Advisory
Service Forum: Pensions Litigation
1999 They think it's all over - it isn't yet....
by Karen Lush, specialist pensions litigator,
Baker & McKenzie
When OPDU asked me to write a similar column at the end of 1998, there were not many important cases to report upon. However, over the past year, the courts roused themselves for a fin de siecle burst of interesting decisions.
Surplus issues were particularly well represented. However, as most surplus cases turn on the precise wording of the particular scheme's rules, they provide only limited guidance on the vexed question of "whose surplus is it anyway?".
Surplus case of the year was probably the Court of Appeal's decision in the National Grid case. Pensioners had complained that surplus had been unlawfully misapplied by the employer. The court held that in the absence of an express power under the Rules, the employer could not use surplus to avoid a liability to contribute that had already accrued. In a curious twist, however, the court indicated that an amendment to the rules would have saved the situation for the employer. This amendment has now been made retrospectively and will be tested when the case reaches the House of Lords.
National Bus (Bus Employees Pension Trustees
v Harrod)
After a decade of arguments over the ownership of the surplus taken from the National Bus pension schemes after privatisation by the last Government, John Prescott ordered the lawyers to stop their "fancy dancing" and reach a settlement. But the lawyers managed one last tango with the Vice Chancellor, who was asked to decide whether the wound-up schemes still counted as 'occupational pension schemes' subject to the Pensions Act 1995. This technical issue was important to the members, who wanted member-nominated trustees to help fight the action against the Government. However, the Vice Chancellor found that the schemes did not fulfil the statutory definition of a scheme "capable of having effect" so as to provide benefits', as they had no assets other than the cause of action against the Government. The Act therefore did not apply.
The Government has now settled the substantive case with a payment of over £350 million.
Hillsdown: HF Pension Scheme Trustees Ltd v Ellison; Hillsdown Holdings plc v Inland Revenue
There were two more chapters in the Hillsdown saga, which concerned invalid repayments of surplus to employers in 1989 and 1990.
Some pension lawyers will have breathed a sigh of relief as the court threw out the trustees' negligence action against their solicitors for having advised that the repayment was lawful. Although the trustees could not have known at the time that the advice was incorrect, and thus were unaware that they had a cause of action to bring, they were aware of all the material facts. Therefore, the six-year limitation period started to run at the time of the transfers, and had now expired.
The employer, however, succeeded in recovering the tax paid on the invalid surplus repayments from the Inland Revenue. The court held, that since the repayments were invalid, and the company had received the money merely as a constructive trustee for the scheme, they were not 'payments' for the purposes of the Taxes Act 1988 and thus could not be taxed.
The Inland Revenue have since expressed the view that this decision would only apply where the company actually returned the invalid surplus repayment to the scheme. If the employer went into insolvent liquid- ation and the money could not be re-covered, they would not repay the tax.
Not to be left out, the Privy Council had a shot at the surplus question in this appeal from the Jamaican courts. The Air Jamaica scheme was wound up in surplus. Under the scheme rules, employers and employees paid 'matched contributions', and, unusually, there was no provision dealing with the distribution of any residual surplus on winding up. The company purported to amend the rules to permit the surplus to be paid to itself, in breach of a prohibition in the rules against such amendments. The Privy Council held that the amendment was invalid and, in the absence of a rule dealing with residual surpluses, the surplus was held on a resulting trust for those who had contributed to it. As the members and the company had made equal contributions, each was entitled to a half-share.
However, in the case of a scheme in winding up which has a residual surplus rule, or in an ongoing surplus situation, members will not be able to rely on Air Jamaica to argue that they have beneficial rights in the surplus simply because they have contributed to it
The Pensions Ombudsman's perception of his own jurisdiction was severely curbed in one of this year's key decisions. The trustees had exercised their discretion to reduce a scheme surplus by granting benefit improve- ments to some, but not all, categories of members. The Ombudsman set aside their deed of amendment, finding that they had breached their duty of impartiality, failed to act in the best interests of all the beneficiaries, and exercised their power for an improper purpose.
The Court of Appeal found that the Ombudsman had approached the exercise of the trustees' discretion on entirely the wrong basis. It was not for him, or any court, to judge whether the trustees' decision was 'fair'. The trustees' duty was to act in a way which appeared to them to be fair and equitable in all the circumstances. They must exercise their power for its proper purpose, giving proper consideration to relevant factors and excluding irrelevant ones. The weight to be given to any one factor was a matter for them. They were also entitled to consider the interests of the employer. If they followed these principles, they could not be criticised if they reached a decision which appeared to prefer the claims of one interest over others. This clear ruling restores the traditional understanding of the position relating to the exercise of trustees' discretions.
The Court also considered an important jurisdictional point. It stated that the Ombudsman should not take on cases which, although starting with an individual complainant, can affect the contributions and benefits of third parties (in this case, the employer and other members).
However, this may not be the end of the story, as the Government has included in the Child Support, Pensions and Social Security Bill a provision which, if enacted, will allow the Ombudsman to make determinations which affect unrepre- sented third parties as long as he is satisfied that their interests have been properly considered.
Law Debenture v Malley and the Pensions Ombudsman
Many complaints to the Pensions Ombudsman concern the refusal of an ill-health early retirement pension. On occasion, the Ombudsman has effectively taken into his own hands the decision as to the member's incapacity. Developments this year have curbed that practice, and in his more recent ill-health determinations, the Ombudsman has conscientiously applied the Edge principles.
In this pre-Edge case, the trustees, faced with inconclusive medical evidence, decided to have the member videoed by a private detective to help them decide whether he was truly incapacitated. The Ombudsman held that this in itself was mal-administration, and awarded £2,000 compensation for the unwarranted intrusion into the member's private life. The court however held that covert surveillance could be a legitimate tool in the investigation of claims. The trustees had considered the evidence available, and had not reached a perverse decision. Therefore, there was no maladministration.
The status of pension rights in bankruptcy received further clarification. Re Landau had decided that a Section 226 policy is property which vests in the trustee in bankruptcy, notwithstanding that the pension may not become payable until after the bankruptcy has been discharged. Here, the court held that the same principle applied to occupational pensions. Benefits accrued prior to the bankruptcy will vest in the trustee in bankruptcy. However, this did not include guaranteed minimum pensions or any benefits accrued after the bankruptcy had been discharged.
The case concerned the winding up of a scheme with separate money purchase and final salary sections. The trustees sought the court's sanction to take out insurance against any claims made after the final distribution. The court declined, holding that this was not an expense of the winding-up but simply costs that the trustees wished to expend for their own benefit.
The court also held that surplus moneys could not be applied from the final salary section to offset the employers' contributions due to the money purchase section. In doing so, the judge seems to have viewed the scheme as two entirely separate trusts, which is a doubtful conclusion in the context of a hybrid scheme. He was also concerned that the money purchase section had not been established on definitive documentation, and so there were no specific terms governing the employers' duty to contribute other than an announcement to members. It seems that the case turns on its own facts, and the decision would probably not invalidate an express power contained in the rules of a scheme to offset surplus against contributions.
By mistake, Scottish Equitable made a massive overpayment to Mr Derby, a policyholder. He spent £200,000 on paying off part of his mortgage and purchasing another pension policy. He also spent £9,000 on modest improvements to his lifestyle. When Scottish Equitable tried to reclaim the money, he relied on the alternative defences of estoppel and change of position.
The court held that Scottish Equitable's carelessness was no bar to the recovery of money paid by mistake. Since the mortgage repayments and new pension policy could easily be unwound, he had not suffered any financial detriment or change of position, and so could not rely on either defence. Although the £9,000 had been spent in good faith and was not recoverable by Scottish Equitable, this small detriment could not give him a defence to the entire claim. This decision brings some balance to the rather all-or-nothing doctrine of estoppel, and develops the flexible new defence of change of position first recognised in Lipkin Gorman.
The new millennium
Y2K may see the final resolution of the National Grid case, and the distribution of at least some of the National Bus settlement monies. Also awaited is the European Court's decision on the issue of sex discrimination against part-timers. The more complex aspects of the Pensions Act, such as the Minimum Funding Requirement or member-nominated trustee opt-outs, however, seem more likely to develop through direct government intervention than through the courts.
