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Preventing Pension Dumping

About The Author

Jade Rigby (Writer)

Jade is a third year Law student at Newcastle University. She is currently completely an Erasmus year abroad at Universitat Pompeu Fabra in Barcelona, Spain, and will return to Newcastle in 2015. Jade is predominantly interested in commercial law, but also writes on criminal and private law topics.

Over the past few decades, there has been concern over the regulation of pension schemes in the UK. In the late 80s and early 90s, the Maxwell affair sparked outrage amongst employees across the UK. The scandal involved Robert Maxwell, a media proprietor, who fraudulently plundered the pension fund of his own company, the Mirror Group. The fund was invested poorly, often in some of Maxwell’s own interests, causing significant reductions in its value. Since then, the Government has attempted to restore stability and security into pension regulations.

Pension funds normally operate in the following way:

  1. Workers and their employers pay money into the workers’ pensions fund on a regular basis
  2. The money paid in is invested by pension fund trustees so that the pot of money (fund) can grow
  3. When workers reach retirement age, they get their pot of money to live off for the rest of their lives. Usually, they will receive this in instalments to give them a regular income but they may also get a lump sum, depending on the scheme.

The Pension Protection Fund (PPF) was established under the Pensions Act 2004, which provided for the:

[Payment of] compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.

The PPF must make a judgment as to whether a company or business will be able to fulfil its pension obligation. The PPF will investigate the possible insolvency over an assessment period before making their final judgment. The compensation in question is paid for by a compulsory, annual levy on all schemes that are eligible for compensation.

However, in November 2014, the Financial Times reported that ‘pension dumping’ is on the rise amongst employers. ‘Pension dumping’ is a process whereby businesses or companies falsely claim to be near insolvency, and thus require the Pension Protection Fund to give compensation to their staff who are members of their pension schemes. Companies and businesses can therefore avoid paying into expensive pension schemes, and let the PPF ‘foot the bill’ for their pension obligations. Workers, typically, receive 90-100% of their expected pension from the compensation awarded by the PPF.

The FT reported that Malcolm Weir, who has been the head of restructuring and insolvency at the PPF since 2013, was concerned about a rise in suspected fraudulent claims:

Every single time that we have had a proposal put to us the first thing to check is the inevitability of the insolvency… However, since the end of summer there’s been more cases where we’ve said we are not fundamentally convinced you’re insolvent, or will become insolvent.

Although pension dumping seems to be a very bold move for companies or businesses to take, given the increasing emphasis on company ethics in the media, there does seem to be an opportunity for significant financial benefit. The FT reported that Alan Rubenstein, the Chief Executive of the PPF, ‘suspected more companies would consider pension dumping as the economy improved and interest rates began to rise, prompting banks to take a tougher line with companies on life support.’

Why Pensions Are Important

For many workers, retirement is a concept in the very distant future and there are mixed views on how to financially prepare for retirement. Some people do not want to think about how they are going to financially support themselves in their later life, because it can be a very daunting prospect, whereas others prefer to save for the future. However you decide to approach the issue, as the Citizens’ Advice Bureau has pointed out, pensions play a significant role in elderly life:

Everyone needs money for their retirement, to support you and give you a decent standard of living. You may also need to support a partner or other people in your family.

These days, people live longer so your pension will need to last you longer. This means you'll need to try and save more.

Many older people live in poverty because they haven't been able to save enough. The help offered by the state can change over time. If your retirement's a long way off you shouldn't assume that all your needs will be covered by state benefits, or that State Pension rules will be the same as now. So it's best to start putting some money away as early as you can.

Instability for the Most Vulnerable

One of the biggest problems surrounding the issue of pension dumping is that the action directly affects some of society’s most vulnerable people. Although not everyone of a pensionable age is in a vulnerable state, many face mounting health and mobility problems and limited opportunities to re-enter the job market if they fall short of money.

As has already been noted above, pensions play an important role in elderly financial life and state pensions may only meet very basic needs, such as paying utility bills and buying enough food to eat.

Age UK has launched a report to investigate the true impact of living on a low income in later life.

The report indicates that 1 in 6 pensioners live in poverty, and many prevent themselves from going into debt by relying on their own resourcefulness. For instance, many go to lengths to repair rather than replace household objects, whilst others spend a lot of time researching food prices and ‘shopping about’ for necessities. It is hardly the image of stress-free retirement that many people hope for. Admittedly, a recent report for the Joseph Rowntree Foundation has found that poverty has reduced amongst the over 75s. This does not mean that poverty amongst pensioners is eradicated, however. Tom MacInnes, Research Director at the New Policy Institute, said of the findings:

This report highlights some good news on employment – but earnings and incomes are still lower than five years ago, and most people who moved from unemployment into work can only find a low paid job. Government has focussed its efforts on welfare reform, but tackling poverty needs a wider scope, covering the job market, the costs and security of housing and the quality of services provided to people on low incomes.

Hence, despite the recent findings concerning poverty amongst pensioners, pension regulation needs to be stringent in order to alleviate poverty concerns for current and subsequent pensions.

The PPF has the power to pay high amounts of compensation to employees whose employers become insolvent, which means that workers are not abandoned in their old age if their employer is no longer able to fulfil pension expectation. Generally, the PPF will pay compensation at a rate of 90-100% of the value of the pension at the time of insolvency.

However, pension dumping threatens to undermine this safeguarding system by placing increasing demand on the PPF. This demand will result in a higher annual levy for employers, which could have significant adverse effects for businesses and generate an incentive for false claims. For instance, if the PPF have to conduct more stringent investigations, this could delay compensation for members of truly eligible schemes. Such destabilisation of the level of support that many people are expecting in later life presents a huge social concern.

Instability in the Economy

According to Jon Exley’s paper ‘Pension Funds and the U.K. Economy’, pension funds are generally “regarded as having a significant impact on the UK economy” for a variety of reasons. Jim McMenamin (Financial Management: An Introduction, Routledge 1999, pg. 82) attributes the influential nature of pension funds to the fact that they form the largest group of investors in UK equities, accounting for 35% at the time of publication. As a consequence, pension funds and their investment capabilities have historically had a significant impact on the UK economy.

Pension dumping can therefore cause fluctuations in the economy by preventing individual pension funds from investing in a variety of fields. Although the PPF also has powers of investment, ‘the primary objective of the Fund is to have sufficient funds to pay compensation to members of schemes that have transferred to the Fund’. The PPF is not, therefore, a viable alternative to having numerous pension fund investors because it does not operate to generate better returns for employers and employees. Moreover, it would be difficult for the PPF to become involved with as many different investments as numerous pension funds can. Hence, the diversity of investments would reduce.

Legal Obligation to Act in Good Faith

One of the most serious consequences of pension dumping is that it conflicts with the duty of pension trustees to act in good faith towards members of the pension scheme. This duty derives out of trust law, known as fiduciary duties, owing to the relationship of trust and confidence between the trustees and members of pension funds. Recent case law confirming this duty will be explored further below.

The duty to act in good faith had been a contentious issue in the UK, largely because it was not clear what this duty entailed. However, in 2001, the Myners report set out 10 principles of good governance of pension schemes in order to guide trustees in their actions and decisions:

  • Effective decision making
  • Clear objectives
  • Focus on asset allocation
  • Expert advice
  • Explicit mandates
  • Activism
  • Appropriate benchmarks
  • Performance measurement
  • Transparency
  • Regular reporting

The recent decision in IBM (UK) Holdings Ltd v Dalgleish [2014] presents an example of the important relationship of ‘good faith’ between employers and employees. IBM wanted to make savings to its pension costs by making changes to its UK pension plans. However, some employees, who were also members of the pension plans, were unhappy about this and brought an action arguing that IBM had breached the implied duty of good faith that pension schemes owed to members. Additionally, they argued that IBM had also breached the implied duty of good faith between employers and employees. The High Court ruled against IBM, and held that they had breached their obligations to their employees.

The judgment from the High Court has significant implications for employers and employees, but it is also important in pensions law as the majority of the judgment dealt with pension issues. A prevalent critique in the judgment concerned what IBM said and did during a consultation process, which undermined the relationship of trust and confidence.

Suspected incidents of pension dumping could also be subject to actions in court for breaching the implied duty of trust and confidence. Given the severity of the nature of pension dumping and the extent to which it undermines the implied duty of trust and confidence, bringing a court action would be a sound suggestion for many dissatisfied employees. Pension fund trustees have a legal requirement to act in accordance with this duty, as demonstrated by the above case, hence pension dumping could be viewed as distorting the balance between acting in favour of the employer and employee. Rather than demonstrating concern for the maintenance and growth of the pension fund, pension dumping enables employers to avoid fulfilling their financial obligations. Hence, we can arguably see a direct breach here.

The protective stance of the High Court in the aforementioned IBM case suggests that, in instances where employees or pensioners bring actions against their employers for pension dumping, the court would continue to act protectively. This would be a positive step in enforcing the implied duty of trust and confidence. Although this can only be speculative, it is significant to remember pension law in the wider context of trust law, and the emphasis that courts have placed on upholding relationship of trust and confidence.

Recent Developments

Other developments in the field of pensions may impact the practice of pension dumping. A recent decision in the High Court, The Trustee of the Singer & Friedlander Ltd Pension and Assurance Scheme v Corbett (“Corbett”), allows pension trustees to sell company debts to other companies who are more capable of recovering debts. Trustees can focus on meeting the obligations arising from the pension fund much sooner than if they had to pursue debtors. According to Out-Law, the legal commentary site provided by Pinsent Masons, the ability to sell off debt ensures stability because trustees can be certain about future income, which enables them to plan better for the future of the fund and for the members.

Corbett concerned Kaupthing, Singer and Friedlander (KDF), the UK subsidiary of Icelandic bank Kaupthing. When it went into administration, the business owed its pension scheme £74 million.

In relation to pension dumping, the High Court has provided companies heading towards insolvency with another avenue of raising funds for the pension scheme. Utilising debt as an asset in economically-stringent times is a pragmatic solution, and could be of great benefit. For example, in Corbett trustees were allowed to sell debt in order recover a vast amount of money owed to the pension scheme. By dealing with debt as an asset, the trustees had something of value to utilise. Hence, members of the pension scheme were protected from uncertainty and long delays.

The powers vested in the PPF ensure a high level of security for members of pension schemes. Compensation is available in times of need, but this need has to be proven. However, if concerns about pension dumping continue to rise, it is likely that the PPF will continue to conduct increasingly strict assessments and thorough investigations before providing eligible pension funds with compensation for their members. This may delay compensation payments to members of truly eligible schemes. Pension dumping presents a significant socio-legal threat, so the PPF may have its work cut out for it in the following months. Hopefully, the PPF will be successful gatekeepers against fraudulent claims in the future, although the improving economy may pose a threat to stability. Moreover, with the new development in Corbett concerning selling debt as an asset, it is clear that instances of pension dumping will not be taken lightly when there are more efficient means of dealing with pension scheme liabilities. The High Court has attempted to protect pension scheme members from the blows dealt by insolvency, and it will expect trustees to utilise their new freedom.

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Tagged: Commercial Law, Company Law

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