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Promises, promises… (of a pensions nature)

Promises, promises… (of a pensions nature)

The Pensions Ombudsman has held that an employer “unjustifiably” stopped a member’s monthly pension payments which it had funded for some years following the winding-up of its occupational pension scheme.

Background

Mr Royston Muller, a 95 year old former employee of the County Tyre Group of Companies (the Company) retired in 1988 and started receiving his benefits from the County Tyre (Holdings) Limited Retirement Benefit Scheme (the Scheme). In February 2002, the Company received a letter from the Occupational Pensions Regulatory Authority (Opra), the predecessor to today’s Pensions Regulator, stating that the Scheme had been wound up and that compliance with the Pensions Act 1995 was no longer necessary. The letter also stated that Opra’s powers were limited to ensuring compliance with the Pensions Act 1995 and that Opra “cannot therefore comment on the employer’s decision to continue funding pensions out of income.”

It transpired that at the time the Scheme was wound-up a decision was also taken not to buy out the five pensioner members’ benefits with an insurance company. Instead, evidence pointed to the Company agreeing to fund these benefits out of its own resources. As well as the reference in Opra’s February 2002 letter, this decision was also minuted at a meeting of the Scheme trustees on 24 May 2000. The decision seems to have been driven by the disproportionate cost of buying out the benefits of the five members.

In July 2013, a Mr Freeman bought the Company. In November 2013, Mr Muller’s pension benefits were stopped. Mr Freeman contended that he was not aware of the Scheme when he bought the Company.

Mr Muller complained to the Company, and then to the Pensions Ombudsman.

Determination

The Pensions Ombudsman upheld Mr Muller’s complaint, thereby requiring the Company to reinstate Mr Muller’s pension benefits.

The Pensions Ombudsman noted that the May 2000 trustee minutes, as well as other evidence submitted by Mr Muller such as:

  • a Scheme membership listing showing him as a member with a pension of £969 per annum;
  • an October 2013 payslip showing a monthly payment equivalent to £969 per annum; and
  • the Scheme booklet stating that the Scheme commenced in 1972 and that a member’s pension “is payable for life from the date of your retirement by monthly instalments”;

indicated that Mr Muller was a pensioner member of the Scheme. Opra’s February 2002 letter made it clear that the Company had decided to continue to fund the benefits out of its own resources and the very fact that payments had continued after 2002 (post the apparent wind-up of the Scheme) gave the Ombudsman little option but find in favour of Mr Muller. A direction was made for his pension to be reinstated and for back-payments to be made (with interest) to November 2013.

Furthermore, the wording contained in the Scheme booklet was deemed an enforceable “promise” to pay a pension. By stopping Mr Muller’s pension payments in November 2013 without a buy-out, the Company was also found guilty of maladministration. £1,000 was awarded for distress and inconvenience caused by this maladministration with specific mention of the significant effect this would have had on someone of Mr Muller’s age.

WB comment

The legal basis for this determination is somewhat puzzling especially in light of the very clear methods of securing members’ benefits in the event of a wind-up of an occupational pension scheme:

  • buy-out with an insurer;
  • a transfer to another pension arrangement; or
  • commutation.

An employer taking on the liability does not feature within these statutory options!

The interpretation of the wording contained in the Scheme booklet also raises questions: how this is enforceable as a matter of contract law, and who it is enforceable against – the trustees or the Company?

Neither of the above issues were discussed in the determination.

What is clear, however, is that the new owners of the Company will have received an unwelcome liability. One should therefore never underestimate the importance of rigorous due diligence on the part of a purchaser even where the acquisition is modest in terms of size and value.

By Justin McGilloway

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