Advisory Service Forum:
Pensions Litigation 2000

by David Pollard

David Pollard is a partner in the Employment Pensions Benefits Department at Freshfields Bruckhaus Deringer

Overruling on surplus allocation

In Barclays Bank v Holmes [2000] PLR 339, the High Court overruled the pension ombudsman's determination that Barclays Bank (the Bank) acted unlawfully in reducing its contributions in relation to members of its money purchase section (MPS). The MPS was established by a deed of amendment to the Barclays Bank UK Retirement Fund (the Fund) as an additional benefit structure alongside the final salary section (FSS). Members could transfer from the FSS to the MPS if they desired. The FSS was closed to new members. Neuberger J held that there was no overriding legal reason why a MPS should always be a separate trust. It was a question of drafting. It was held that here the two schemes had been drafted to have a single trust fund and the employer was entitled to suspend pay-ments into the Fund by drawing on the surplus to make credits for MPS mem-bers (as long as the trust allowed it).

It is unclear how Neuberger J's judgment will affect the future of defined benefit schemes. It could encourage employers who are considering closing defined benefit sections and setting up defined con-tribution sections to do so and use the surplus to fund them.

There may be some adverse con-sequences for members, but it makes commercial sense to allow flexibility where employers have no obligation to provide pension schemes.

Tupe and pension rights

In Beckmann v Dynamco Whicheloe Macfarlane Ltd [2000] PLR 269, the High Court held that rights to enhanced benefits from a pension scheme on redundancy may transfer under Tupe, despite the decision in Frankling v BPS Public Sector [1999] IRLR 212 that they did not. In Frankling v BPS Public Sector, the EAT held that rights to accelerated pension benefits were excluded from Tupe because they were "benefits for old age, invalidity or survivors" (regulation 7 of Tupe), even though they were triggered by redundancy. However, in Beckmann the High Court considered this point again and has decided that it is unclear. It has therefore ordered that the point be referred to the ECJ. Until the ECJ has given its judgment, care should be taken on Tupe transfers because there is a risk that a transferee may be liable for the redundancy benefits.

In Jones v Connex South Eastern Ltd (ET/2301167/99) an employment tribunal had ruled that a special early retirement pension (SERP) payment fell outside the exception provided by regulation 7 of TUPE. The employee's contract of employment incorporated certain trade union agreements, including an agreement as to pension rights. The tribunal found that the entitlement to the SERP payment had been incorporated into the employee's contract of employment and, therefore, did not fall within the regulation 7 exception. The payment was one made by the employer and was not made, or refunded by, the pension fund operating the occupational pension scheme.

Ombudsman need not issue notifications of preliminary conclusions

In Blake v The Pensions Ombudsman and Buckinghamshire County Council [2000] 51 PBLR (5) the High Court held that the pensions ombudsman is not required to issue notifications of preliminary conclusions.

Usually, the ombudsman does notify his preliminary conclusions to the parties to a dispute. This means that the parties can then make comments on the preliminary conclusions, before the ombudsman issues his final determination. In Blake the ombudsman did not notify his preliminary conclusions, and so the member appealed his decision on the grounds that the ombudsman had breached the rules of natural justice. The High Court held that there had been no breach and the ombudsman was not under a duty to issue a preliminary view.

Parties to a dispute before the ombudsman should be aware that they will not always be notified of his preliminary conclusions.

Trustees ordered to pay own costs

In Breadner v Granville-Grossman Ch.D (Park J) 17/7/2000, Lawtel C9900023 the High Court considered the circumstances to be taken into account when exercising its discretion as to costs under the civil procedure rules, CPR 44.3(2). This case illustrates the need for legal advisers and trustees to be aware that where exceptional circumstances such as those identified below are present, and even when trustees with no beneficial interest in the fund act on the advice of counsel in seeking the court's guidance, they may be ordered to pay the costs of the application out of their own resources. Park J identified the following seven factors as influencing his decision not to award the trustees costs:

• the trustees were the unsuccessful party in the proceedings
• the potential hardship to the beneficiaries of the trust fund should they be ordered to pay the costs directly or indirectly through the trust fund
• the trustees were professional trustees who charged for their services and were insured
• the present proceedings were created by an error on the part of the trustees in that they had failed to execute the trust deed before it had expired
• the trustees had adopted a partisan role - albeit entirely sensible in this case
• the trustees were involved in a claim adverse to one group of the beneficiaries
• although the application was internal in the sense that only the trustees and the beneficiaries were involved, it was 'hostile or adversarial' in nature.

Beneficiaries entitled to see legal advice

In Cas (Nominees) Ltd v Nottingham Forest plc [2000] All ER (D) 1115, the Court of Appeal confirmed that beneficiaries are entitled to see legal advice obtained by trustees unless the advice is for the purpose of litigation involving the beneficiaries.

Minority shareholders who were pursuing an unfair prejudice petition under s.459 Companies Act 1985 were entitled to see advice which the company had received from its legal advisors about various actions the company had taken. Although it was probable that these actions would lead to the current petitioners commencing legal action, the documents were not immune from disclosure as being legally professionally privileged because they were not created specifically for the ensuing litigation.

The point was decided on the basis that the law in this area is the same for company directors as that for trustees. The judgment refers to various earlier cases which make it clear that, where trustees (or directors) obtain legal advice in relation to their own defence in litigation brought against them by the beneficiary (or shareholder) these remain privileged. The judgment also refers to cases which confirm that such privilege remains where the relevant advice relates to the specific litigation currently envisaged.

Sub-underwriting by trustees exempt from tax

In Clarke (Inspector of Taxes) v Trustees of the British Telecom Pension Scheme [2000] PLR 157, [2000] OPLR 53, the Court of Appeal held that sub-underwriting by pension scheme trustees did not constitute trading income, because it was an integral part of the investment activities of the trustees concerned, and was therefore exempt from income tax. The Court of Appeal overruled the judgment of the High Court and reinstated the decision of the Special Commissioners. The court said it was significant that the BT scheme used an index tracking method of investment and, in most cases, merely followed this strategy when deciding whether to sub-underwrite. The court said that the case should not be viewed as a test case on which the sub-underwriting of all other pension schemes could be judged. It said that the issue would depend on the facts of each particular scheme.

Guaranteed annuity rates -the Equitable Life House of Lords decision

In Equitable Life Assurance Society v Hyman [2000] 3 WLR 529, [2000] PLR 249, the House of Lords held that Equitable Life had acted unlawfully in paying differential final bonuses to with-profits policy holders depending on whether they chose a guaranteed annuity rate (GAR) or opted out of it. The directors had a discretion to award bonuses, but the Lords said it was an implied term of the policy that they would not do so in a manner that would deprive the GARs of any value as this would conflict with policy holders' reasonable expectations. The decision indicates the courts' attitude in construing documents, particularly where discretions are given. It is likely to give rise to more litigation on this issue.

Court of Appeal overturns Ombudsman - Solicitors not "administrators"

In Ewing v The Trustees of the Stockham Valve Limited Staff Retirement Benefits Scheme and Arthur Cox [2000] 22 PBLR (7), it was held that whether solicitors could be considered to be "administrators" of a pension scheme, and so come within the PO's juris-diction, was a matter of fact and degree.

In this case, the member of a pension scheme had transferred all her assets out of the scheme. The trustees of the scheme later mistakenly informed her that she was entitled to a lump sum and pension from the scheme. She claimed the lump sum and began to receive a pension. The error was discovered over three years later. Arthur Cox, as solicitors to the trustees, wrote a letter of claim to the former member, on which the complaint to the PO was based. The Court of Appeal in Northern Ireland found that in this case the solicitors were only acting as the agent of the trustees, and could not be considered to be administrators. The mere act of writing a letter of claim was not "concerned with the administration of the scheme". Accordingly they were outside the PO's jurisdiction.

The PO had awarded the former member a sum for injustice caused by the peremptory style of the letter. The Court of Appeal considered that if writing in such a manner could constitute maladministration, the trustees would be liable for this, as they had instructed the solicitors to send the letter. However, the Court found that the letter was recognisable as a standard letter sent out by solicitors to debtors, and was not too abrupt considering that the former member must have been aware that she had been overpaid. There had been no injustice caused, and so the award made by the PO could not stand.

Insurance company owes duty of care to insured's dependants

Insurance company owes duty of care to insured's dependants In Gorham & ors v British Telecommunications Plc [2000] PLR 293, [2000] 3 All ER 867 the Court of Appeal held that where an insurance company gave pensions advice knowing that the interests of the insured's dependants were involved, the insurance company owed a duty of care not only to the insured but also to his intended beneficiaries. Therefore, when an insurance company mis-sold a personal pension to an employee who could have joined his employer's occupational pension scheme, it was liable to the employee's dependants for the death benefits that they would have received if he had been a member of the occupational scheme.

Equalisation of early retirement benefits

In Jones v Foxboro International Ltd (EAT 31 March 2000) the Employment Appeal Tribunal confirmed that a man is only entitled to equalised pension benefits back to 17 May 1990 and not, as the appellant claimed, back to 1 January 1973 (the date of the UK's accession to the Treaty of Rome). Both parties stayed appeals from a tribunal decision, which allowed backdating to 1973, until the Coloroll case returned from the ECJ. The decision in Coloroll confirmed the cut-off date in Barber of 17 May 1990.

The appellant's pension was increased on this basis, and both appeals were withdrawn - but he then claimed that the decision of the tribunal stood and his pension should be further increased to account for backdating to 1973. The EAT held that it would be inequitable to allow him to rely on the tribunal decision, as the correspondence between the parties clearly contemplated that the appeals were stayed and withdrawn with the intention that the Coloroll decision should be followed. Accordingly he was not entitled to a further increase to his pension.

Personal pensions available to creditors

In Krasner v Dennison and others; Lesser v Lawrence [2000] 3 WLR 720, [2000] PLR 213 the Court of Appeal endorsed a 1997 decision which established that benefits under retirement annuity contracts and personal pension schemes are available to meet the claims of a bankrupt's creditors. Following Re Landau [1997] 3 WLR 225, the Court held that these benefits form part of a bankrupt's estate and therefore vest in the trustee in bankruptcy, even after bankruptcy has been discharged. The trustee does not need to obtain an income payments order under the Insolvency Act.

This decision applies to any bankruptcy after 29 December 1986, but assets in most occupational pension schemes will be protected by forfeiture clauses.

Since this case the Welfare Reform and Pensions Act 1999 has come into force so that all types of Revenue approved pension rights will be excluded from a bankrupt's estate whether they are derived from occupational or personal pension schemes. All benefits will remain vulnerable to income payments orders, but only until the bankruptcy is discharged. This protection only applies to bankruptcies starting after 29 May 2000.

No duty to give employee pensions advice

In Outram v Academy Plastics Ltd,[2000] PLR 283, [2000] IRLR 499, the Court of Appeal held that an employer, who was also trustee of an occupational pension scheme, did not owe a duty of care in tort to an employee to give advice relating to membership of that scheme.

The employee was a member of the pension scheme until he resigned from his position. He later rejoined the company, but did not rejoin the scheme. Shortly afterwards, he resigned again due to ill health, and died. His widow argued that his employer should have advised him to rejoin the scheme because she would then have been entitled to death benefits. As it was, she was only entitled to a return of contributions. The Court of Appeal held that as it was not alleged that the employer was under a contractual duty to provide any advice, following the case of Scally v Southern Health and Social Services Board [1991] PLR 195, [1991] 4 All ER 563, there could be no duty in tort upon an employer or a trustee to provide advice to prevent economic loss.

Part-timers and pension schemes

In Preston v Wolverhampton Healthcare NHS Trust [2000] PLR 171, [2000] IRLR 506 the European Court of Justice delivered judgment on the time limits applying to part-time employees claiming back dated membership of their employers' pension schemes. Unfortunately, the judgment has not provided any definitive answers and the issues have been transferred back to the House of Lords whose ruling is eagerly awaited in 2001. The ECJ did clarify that:

• EU law permits a domestic juridical procedure which requires a claim for discrimination in eligibility to membership of a pension scheme to be filed within six months of the end of employment to which the claim relates
• EU law forbids a domestic juridical limitation on bringing a claim for no more than two years worth of pensionable service before the date of a claim
• The six months limit applies at the end of a series of consecutive contracts even if there were separate employment contracts
• The appropriate limitation period applicable to years of service claimed is that applied by domestic law.

No legal basis for transferees to participate in surplus proceeds

In the Canadian case of Reichhold Ltd v Wong [2000] 23 CCPB 188, [2000] PLR 277, members who had been transferred to a new plan were not entitled to any of the remaining assets of their former plan. It was held that the plan administrator did not owe a duty of care for future benefits to those members who had transferred properly and legally to a new plan. There was no contractual or trust law basis for any alleged right of those who transferred to participate in the surplus proceeds. This case involved a pension scheme which fell to be wound-up and surplus funds in the plan were distributed to members. An individual who had been the subject of a transfer of assets and liabilities to another pension plan prior to the date of winding-up, sought to establish that he and the other transferees should be entitled to a share of the surplus. This was so in spite of the fact that there had been a transfer of the pro rata share of the assets and liabilities of this group to the new pension scheme offered by their new employer.

Custodial sentence inappropriate for Pensions Act offences

In R v Dixon [2000] OPLR 47, the Criminal Division of the Court of Appeal considered the case of Mr Dixon, a company director who had been sentenced in the Crown Court to six months imprisonment under the Pensions Act 1995. Mr Dixon had deducted pension contributions from his employees' salaries, but had not paid them into the relevant pension scheme. The court held that a custodial sentence was inappropriate where a company director pleaded guilty to the charges, especially because the criminal offence of late payment was soon to be repealed. The court substituted fines of £3,000 instead.

Incapacity pension: meaning of ordinary duties

In R v Sussex Police Authority ex p Stewart [2000] ICR 1122 the Court of Appeal set aside the Authority's decision to terminate a former employee's incapacity pension on the ground that she was now able to perform 'ordinary duties' again. The court held that, looking at the ordinary meaning of words in the relevant regulations, the employee should still be regarded as incapacitated.

Pension rights lost by acceptance of payment in lieu

In Silvey v Pendragon plc [2000] All ER (D) 1492 when a 38 year employee of a motor dealer's contract was terminated 12 days before his 55th birthday, after which he would have received increased pension rights, the EAT held that he could not simultaneously receive money in lieu of notice and claim the benefit of the increased pension rights. The EAT held that, in order for the Appellant to claim that his employment had continued to the expiry of the notice period when he would have achieved higher pension rights, he would have had to refuse the offer of payment in lieu or make it abundantly clear that his acceptance of it was without prejudice to his employment continuing.

Preservation requirements do not apply to unfunded schemes

In Royal Masonic Hospital Appeal and another v Pensions Ombudsman and another [2000] All ER (D) 2390, Rimer J held that the preservation obligations in the Pension Schemes Act 1993 only apply to schemes which are funded. According to the clear wording of the legislation, the preservation require-ments only apply to occupational pension schemes with resources derived partially or in full from payments the employer is obliged to make by an actual or contingent legal obligation. As the pension scheme in question was unfunded and employees' benefits were to be made out of the general assets of the employer hospital when they fell due, neither preservation requirements nor any deferred right to a pension for early leavers applied. On this reasoning, a funded unapproved scheme would be subject to preser-vation obligations but an unfunded top-up promise would not be treated as part of the funded scheme and therefore be subject to preservation obligations. Provision for vesting would have to be made as a contractual matter.

Dishonest assistance in breach of trust

In Wakelin v Read [2000] PLR 319 the Court of Appeal decided to remit a dispute to the Pensions Ombudsman as to whether a member of a pension scheme, who was also a director of the company acting as trustee of the scheme, had been a dishonest accessory to a breach of trust by the trustee company. It held that if the PO were to determine, without error of law, that the member had not been dishonest, then he had no discretion to decline to direct the new trustees of the scheme to pay benefits to him under the scheme.

The original complaint, which was brought to the PO by the new trustees of the pension scheme, was that the member had been a dishonest accessory to the purchase of a property from the sponsoring company at a high price when the company was in financial difficulties, and the subsequent sale of the property at a significantly lower price. It was not alleged that any other directors of the trustee company were dishonest.

The PO concluded that the member had acted in the same way as his colleagues, and since no dishonesty was alleged against them, then the member could not have acted dishonestly. The Court of Appeal found that this was an error of law, and that the PO had not considered all the factual circumstances relevant to the alleged dishonesty. However, only the PO could determine the question of dishonesty, and so the dispute should be remitted to him.

The new trustees claimed that loss resulting from the alleged dishonesty exceeded the amount of the member's benefits under the scheme, and accordingly withheld those benefits. The PO declined to direct the trustees to pay benefits to the member despite finding no dishonesty. The Court of Appeal considered whether the PO had such a discretion, and found that directing benefits to be paid was an equitable remedy which could be refused on the grounds that the member did not come with "clean hands". The PO did not have a discretion to decline the direction where he had determined that the member had not acted dishonestly.

Sun Alliance annuity dispute

In Sun Alliance and London Assurance Co Ltd v Pensions Ombudsman [2000] All ER (D) 1429, allowing an appeal from the decision of the pensions ombudsman regarding the construction and effect of an insurance policy, the High Court held that Royal & Sun Alliance was entitled to remove the guaranteed annuity rates (GARs) from new contributions to money purchase schemes. This means that anyone contributing a fixed sum per month to their pension would retain GARs for that portion of their fund but not to any increased premium. The case was distinguished from the recent Equitable Life case, in which the House of Lords held that Equitable Life had acted unlawfully in paying differential final bonuses to with-profits policy holders depending on whether they chose a GAR or opted out the of the GAR.

No duty on pension scheme administrators to provide advice

In Wirral Borough Council v Evans [2000] All ER (D) 1728, an appeal to the High Court of the Pensions Ombudsman's determination, Evans-Lombe J held that there was no duty on the administrators of the Local Government Pension Scheme (LGPS) to provide pensions advice to a member explaining the difference between 'reckonable' and 'qualifying' service even where only 'reckonable' service would be taken into account on transfer to the LGPS. On commencing a university post that made Mr Evans eligible to join the LGPS the guide for which stated that his 'reckonable' service would include any period of service transferred from his previous employer's pension scheme (he had been employed by BT for 19 years previously), Mr Evans transferred his accrued rights in the BT scheme and subsequently found that his pension rights had substantially devalued his benefits under the BT scheme.

Notwithstanding the decision in this case, Evans-Lombe held that, where administrators are found to have offered pensions advice they must do so competently. In a case where the administrators had negligently provided advice on the difference between 'reckonable' and 'qualifying' service, this would have constituted maladministration within the meaning of the Pension Schemes Act 1993, section 146(1)(a).

Beneficiaries can sue trustees for breach of trust

In Walker and others v Stones and another [2000] 4 All ER 412 the Court of Appeal held that a beneficiary had standing to sue a trustee for breach of trust if: (a) the beneficiary could show that that the trustee's conduct had consti- tuted a breach of some legal duty owed to him personally; and (b) the breach had caused the benefciary's personal loss. In considering whether a breach of trust had been dishonest, the test was not purely subjective - a person might act dishonestly even though he genuinely believed that his action was morally justified.

David Pollard
Employment Pensions Benefits Dept.
Freshfield Bruckhaus Deringer
Tel 020 7936 4000
david.pollard@freshfields.com