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On 31 March 2015 the Deputy Pensions Ombudsman gave a determination in a case [1] where two former trustees acted in breach of their scheme rules in authorising a payment back to the employer.

Facts

The respondents were four former trustees of the Pilkington’s Tiles Pension Scheme, two of whom were directors of the company, and two of whom were member nominated trustees. The scheme had defined benefit (DB) and defined contribution (DC) sections, of which the administration had been moved in 2009 from Capita to Scottish Life.

Payments of £187,191.25 on 24 December 2009 and £5,819.68 on 11 March 2010 were made from the scheme to the company. Trustee meetings were held between October 2009 and March 2010 which are considered below.

Timeline

October 2009 – a meeting of all four trustees and the company took place.  It was agreed that excess employer contributions of around £30,000 would be kept in the fund and considered as general additional employer DB contributions. The excess employer contributions had arisen through new entrants joining the DC section of the scheme but then leaving within two years and taking a refund of their own contributions.

November 2009 – the administrators informed one of the trustees, Mr Burrows, that the excess contributions were in fact valued at £198,647.50.

21 December 2009 – an email was sent out from the company to their refinancing advisers which stated that a £187,191.25 (£198,647.50 minus administrator costs) cash refund of excess company contributions would be received in the company bank account within the next few days.

24 December 2009 – Capita in fact transferred £177,000 to the trustee bank account. On the same day two of the trustees, Mr Burrows and Mr Lloyd, authorised payment of £187,191.25 (the previously anticipated amount) from the trustee bank account to the company bank account.

12 January 2010 – a trustee meeting took place at which all of the trustees agreed to the company’s request for a loan to pay the 2008 PPF levy, which the company could not otherwise afford.

June 2010 – the company went into administration, following which Bridge Trustees Limited were appointed as the new trustee.

Complaint

The new trustee complained to the Ombudsman’s office that the return of the excess contributions to the company contravened scheme rule 5.6 (which allowed excess employer contributions to be used to meet costs arising across the scheme or contributions from any section) and was contrary to members’ interests. The two former trustees argued that the wording in rule 5.6 was not sufficiently clear to interpret the above meaning. They also submitted that the complaint had proceeded on a fundamentally flawed basis, as a reserve derived purely from the DC section of the scheme could not properly have been applied towards the DB section or the PPF levy.

An oral hearing took place in January 2015 with Mr Burrows, Mr Lloyd and a representative of Capita, Mr Harper. Mr Burrows stated that Mr Harper had told him that the excess contributions should be returned to the company. Mr Burrows and Mr Lloyd further stated that they had not considered whether the payment was permitted under scheme rules or whether there would be any tax implications, but had simply relied on Mr Harper’s directions. Mr Harper denied giving any such instruction. Finally, Mr Burrows and Mr Lloyd claimed that they had considered the payment informally with the other two trustees, which the other trustees denied.

Determination

The Deputy Pensions Ombudsman upheld the complaint against Mr Burrows and Mr Lloyd, and dismissed the complaint against the other two trustees.

Even though it was not a breach of trust for pension trustees to want to assist an employer [2], trustees in such a position should have considered whether a loan or advancement to the company was reasonable or prudent. Providing an employer with funds from an underfunded scheme was unlikely to be prudent.

It was therefore held that the two trustees were in breach of trust in making the payment to the company without:

a) considering whether it was permitted under the rules;

b) considering whether it was in the members’ best interests;

c) taking legal or tax advice;

d) conferring with their fellow trustees; or

e) considering the alternatives.

The trustees were influenced by the financial position of the company as the funds returned provided the company with a material benefit, which amounted to a conscious wrongdoing.

They also failed to provide the remaining two trustees with information about the payment to the company whilst discussing the PPF levy loan. If they had, the remaining trustees may have come to a different conclusion when considering whether or not to make the loan. Mr Burrows and Mr Lloyd therefore did not evidence undivided loyalty towards the scheme members as required under their fiduciary duty to act in members’ best interests.

The Deputy Ombudsman found Mr Burrows and Mr Lloyd jointly and severally liable for any loss caused to the scheme. They were therefore ordered to reimburse the scheme for the total payments to the company of £193,010.93, along with any tax and late payment charges.

Comment

This determination serves as a stark reminder to trustees of the limitations of exoneration clauses in scheme rules. They should also be mindful of the fact that the duty to take advice extends to a duty to question advice received and take further advice as appropriate.

This post was contributed by Hannah Algrafi. For more information, email blogs@gateleyplc.com.

[1] Bridge Trustees Limited – PO-763

[2] Edge v Pensions Ombudsman [2000] Ch 602


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.