In a recent determination by the Deputy Pensions Ombudsman a complaint against two pension scheme trustees was upheld in relation to a cash transfer from the pension scheme to the employer.
The respondents had been trustees of the Pilkington’s Tiles Pension Scheme, which contained both DB and DC sections. Mr B and Mr L (together “B&L”) had both been directors of the sponsor, Pilkington’s Tiles Limited (the “Company”).
By late 2009 the Scheme had fallen into deficit, the Company’s funder was in the process of exiting the UK and, as a result, the Scheme’s administration was moved from Capita Hartshead to Scottish Life.
Scheme rule 5.6 provided that any excess employer DC contributions from early leavers whose benefits had not vested (“EECs”) should be held in general reserve and “applied by the trustees as the principal employer shall from time to time direct to pay the costs and expenses of the scheme and/or to reduce the amount of the contributions which would otherwise be required from the employers…”
Scheme rule 14.20 was an exoneration and indemnity clause that protected the trustees unless there was fraud or “deliberate disregard of the interests of the beneficiaries”.
At a trustee meeting in October 2009 it was agreed that the EECs, which were thought to be valued at approximately £30k, were to be considered an additional DB contribution. Mr B later submitted that following the meeting Mr Harper of Capita had told him that the trustees lacked the relevant authority to take this decision and as a result they were obliged to return the EECs to the Company.
The following month Mr Harper informed Mr B that the ECCs real value was approximately £187k net of Capita professional fees. On 21 December 2009 the Company’s finance director emailed KPMG confirming that he expected to receive a cash refund of £187k from the trustees. B&L then authorised payment of £187k from the trustees’ bank account to the Company.
At a trustee meeting on 12 January 2010 the Company’s request for a loan of £205,000 to pay the PPF levy was granted. The minutes of the meeting did not make any mention of the EECs. Two months later B &L authorised the transfer of what they thought to be the remaining balance of the EECs to the Company, making a total of £193,010.93 paid over. In June Bridge Trustees, who had been appointed as the Scheme’s new trustees following the Company’s liquidation, brought a complaint against the previous trustees.
They complained that B&L’s return of the £193k to the Company contravened Scheme Rule 5.6 and was contrary to members’ interests. B&L argued that the basis of the complaint was fundamentally flawed as the wording of Rule 5.6 was insufficiently clear. They also argued that the dispute should be heard in the High Court.
At an oral hearing Mr B stated that he had been acting on Mr Harper’s instructions and his expectation had been that the Company was to make an additional DB contribution. B&L together said that they had not considered whether the EEC payment was allowed as they had been acting on Mr Harper’s directions. Mr Harper denied giving such instructions, stating that he was fully aware of the restrictions and would not have told Mr B otherwise.
Construction of rule 5.6
The Deputy Ombudsman determined that section 146 of the Pension Schemes Act 1993 did not impose any restriction on the type of dispute that could be heard by the Ombudsman and therefore the hearing was the appropriate forum. The wording of 5.6 was held to be unambiguous and in any event payment of the EECs back to the employer was not allowed. B&L had therefore failed to comply with scheme documentation.
Existence and effect of instructions from Capita
Capita provided administration services to the trustees rather than technical advice and there was no evidence that Mr Harper had given an instruction for the EEC to be paid to the company – it would have been “surprising” had he done so and on the balance of probabilities the Ombudsman found that he hadn’t done so.
In any event it was held that even had such advice been given the trustees were not entitled to simply rely on it. B&L should have considered its reasonableness and challenged it where appropriate. According to the Pensions Regulator’s Code of practice 07: Trustee knowledge and understanding, trustees should have sufficient knowledge and understanding of trust affairs to question professional advice where necessary. Had they fulfilled their duty to take legal or tax advice on technical matters or matters of uncertainty they would have discovered a rule change was necessary to proceed with the payment to the Company and that the payment would attract a 40% tax charge.
Breach of trust
The Deputy Ombudsman pointed out that previously it had been determined that it was not a breach of trust for pension trustees to want to assist an employer (Edge v Pensions Ombudsman  Ch 602), although trustees must still consider whether an advancement or loan to the Company was "reasonable or prudent" and doing so from an underfunded scheme was "high risk" and unlikely to be prudent (Lawrence Graham Trust Corporation (Q00623): scheme investment: trustees personally liable for unlawful employer loan).
B&L did not act prudently or reasonably in making the payment to the Company without considering if it was allowed under the rules or in members' best interests, taking legal or tax advice, conferring with their fellow trustees or considering all the alternatives, which included asking the Company to direct them to pay the PPF levy with the EECs. In acting in this way, B&L were influenced by the financial position of the Company. The Deputy Ombudsman therefore held that B&L committed a breach of trust in authorising the payment to the Company in contravention of the rules of the scheme.
In addition, B&L failed to show the undivided loyalty towards the scheme members required under their fiduciary duty to act in members' best interests. If they had been informed, with proper advice, the other trustees might not have agreed so readily to the PPF levy loan to the Company, which further reduced the scheme's available assets. Finally, B&L did not consider if they had a conflict of interest when authorising the EEC payment to the Company.
Exoneration and indemnity clause
B&L's decision to transfer £187,191.25 to the Company – the amount it had been expecting and which was cited in the finance director's email – rather than the £177,233 they actually received from Capita, demonstrated that they were more interested in meeting the company's commitments than protecting members' interests, of which it was a "deliberate disregard" amounting to "conscious wrongdoing". They were not therefore protected by the exoneration and indemnity clause in rule 14.20, which excluded "deliberate disregard of the interests of the beneficiaries." They were therefore jointly and severally liable for the loss to the scheme, while the remaining trustees, who were kept ignorant of the EEC payment, were not party to the breach of trust and the complaint against them was dismissed.
The Deputy Ombudsman directed B&L to reimburse the scheme for the total EEC payments to the Company of £193,010.93 (with simple interest), together with any tax charges arising from the payment, including any late payment charge.