Update: pensions

MCP Pension Trustees v Aon Pension Trustees [2009] EWHC 1351 (Ch) is an interesting case on a well-worn concept in the winding up of pension schemes, namely, that of how trustees, in disposing of the scheme's assets, may protect themselves against any claims that might emerge after all the scheme assets have been applied.

A section 27 Trustee Act 1925 advertisement has traditionally been used as a tool to deal with the risk that unknown beneficiaries may later make claims against the scheme for benefits. In summary, MCP makes it clear that a section 27 notice will not necessarily mean that the scheme trustees will be protected from claims from overlooked beneficiaries where the trustees can be deemed to have had knowledge of such claims, even if the beneficiaries had not actually replied to the section 27 notice.

In this case, a group of members had earlier transferred in to the scheme, but, because of an administrative oversight, their benefits were not taken into account in the winding up. It reinforces the importance of good administrative practice and sound record keeping in a scheme, and that undue reliance should not be placed on a section 27 notice as a means of dealing with 'missing' beneficiaries. The case also highlights the importance of insurance for trustees in connection with a scheme winding up.

Pension loss calculations

The Earlier Employment Tribunal and Employment Appeal Tribunal in Aegon UK Corporate Service Ltd v Roberts [2009] EWCA Civ 932 decided that an unfairly dismissed employee could claim continuing pension loss, even though straight away she had started a new job where the overall remuneration package was better. This involved the now common problem of an employee moving from a position where they have a defined benefit scheme to a new job offering a defined contribution arrangement, and how that loss should be compensated.

Very few employees joining a new employer will be given the opportunity to join a defined benefit scheme, because, even if the employer has a defined benefit scheme, the chances are that it will be closed to new members and the employer is likely to have put in place a defined contribution arrangement, such as a group personal pension scheme. In this case, the key points were that the defined benefits scheme was an important part of remuneration, but not a unique benefit, and that the loss of earnings and loss of pension should not have been separated.

While significant, the particular circumstances of this case (that the employee walked immediately into an overall better remunerated package) should be borne in mind when dealing with issues of pension loss.

Scheme amendment and related issues

Re IMG Pension Plans deals with some key issues which have arisen in relation to pension schemes over recent years; in particular, the scope and the means of scheme amendments.

IMG established a defined benefits pension scheme in 1977. The original scheme amendment power included a restriction that any amendment must not reduce the value of the benefits secured by the contributions already made. Such a restriction was not uncommon in older scheme documents. In 1992, IMG converted the scheme to defined contribution. In the process, this restriction was dropped.

The court decided that the restriction could not properly be removed. In addition, the court concluded that, although the benefits under the scheme had been converted to defined contribution benefits, those benefits had to be subject to an underpin by which the value of a member's benefits, secured by those converted defined contribution rights, would not be less than the value of the accrued defined benefits determined by service up to the date of conversion and final pensionable salary on leaving service.

The court then went on to consider the employer's claim that the members were either estopped from claiming such an underpin, or that, by completing an application form agreeing to stay in the scheme and agreeing to convert their accrued benefits to defined contribution benefits, the members had entered into a contract consenting to the changes to the scheme.

The court rejected both arguments; the estoppel arguments because the court considered that the members had done no more than accept what had been offered, with no real alternative. Nor did the court find that the members had entered into any contract, acknowledging again that the changes amounted to a fait accompli and that no agreement from the members was required before the changes could occur.

Finally, the court decided that any purported compromise or waiver of pension entitlements was invalid because of the provisions of section 91 of the Pensions Act 1995 (which prohibits the alienation of pension rights) and therefore it was not open for the individuals to compromise their pension rights.

This case reinforces the fact that employers need to exercise care when making changes to their schemes and that the correct process is followed. In particular, care is needed where (as has become common practice in recent years) amendments are sought to be made by way of agreements outside the confines of the scheme; for example, by way of member announcement. It also sends a strong message regarding the application of benefit underpins, depending on the particular wording of any restrictions in the scheme.

Lump sum death benefits

The distribution of lump sum death benefits under pension arrangements is one of the most common sources of challenge to the exercise of trustee discretion. It is perhaps not surprising given that in some cases the amounts available for distribution to potential beneficiaries are significant. And as a result it is a very common topic on which the pensions ombudsman is called upon to determine.

Many of the decisions by trustees about the distribution of lump sum death benefits may appear fairly straightforward, but even in those cases there lurks scope for conflict. It is important for trustees to tread carefully in all cases. Trustees should not be lulled into a false sense of security despite most schemes giving the trustees a wide discretion as to whom and in what proportions death benefits are applied. Failure to follow and construe properly the rules of the scheme, and a failure fully and properly to investigate the particular circumstances of the deceased member, are common causes of complaint.

It is also important that trustees reach a decision which will withstand scrutiny, and which will not be seen as perverse. It is worth bearing in mind the ombudsman's approach regarding the giving of reasons for a decision by trustees: an earlier case (Allen) suggested that failure to give reasons where appropriate may amount to maladministration.

Although the pensions ombudsman is at pains to point out that he is not there to impose his decisions on benefit distribution in place of the trustees, if the decision-making process is considered to be flawed or inadequately documented then the trustees may be directed to reconsider its decisions.

Some pensions ombudsman determinations during the year have served to highlight areas where trustees need to be particularly careful. In Curren (74746/1) there were some complex family arrangements. The complaint was upheld by the pensions ombudsman because there was insufficient evidence that the trustees had gathered and considered all relevant information. The trustees were required to obtain further information and then to revisit their earlier decision, with reasons and an explanation.

In Hernandez (74745/1), the pensions ombudsman similarly upheld a complaint because insufficient steps were taken to gather relevant information in order to make a decision on benefit distribution, and proper consideration was not given to the exercise of their discretion (another similar decision was made in McPherson (73461/1)).

For some balance though, in McGurk (74946/2) the trustees were found to have gathered and taken into account all relevant information in reaching their decision, and that complaint was not upheld.

Death in service benefits

Wade v Active Navigation is an interesting case concerning a (very large) discrepancy in the amount of a lump sum death in service benefit. The decision was anything but obvious. Lump sum death in service benefits are a valuable and commonly provided benefit.

Mr Wade was a highly paid sales director who benefited from a lump sum death in service arrangement. Most arrangements are insured, as was the case here. In most cases, the lump sum payable on death will be a multiple of annual salary; typically two times or four times.

In most cases, the insurer will not require the completion of individual proposals, but will probably do so where (as in this case) there is a single large risk. The insurer may require an additional premium to be paid too.

The issue in Wade was that the insurer placed a cap on the salary it would take into account without the completion of an individual proposal and payment of additional premium. When Mr Wade died, the insurer paid the multiple of this capped salary rather than a multiple of Mr Wade's full salary. That appeared to be the intention of the employer and the expectation of the employee. The problem was that the necessary arrangements to give effect to the additional amount of cover were not concluded. The member's wife claimed the difference between what had been paid out and what she contended should have been paid out.

All probably pointed to the claim being likely to succeed. The court, however, had other ideas, and decided that unless there is a clear indication to the contrary it cannot be taken as read that the full salary (rather than the capped salary) will be used in calculating the lump sum death in service benefit payable.

Had the decision gone in favour of the claimant, it could have been a costly oversight on the part of the employer.

The point for employers providing similar lump sum death in service benefits is clear: make sure that the benefits promised in the contracts of employment are properly insured.

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