pensions Ombudsman directed that a board of trustees must repay more than £500,000 plus interest for four breaches of trust which occurred before the sponsoring employers became insolvent.

First, the trustees were issued with shares of the sponsoring employer in lieu of outstanding contributions. The Ombudsman pointed to the clear conflict of interest of Mr Robinson, the Chair of Trustees and the Chief Executive, and was satisfied that the real purpose of the investment was to improve the position of the company. The Ombudsman found that Mr Robinson knew this was a breach of trust and therefore was not allowed to rely on the exoneration clause (this investment pre-dated the 1995 Act). However, in the absence of any evidence about the company's ability to pay the outstanding contributions, the Ombudsman found that there was no additional loss to the scheme.

Second, in 1998, the Trustees purchased £195,000 of shares in a subsidiary of the principal employer. The purpose was to allow £70,000 of unpaid contributions from the employers to be paid and working capital for another group company. The Ombudsman found that the trustees did not need to pay £195,000 to get £70,000 back and rejected the trustees' evidence that they thought the businesses were viable. As this investment post-dated the 1995 Act, the exoneration clause in the scheme was no longer available and all of the trustees were jointly and severally liable for the £195,000 lost.

The third complaint was that the trustees remained invested in cash for nearly four years, ignoring the advice of the actuary and investment advisers. The trustees tried to rely on section 61 of the Trustee Act 1925, but this was rejected by the Ombudsman as they had acted unreasonably in failing to follow the investment advice (or at least not seeking further advice) and were unable to give any reasonable explanation as to why they remained invested in cash after changing fund managers. The Ombudsman found the trustees liable for losses of £330,000.

The final ground of complaint upheld was that a full transfer value had been paid in respect of Mr Robinson at a time when the scheme was underfunded. The Ombudsman found that the other trustees had demonstrated weakness in agreeing the transfer value, but could rely on the exoneration clause as it was not a deliberate and knowing breach of trust. Mr Robinson, however, was found to be sufficiently reckless as to the effect on the scheme that he was in wilful default and personally liable for the loss caused to the scheme. (As Mr Robinson had moved to New Zealand the loss was only to be calculated if the independent trustee believed there was a reasonable prospect of recovery).

These cases serve as a reminder that pension scheme trustees can still be made personally liable for breach of trust even though there is usually some form of protection from exoneration or indemnity clauses. It is also easy to see why pension trustee liability insurance is becoming increasingly popular as providing further protection against potentially huge personal losses.

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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