The Pensions Ombudsman (TPO) has determined that:
- a new employer (the Employer) acted in breach of law and was guilty of maladministration in:
- failing to provide a pensioner, Mr H, with mirror pension benefits following a transfer to its pension scheme in line with a contractual obligation provided to Mr H when he agreed to transfer and thereby acting in breach of its Imperial (named after the 1990 Imperial Tobacco case) duty of good faith; and
- not documenting the contractual obligations for almost 18 years, and upon finding out about them, attempting not to provide them in breach of contract;
- the trustee of the new scheme acted in breach of trust (but not maladministration as it had acted upon legal advice) by not providing Mr H with the employer promised benefits upon receiving a transfer of Mr H’s benefits from the predecessor scheme and for not administering the new scheme in accordance with its rules.
The determination runs to 69 pages (typically a TPO determination will be much shorter between 10-15 pages) and covers important ground on the areas of contractual pension benefit entitlements (which do not often arise in the pensions sphere), estoppel by convention (which is also rare in a pensions context) and limitation.
Facts of the case
Mr H and pension increases
Mr H was one of several previous scheme members who transferred to the new scheme, but the only one who did so with special term status. During his previous scheme membership, Mr H was told that his pension in excess of his guaranteed minimum pension (the Excess Pension) would increase by the lesser of the Retail Price Index (RPI) or 5%. Mr H was also told by the Employer that his transferred-in benefits and those accrued under the new scheme would ‘mirror’ those in the previous scheme.
1 January 1998 (the Transfer Date)
Mr H transferred his previous scheme benefits to the new scheme.
The promised mirror benefits (including relevant terms from member announcements that were sent to previous scheme members in 1997 (the 1997 Announcements) about the transfer) were never incorporated into the new scheme rules as they should have been. The new scheme rules did not contain a pension increase provision which meant that, under the new scheme, only that part of a pension relating to post-6 April 1997 pensionable service would increase in accordance with statute.
10 June 1998
Mr H left employment and pensionable service under the new scheme.
2015
The new scheme trustee obtained advice from Counsel on various matters relating to the new scheme including pension increases. Although Counsel did not consider Mr H’s special terms status, they did consider the 1997 Announcements which referred to more generous pension increase terms than statute (and therefore the new scheme rules) provided. Counsel advised that:
- the terms of the 1997 Announcements had never been incorporated into the new scheme rules (which conclusion TPO agreed with);
- previous scheme members and the Employer were not contractually bound by the 1997 Announcements’ terms; and
- members could not rely on estoppel to provide such benefits.
(TPO did not agree with conclusions 2 and 3 so far as they concerned Mr H.)
22 May 2017
Following receipt of Counsel’s advice, the trustee told relevant members including Mr H that their pension would be frozen, and no further increases would be provided on any pre-97 Excess Pension (there being no statutory requirement to do so).
21 April 2020
After unsuccessfully complaining through the new scheme’s internal dispute resolution procedure in 2018, Mr H complained to TPO.
TPO’s decision
Legally enforceable contract to provide Mr H with mirror benefits
TPO found that there was “an enforceable contract between the Employer and Mr H to procure that Mr H is offered membership of the New Scheme on terms that mirror his membership, as a Special Member, of the Previous Scheme (including terms relating to increases) … [and to] “procure that the rules of the New Scheme would be amended to ensure the provision of the promised mirror benefits”. The necessary elements for a legal contract (offer, acceptance, intention to create a contractual relationship and consideration) were present.
The contract included an implied term that neither party would act to frustrate performance. The Employer failing to provide the promised benefits breached its implied duty of good faith in this regard.
No limitation defence for Employer
The Employer argued that Mr H’s complaint failed on the grounds of limitation. Case law has determined that TPO can consider complaints that would ordinarily be time-barred under the Ombudsman’s own procedural rules - three years (having the power to do so under regulations), but must give effect to a valid limitation defence (i.e. where court proceedings would be time-barred).
TPO found that, in respect of Mr H’s claim for breach of contractual duty, time did not start to run until 22 May 2017 at the earliest and Mr H had submitted his Ombudsman complaint within the requisite three-year timeframe. Even if TPO was wrong in this regard and time began to run before then, the claim could rightly be framed as one of ‘specific performance’ which meant that the usual six-year limitation period for contracts was disapplied.
Estoppel by convention likely to arise
Estoppel by convention arises when parties proceed based on an underlying assumption and to allow a party to renege on that assumption would be unfair or unjust. TPO noted that the complaint might be “one of the unusual cases where estoppel by convention may apply”. The trustee, the Employer and Mr H had all acted on an agreed assumption that Mr H had rights which differed to those to which Mr H was entitled under the documents and that the Employer would document these properly in the future. Their relationship was conducted based on this continued assumption.
Trustee was obliged to provide ‘mirror benefits’ to Mr H and no limitation defence
The trustee also had obligations in respect of Mr H’s benefits. TPO determined that it was required to provide Mr H with special term benefits in respect of his previous scheme service and had the power to do so under the transfer-in rule. It had not been doing so in relation to pension increases and this was a breach of trust. Mr H could enforce his right to mirror benefits directly against the trustee – the claim would be one for recovery of trust property in the possession of the trustee in respect of which there is no limitation period.
What were the contractually promised mirror benefits?
Mr H was entitled to special benefit terms with pension increases to be determined in accordance with the previous scheme increase rule which provided that the Excess Pension “shall increase at such percentage rate … as may be fixed from time to time by the Trustees at the direction of the Principal Employer and advised in writing to Members”. The meaning of the Increase Rule was somewhat unclear and disputed by the parties. It fell to be interpreted by TPO.
TPO decided that the Increase Rule should be determined on the basis that: the rule’s purpose was to protect the value of pensions by increasing them, a zero rate could not be applied, but the Principal Employer did have the sole discretion to change the rate from a previously fixed one.
TPO concluded that:
- the previous employer had exercised its direction making power to provide increases in respect of that part of Mr H’s Excess Pension relating to pensionable service up to the Transfer Date at RPI, capped at 5%;
- Mr H was entitled to statutory increases for his pensionable service from the Transfer Date until 10 June 1998 when he left the new scheme; and
- these levels of increase would continue until the Employer made a new direction, which it could do so as from a future 1 April.
Trustee: no maladministration but breach of law
There was no maladministration by the trustee in freezing pensions in May 2017 because it acted on Counsel’s advice (it is not automatically maladministration to act upon legal advice even if the advice is later found out to be incorrect). However, it was guilty of breach of trust because it had not administered the scheme in compliance with the new scheme rules in respect of Mr H’s transferred-in benefits following May 2017.
Commentary
This case involved detailed facts with TPO noting the length of the Employer’s response (84 pages and 1,000 pages of supporting documents) being one of the key reasons for the long determination.
The decision provides useful guidance for those who may have to consider similar issues in the future, especially on potential contractual benefit entitlements following a transfer in respect of which members have been told something different to that which ends up being provided for under the receiving scheme’s governing provisions (or other situations where an employer might have made a promise to members outside of the strict terms of a scheme’s rules). It is unusual for a contractual entitlement to arise based on non-governing documentation. Central to this case was the promise of mirror benefits rather than a promise of benefits to be provided in accordance with the rules of the scheme with accompanying disclaimer wording.