Top of the agenda

1. Pensions Regulator starting to clamp down on auto-enrolment non-compliance

The Pensions Regulator has a number of powers to ensure employers comply with their auto-enrolment obligations.

It can issue a “compliance notice” to employers, requiring remedial action, if the Regulator is of the opinion that the employer has not complied with some or all of its auto-enrolment obligations. The Regulator also has powers to issue a compliance notice to third parties, such as scheme trustees, if the employer has failed to comply with some or all of its auto-enrolment obligations because of an act or failure to act by the third party.

In June 2012, the Regulator set out its strategy and policy to enforcing compliance with the auto-enrolment requirements – these documents may be found on the Regulator’s website: The guidance makes it clear that the Regulator’s normal approach would be to try to resolve any non-compliance issues first by issuing instructions by email or in writing or, if appropriate, having a face to face meeting with the individual(s) responsible for the breach. Where this does not resolve the matter, or is not appropriate for some reason, the Regulator may issue an (informal) warning letter before proceeding to a formal compliance notice.

In its recently published Corporate Plan, the Regulator stated that its main focus over the next three years would be to ensure compliance with the auto-enrolment regime.

The Pensions Regulator has now confirmed that it has issued its first ever non-compliance notice against an employer (though no further details have been given about the underlying breach). The report also confirms that the Regulator has issued 38 warning letters.

Comment

With the Pensions Regulator clearly starting to take action against employers for non-compliance, employers who have not yet reached their staging dates should ensure that they are compliant in time. Employers which are considering using their existing schemes for auto-enrolment purposes, are likely to need to amend their rules to ensure the schemes are fit for auto-enrolment purposes and should leave themselves sufficient time to achieve this. To view our briefing on typical rules under defined benefit and defined contribution schemes that may need amending, click here.

Cases

2. Kaupthing: administrators’ attempts to reduce the pension scheme trustees’ proof of the employer debt fail

The High Court has held that a decision by administrators of Kaupthing Singer Friedman (the Company) to reduce the pension scheme trustee’s proof of the employer debt in the administration of the Company should be reversed.

Background

This is another in a series of disputes concerning the Icelandic International Bank and its pension scheme, the Singer & Friendlander Limited Pension & Assurance Scheme (Scheme).

In an earlier dispute, the High Court had clarified that an employer debt arising on an employer insolvency should be calculated as at the date of the employer’s insolvency and not the date the debt is certified by the actuary. Had it been the date of certification, the Bank may have been liable for an extra £66m by way of employer debt to the scheme trustees. For our update on the decision, click here.

Facts

The facts of the current dispute are as follows:

  • The Trustee held a bank account with the Bank, for the payment of pensions, into which the Trustees had paid £2m on 3 October 2008.
  • The Bank was in financial difficulties and received instructions from the then Financial Services Authority to transfer the £2m into a segregated trust account held with the Bank of England (“the Account”). The Account was frozen when the Company entered administration on 8 October 2008.
  • A year later, the administrators of the Company issued an application for directions to the High Court as to whether the money in the Account was held on trust and if so who were entitled to the funds. In the High Court, the Court held among other things that all the money in the Account was held on trust. On appeal, the Court of Appeal held that the funds in the Account belonged to the trustees and that there was no entitlement on the part of the Company to withdraw the funds in the Account.
  • In April 2012, the Scheme actuary certified the employer debt, using the Scheme’s annual report and financial statements for the period ending 7 October 2008. In the report and financial statements, the £2m held in the Account was given a nil value on the basis that the trustee couldn’t confirm (at the time) that it would actually be able to recover the moneys from the Account as the issue was subject to legal proceedings.
  • The actuary certified the debt at (approx.) £74m and in July 2012, the Trustees filed a proof for this amount.
  • The administrators of the Company told the Trustee that they were deducting the £2m from the Trustee's proof of the employer debt as the same amount had been paid by the Bank to the Scheme from the Account.
  • The Trustee applied to the Court to reverse the administrator's decision.

Administrators' submissions

The administrators did not query the employer debt calculation. They accepted that the employer debt was as certified by the actuary. They argued that they could reduce the Trustee’s proof of the debt in the administration of Company on two grounds:

  • The payment of the employer debt had been partly discharged by the £2m paid from the Account so for the Trustees to now recover that amount in the administration of the Company amounted to “double-dipping” into the Company’s assets.
  • As the Trustees’ assets had been boosted by £2m since the calculation date of the employer debt, there would be an over-recovery of the assets by the Trustees and the principle of “unjust enrichment” would apply so that the excess (the £2m) would fall to be held on trust by the pension scheme trustees for the Company.

Decision

The Court ordered that the decision of the administrators to reduce the Trustee’s proof by £2 million to reflect the £2 million paid to the Trustee out of the Account be reversed. There were “insurmountable” problems with the administrators’ submission:

  • The administrators had not contested the employer debt. The Court cited the earlier decision of the High Court that the employer debt in these circumstances requires the assets and liabilities of a pension scheme to be valued immediately before the trigger of an insolvency event, (in this case the bank entering into administration on 8 October 2008). Any changes in the value of assets or the extent of liabilities after the calculation date of the employer debt were irrelevant.

That said, the Court acknowledged that it is not impossible to envisage circumstances in which the actuary’s certification of the s75 debt could be set aside because of matters subsequently coming to light, citing fraud as an example.

  • Moreover, the £2m held in the Account had always been held beneficially for the Trustee and had always been the Trustee's property. The relationship between the Trustee and the Bank had never, therefore, been one of creditor and debtor.

On the double-dipping point, the Court said that the principle had no relevance here. The Trustee’s claim to funds in the Account was a separate claim for their proof of the employer debt in the administration process. In such claims, as was pointed out by Walker J in Re Polly Peck International plc [1996] 2 All ER 433 at 444, the focus is normally on legal substance rather than economic substance and as the Trustee claim in relation to Account was different, in legal substance, to their proof of the employer debt, the issue of double dipping was irrelevant.

The Court also found that under the administrators’ best estimate of the likely final dividend available for unsecured creditors, the Trustee was expected only to receive approximately £ 65.5m, (some £9m shy of its total claim for the employer debt). So, even if the £2m were taken into account, there would still be a substantial shortfall – consequently, it could not be said that the Trustee had been unjustly enriched.

Comment

It is not difficult to sympathise with the administrators’ seeking to reduce the Trustees’ proof of the employer debt by the £2m as the Company seems to be out of pocket by £2m only because, as at the employer debt calculation date, the Trustees could not be sure whether the funds belonged to the scheme or not. When it was confirmed, it seems that whatever arguments the administrator tried to use, that the amount should be brought into account, failed.

Although the Court said that an insurmountable problem with the administrator’s submissions was that it did not query the certification of the employer debt, in the same breath it said that on the facts, there was no accountancy or other relevant evidence to support the case for reviewing the employer debt and the actuary’s valuation of the assets of the scheme. So even if the Trustees had challenged the employer debt calculation, it is unlikely that it would have succeeded.

Bestrustees Plc v Kaupthing Singer & Friedlander Ltd [2013] EWHC 2407 (Ch)

3. Court holds that a company taking a member dispute directly to Court (as a tactical measure to prevent the complaint being heard before the Pensions Ombudsman) was not an abuse of court process

The High Court has held it is not an abuse of process for an employer to bring a claim to the High Court to resolve a dispute with a scheme member, even if this was done as a tactical measure to prevent the member from bringing a complaint to the Pensions Ombudsman.

Background

The case concerns a dispute between Dr Lamb, a member of The Pell Frischmann Retirement Benefits Scheme and the sponsoring employers of the Scheme over Dr Lamb’s benefit entitlement.

The Scheme rules contained a standard augmentation provision allowing the trustees to augment a member’s benefits with the employer’s consent subject to any additional contributions being made by the employer as the trustees on actuarial advice considered appropriate.

In June 1991, the trustees wrote to Dr Lamb that they had approved a request from his employer to enhance his pension benefits to two-thirds of his final salary rather than his basic pension of one-third. Over ten years later, one of the trustees wrote to Dr Lamb that the 1991 letter was the only record of any decision to enhance his benefits and that the employer was clear that it had not approved the enhancement.

Dr Lamb brought a complaint under the Scheme’s Internal Disputes Resolution Procedure (IDRP), but before the trustees could issue their decision under the first stage of the IDRP, the sponsoring employers brought a claim to the High Court seeking a declaration that Dr Lamb was only entitled to his basic pension. The IDRP was also suspended.

Under legislative provisions governing the Pensions Ombudsman’s powers:

  • The Ombudsman cannot generally investigate a complaint until it has gone through a scheme’s IDRP first. A member cannot skip the IDRP by going directly to the Ombudsman.
  • Matters that are the subject of court proceedings are outside the Ombudsman’s jurisdiction.

The effect of these provisions was that Dr Lamb could not make a complaint to the Pensions Ombudsman. The key advantage for Dr. Lamb in having his complaint dealt with by the Pensions Ombudsman was that it is a cheaper process and costs could not be awarded against him if his claim failed. Dr Lamb argued that the employers’ actions were an abuse of court process and applied for the Company’s claim to be struck out.

In the alternative, he applied for a prospective costs order against either the Scheme or the employers. (A prospective costs order is, broadly, an order that, irrespective of the outcome of the proceedings, a party be entitled to be indemnified for their costs).

Decision

The Court highlighted a number of points about the test for an abuse of process as established by previous court decisions:

  • The Court will strike out the claim as an abuse only in the clearest and most obvious case.
  • An action was only an abuse if the Court’s processes were being misused to obtain something not properly available to the claimant in the course of properly conducted proceedings.
  • A purpose is not illegitimate if it is no more than the natural consequence of the action succeeding and if the claim is commenced with a legitimate and an illegitimate purpose, the fact that one purpose is legitimate will justify the claim continuing.

Applying this test, the Court held that this was not a case where the claim to the High Court should be struck out. The key reasons for this were:

  • The employers had issued proceedings in the Court in respect of a dispute over Dr. Lamb’s pension which they were entitled to do under statutory provisions.
  • The employers’ timing may have been tactical (to ensure that the matter came before the Court rather than the Ombudsman). However, this did not justify their claim being struck out as an abuse of process.
  • The employers had admitted that their reasons for bringing the High Court proceedings were tactical as it would be potentially more costly for Dr. Lamb. They also wanted oral evidence to be presented during the Court proceedings – the Pensions Ombudsman procedure does allow oral evidence to be presented too but this is infrequent and mostly complaints are dealt with on paper.
  • The IDRP did not bind the employers. Whatever its outcome, the employers would have been able to bring a claim in respect of the enhanced pension. There was therefore no reason why the Companies should wait until the IDRP was complete. It might be considered sensible for the Companies to see what the outcome of the IDRP is before taking the matter to court but it was not an abuse not to do so.
  • There was no statutory preference for a complaint to be dealt with by the Pensions Ombudsman than the courts.

The Court also denied Dr Lamb his request for a prospective cost order, primarily on the grounds that Dr Lamb’s complaint was for his own benefit and was of no broader benefit to the other members of the scheme.

Comment

The decision does have serious implications for members in that the employer can take the matter directly to the courts and in doing so deprive the member of the less formal and cheaper ways of having their complaint resolved through IDRP and the Pensions Ombudsman. Being forced to deal with the complaint through the Courts, a member is exposed to considerable costs (such as court and barrister’s fees) and paying the employers’ costs should the member’s complaint fail.

It will be interesting to see if Mr Lamb will appeal the decision. If not, it seems a precedent may have been set and more companies may consider dealing with member complaints in this way though a strategy of this sorts is not without its risks – a company too will be exposed to the (higher) court costs and the risk of having to pay the members’ costs should it fail (a point acknowledged by Dr lamb’s employers in this case).

It will also be interesting to see whether, if faced with increasing costs, Mr Lamb is forced to settle his dispute with the employers – which may be another motive for an employer (particularly if the member’s claim is a strong one) in taking the matter directly to the Court – an issue not specifically discussed by the Court in this case.

Pell Frischmann Consultants Ltd and others v Prabhu and others [2013] EWHC 2203 (Ch)

4. Summary rectification granted by court to correct drafting error in scheme rules

In the case of Konica Minolta Business Solutions v. Applegate, the High Court considered an application for summary judgment for rectification of a definitive deed which it was alleged incorrectly recorded the benefit entitlements of a category of members who had transferred from another pension scheme. (The case had previously been before the court on a preliminary technical issue which had been resolved in the claimant company's favour.)

The provisions in question related to the calculation of benefits on leaving service before normal retirement. Members were entitled to a pension on normal retirement of two-thirds of final salary if they had completed at least 10 years' service. Under the rules of the transferring scheme it was clear that on leaving service before normal retirement the member's pension was to be calculated on the basis of "uniform accrual" (i.e. the potential pension at normal retirement was deemed to accrue evenly over the full period of the member's service). It was also clear the rules of the new scheme were simply intended to replicate the benefits under the old scheme. However, the draftsman of the trust deed and rules for the new scheme failed properly to incorporate the uniform accrual formula in the new rules.

The judge found that the fact there had been a mistake was "self-evident" and he therefore had no difficulty in allowing the application

Comment

This case is one of several recent examples of courts' willingness to grant rectification on an application for summary judgment. As the judge commented, "It would appear that summary judgment applications of this nature are becoming a relative commonplace." The advantage of using this process is that cases can be brought to court much more quickly and costs are kept to a minimum since the process avoids the necessity for a full all-party hearing. The evidence to support an application for summary judgment has to be particularly strong as a court may only grant summary judgment if it is satisfied that there is no real prospect of successfully opposing the application. In practice, however, this is likely to be the position in a significant proportion of potential rectification cases, as applications for rectification always require convincing evidence of the alleged mistake to stand any prospect for success.

Pensions Ombudsman

5. Company ordered to pay back unpaid employee contributions if a dividend payable to creditors in the Company’s liquidation

In Bridge (PO-194), the Deputy Pensions Ombudsman has held that the liability for unpaid pension contributions ranks as an (ordinary unsecured) debt and that a pension scheme member who had not had their contributions paid by the employer into a stakeholder pension scheme for some 26 months should be paid his contributions if a dividend was payable to the creditors in the Company’s liquidation.

Background

Mr Bridge had been an employee of Elton Games Limited from 2007 to March 2012 and was a member of the Group Stakeholder Plan with Halifax. Elton had not paid Mr Bridge’s contributions into the Plan for 26 months.

Halifax had earlier informed the Pensions Regulator about the missing contributions and the Company had not submitted a repayment plan to the Pensions Regulator, which the Regulator declined to accept or approve in November 2010 (presumably as the Company was in serious financial difficulties).

In April 2012, the Company went into voluntary liquidation, by which time further contributions had been missed. Mr Bridge and Halifax claimed against the Company and the principal director, Mr Whittaker, for payments to cover the missing contributions. Mr Bridge and Halifax had claimed a payment from the Redundancy Payments Office but some £2,564 remained outstanding.

Determination

The Deputy Pensions Ombudsman did not find Mr Whittaker, the principal director personally liable for the outstanding pensions contributions as there was no evidence that he had carried out administrative acts in relation to the Plan which he would not have ordinarily done. The Company had admitted liability for the outstanding contributions. When the Company went into voluntary liquidation, the unpaid pension contributions, which could not be recovered from the Redundancy Payments Office became an (ordinary unsecured) debt of the Company, and not of Mr Whittaker personally.

The Company was ordered to pay the total outstanding contributions plus simple interest from the date each contribution was deducted to the date of payment, in the event that a dividend was payable to the creditors in the liquidation process.

Comment

As the Company’s liquidators had earlier informed all creditors that there was unlikely to be a dividend, it is unlikely that the member will receive much, if anything, from the Company by way of the outstanding pension contributions.

Tax

6. HMRC publishes revised draft Asset-backed funding guidance

HMRC has updated its guidance on asset-backed funding (ABF) to reflect changes to the tax regime governing ABF arrangements.

The changes to the tax regime had been made in two tranches: first on 29 November 2011 and then again on 22 February 2012. To view our briefings on those changes, click here and here.

Among other things, the draft guidance gives:

  • Examples of the type of structures where it would still be possible for employers to obtain upfront tax relief;
  • Examples where upfront tax relief would not be possible;
  • Impact on arrangements that were already in place before the changes to the legislation were made.

The draft guidance may be found here:

Comment

A key factor in determining if an employer can claim upfront tax relief is if the ABF falls to be treated as a Structured Finance Arrangement (for the purposes of Income Tax Act 2007 or the Corporation Tax Act 2010) (SFA). Guidance on what is an SFA is not provided in the draft ABF guidance but may be found in the Corporate Finance Manual available on the HMRC website.