Background

In the MCP case[1] , the claimant sought damages in respect of loss alleged to have been suffered as a result of the defendant's breach of duty in the provision of pension scheme administration services. The claimant alleged that it had retained the defendant to administer a scheme to which some 32 members had transferred, but that the defendant had failed to maintain the scheme records so that no reference to these members was subsequently found. The result was that they were overlooked when the scheme was wound up and subsequently substantial financial provision had to be made for some of them.

The claimant had arranged insurance cover. The insurer paid out the trustees' loss and sought to recover those costs from the defendant.

The scheme in question was one of the Maxwell schemes and presented many challenges on the administration front with significant member movements. The defendant disputed liability on a number of grounds and denied it had been in breach of duty in the way in which it had administered the scheme. One argument was that, as the claimant had undertaken an extensive advertising campaign and issued Section 27 notices with no former members coming forward as a result, the Section 27 notices provided a complete answer to any claim by the 32 members against the claimant and therefore, against the defendant. This argument was based on the provision in the legislation which states that, once two months has elapsed after the Section 27 notice has been issued, trustees can safely distribute assets by reference only to those beneficiaries of which they have "notice" and no others persons have a claim. This question was tried as a preliminary issue.

Decision

There were two key questions, first whether section 27 applied to pension schemes at all and secondly, if it did, what constituted "notice" for the purposes of that Act.

The judge heard no argument against the proposition that the section applied to pension schemes and therefore perhaps unsurprisingly assumed that it did!

On the second issue the judge considered that there was a distinction to be drawn between "notice" and "knowledge". Section 27, he decided, is concerned with notice and not knowledge. A person has "notice" of a fact even though he may have forgotten it and so not know it any more. The trustees accepted that they had previously been aware of the 32 members in question. The judge therefore concluded that that the section 27 notices were ineffective to protect the trustees from those members' claims.

Implications

It is back to the parties now to work out whether the defendant is or is not liable but the answer does not lie in Section 27.

An appeal is contemplated but unless it is successful the decision means that trustees risk being liable for any members they lose track of and will therefore be expecting more from their scheme administrators to guard against this risk. The world being what it is, records are never going to be complete and accurate 100% of the time. Indeed, the larger the number of schemes operated by employers and the more corporate re-organisations affect scheme members, the greater the risk.

For schemes that have not yet considered the Regulator's guidance on record keeping, the case may be a prompt to look at that more closely, more urgently.

Although Section 27 notices are not a complete answer for trustees who are winding-up schemes, they will continue to provide a layer of protection for trustees, so trustees are likely still to use them.

Given the limitations on the effectiveness of Section 27 notices, buying missing beneficiary insurance looks to be essential for trustees who want fully to protect themselves on a winding-up. The cost of and extent of cover available may, in some instances, be problematic and premiums may increase to reflect the higher levels of risk this case sees trustees exposed to.