Rarely have occupational pension schemes featured in the news to the extent that they do at present. The country’s broadsheets carry seemingly constant headlines about the closure of schemes to future accrual, rising costs for employers and increasing scheme deficits. As the recession has taken hold, employers have focused upon restricting their employees’ pension benefits and reducing the volatility of their pension costs. As well as restricting benefits, employers and trustees are increasingly considering whether the advice, or inadequacies in the advice, of their professional advisers could give rise to an action for professional negligence and thus a payment into the scheme. It is often said that one can expect to see an upturn in litigation during a recession. Pensions are no different. We have seen a number of contentious enquiries of late, with some common themes.
A number of trustee boards have sought to review how their scheme equalised benefits as a result of the decision in the 1990 case of Barber v Guardian Royal Exchange Assurance Group. That decision dictated that occupational pension schemes must equalise the retirement ages of male and female members. Prior to Barber it was common for retirement ages to differ between the sexes, often reflecting the age at which State benefits could come into payment.
The majority of schemes took measures to seek to equalise benefits during the years following the decision in Barber, although a large number to date have not attempted to equalise. In those instances where trustees have sought to equalise, there may be doubt as to whether a number of those attempts have been successful.
We have seen a number of claims arising out of equalisation, or more accurately, failed equalisation. Recent press coverage of claims against leading law firms, actuaries, consultants and, in particular, IFAs suggest that a number of occupational pension schemes are beginning to question whether the measures they took following the Barber decision were sufficient to equalise benefits and as a consequence are looking to their professional advisers to account for any loss to the scheme. The loss could, depending upon a number of factors, be a considerable sum.
It is anticipated that the number of trustees reviewing the measures their scheme took to equalise will increase over the next few years, as many schemes who have identified equalisation issues have had to wrestle with issues of limitation. Furthermore, as many employers seek to reduce their liabilities and move towards the ultimate wind up of their scheme, a number of companies are finding that insurers will not conclude a buyout contract because members’ benefits have not been equalised.
Common themes of complaint include IFAs who have “dabbled”, providing advice which failed to equalise properly a scheme. Another common area for attack is against those advisers who erroneously sought to equalise with retrospective effect.
We also expect an increasing number of claims are likely to centre around a scheme’s investment strategy. Employers who are being asked to fund increasing deficits are taking a much keener interest in the scheme’s investment strategy. Failure by trustees to monitor properly the scheme’s investments, poor investment decisions or failure to take account of the employer’s wishes are all leading to increasing claims of negligence by employers against trustees. Last year also saw two important cases which centred around investments and focussed upon the actions employers and trustees might wish to take, even though they ought not to, in order to survive the recession. One centred upon the payment of a de-mutualisation bonus to an employer, the other a loan to an employer, contrary to legislation.
Despite the above, drafting scheme documentation and amending the same remain the biggest risk for pension schemes and, in particular, their professional advisers. As the recession bites, ineffective or erroneous amendments are more likely to be scrutinised, with a view to making good the scheme’s deficit. This is the case particularly if such an amendment increased the scheme’s liabilities and/or deficit.
Conflicts of interest
A number of firms have, historically, failed to recognise conflicts of interest. This could cause a professional’s advice to be questioned, or give rise to claims where, for example, a firm has acted on both sides of a scheme closure.
Failure to advise
Failure to advise is another problem. Quite often pensions advisers will prepare legal documents, assuring their clients that they have the requisite knowledge, only to issue deeds for execution with a health warning that legal advice ought to be sought. Such a “health warning” is insufficient to obviate responsibility.
Professional advisers must ensure that they actively advise their clients. The case of Pinsent Curtis v Capital Cranfield Trustees confirmed that a solicitor’s failure to advise his client, regardless of whether specific advice was requested, constituted negligence and resulted in the firm (and its insurer) meeting the scheme’s section 75 deficit, the principal employer having become insolvent.
Pensions litigation is likely to increase in the coming years. Professionals and their insurers would do well to implement robust procedures when undertaking pensions work and to review the advice given in order to minimise the risk of professional negligence actions.
- The recession has had a significant impact on pensions benefits and schemes leading to an increase in claims against professional advisers
- It is anticipated that the number of trustees reviewing the measures their scheme took to equalise will increase over the next few years
- Common themes of complaint include IFAs who have “dabbled”, providing advice which failed to equalise properly a scheme
- Another common area for attack is against those advisers who erroneously sought to equalise with retrospective effect
- Failure by trustees to monitor properly the scheme’s investments, poor investment decisions or failure to take account of the employer’s wishes are all leading to increasing claims of negligence by employers against trustees