C11520

PENSION SCHEMES ACT 1993, PART X

DETERMINATION BY THE PENSIONS OMBUDSMAN

Complainant : Mr R E Burt

FMC Scheme : FMC Superannuation and Life Assurance Scheme

FMC Trustee : FMC Superannuation and Pension Scheme Trustees Limited

HF Scheme : HF Meat and Foods Processing Pension Scheme

HF Trustee : HF Meat and Foods Processing Pension Scheme Trustees Limited

Hillsdown : Hillsdown Holdings plc

Lord B : Lord Bradbury

Mr AJB : Mr A J Bothwell

THE COMPLAINT

1. The Complainant alleged injustice due to maladministration in relation to the transfer of assets from the FMC Scheme to the HF Scheme. He also complained about the difficulty he experienced in obtaining information about both of the schemes. He addressed his complaint to:

a. the trustee of the FMC Scheme, FMC Trustee;

b. Hillsdown, parent company of the sponsoring employer of the FMC Scheme, and founder of the HF Scheme; and

c. the trustee of the HF Scheme, HF Trustee.

2. In its original form, the complaint was submitted to my predecessor by LordB, a pensioner of the FMC Scheme, who was later supported by the Complainant and by Mr AJB. Following the death of Lord B, my predecessor agreed to consider the Complainant's complaint in place of Lord B's. The Complainant obtained the support of 51 further FMC Scheme pensioners, including Mr AJB and Lord B's widow. The names of the supporting complainants are listed on the attached schedule. Whilst all 52 complaints are in substance identical, my predecessor and I confined our investigation to the complaint submitted by the Complainant, who wished it to be supported by the documents relating to the complaint submitted by Lord B.

DETAILS OF THE COMPLAINT

3. At his retirement on 16 September 1985 the Complainant was an employee of FMCplc, of which the ultimate parent company had recently become Hillsdown. He had been employed by the FMC group for 32 years. During the period of his membership, from 1 July 1955 (on the inception of the FMC Scheme) to his retirement, the Complainant had paid substantial, compulsory, pension contributions. On his retirement he received a pension from the FMC Scheme. In making some enquiries in early 1992 about the level of pension increases he found that the assets and membership of the FMC Scheme had been transferred to the HF Scheme on 17November 1989. Later, he found that approximately £18.4m of the amount transferred from the FMC Scheme to the HF Scheme had been paid to Hillsdown as a repayment of surplus even though Hillsdown had never contributed to the FMC Scheme and, prior to the transfer, the net assets of the HF Scheme were only £1m. However, members had not been notified of the action proposed or taken.

4. The Complainant believes that the reason that the members and assets of the FMC Scheme were transferred to the HF Scheme was that by doing so Hillsdown could benefit from the surplus under the FMC Scheme. He noted that methods stipulated under the provisions of the FMC Scheme deed for reducing any surplus did not include a power to return funds to a sponsoring employer; nor could an amendment be made to the provisions of the FMC Scheme to enable any transfer of assets to a sponsoring employer while the FMC Scheme continued. Selection of one of the stipulated methods was a task for FMC Trustee exclusively. Had the FMC Scheme been wound up the members' benefits would have been required to be have been increased to the maximum permitted by the Inland Revenue before moneys could be passed to any sponsoring employer. Alternatively, following the termination of the FMC Scheme the assets could have been transferred to another scheme, but it was required that they be held by the new scheme "for the benefit of the pensioners and other Members and other persons concerned".

5. The Complainant also complained that he and Mr AJB experienced difficulties in obtaining information about the FMC Scheme and the HF Scheme. The reports of the respective trustees have been very late and he had not received the trustees reports in respect of the HF Scheme for the years to 5 April 1990, 1991 and 1993 despite requests.

6. The Complainant claimed that in view of the obstacles, the members and assets were transferred before the FMC Scheme was wound up. He believes that the provisions of the FMC Scheme used to make the transfer should not have been used to secure a result which the other provisions did not allow.

7. After the transfer was made, the FMC Scheme, having no assets or members was wound up. Following the transfer of assets on 17 November 1989, HF Trustee amended the provisions of the HF Scheme to permit a payment of surplus to Hillsdown. The Complainant believes that this amendment was not in the members' interests, should not have been made, and that it is invalid.

8. The Complainant considered that FMC Trustee did not act in the best interests of the pensioners in agreeing to the bulk transfer of assets to the HF Scheme in the knowledge that HF Trustee would pay the surplus to Hillsdown. He believes the decision taken by FMC Trustee to be arbitrary and irrational in that no reasonable person, on the facts of the case, would have exercised discretion in that way. He further said that FMC Trustee failed to give the pensioners notice of the proposals to enable proper representations to be made concerning the validity of the proposals. He believes that the decision was taken because the individuals who were directors of FMC Trustee were also directors of Hillsdown and that they failed to distinguish their competing fiduciary duties. His complaint against Hillsdown in this regard was that it brought undue influence to bear on FMC Trustee.

9. The Complainant further considered that HF Trustee did not act in the best interests of the HF Scheme members when it decided to implement a rule change in December 1989, backdated to April 1989, to allow Hillsdown to take a payment of surplus from the HF Scheme. His complaint against Hillsdown is that it consented to this rule change in the knowledge that the surplus which had arisen in the FMC Scheme could not be paid to Hillsdown under the rules of the FMC Scheme.

10. The Complainant believes that he and the other members of the FMC Scheme have suffered injustice as a consequence of these events in that their interests have been disregarded and they no longer enjoy the security and the possible direct benefits of the surplus. He maintains that had it been necessary to terminate the FMC Scheme the members would have received increases in their benefits. Had the FMC Scheme continued FMC Trustee or its successor might have used the surplus for the benefit of the members, but this possibility no longer exists. The Complainant states that when he retired in 1985, it was with the expectation that FMC Trustee would maintain an average level of increase of 5% per annum, as had been granted between 1971 and 1985. He says that it was only from 1986, after Hillsdown took control, that increases were reduced to 3% per annum between 1986 and 1991 (but with a one off bonus of 2% being paid in 1990), 4% in 1992 and less than 3% subsequently.

11. In settlement of his complaint, the Complainant sought a return to the situation which would have existed had the actions of FMC Trustee, HF Trustee and Hillsdown not been taken.

CONSIDERATION OF THE COMPLAINT

12. In considering the main part of the complaint, I have identified the following areas which should be addressed -

Complaints against FMC Trustee

a. Was the transfer contrary to the provisions of Rule 21?

b. Did FMC Trustee act in the best interests of members and their dependants?

Complaints against HF Trustee

a. Was the payment of surplus contrary to the HF Scheme's power of amendment?

b. Did HF Trustee act in the best interests of members and their dependants?

Complaint against Hillsdown

Did Hillsdown exercise its powers in such a manner as to breach the employer's duty of good faith?

I address each of these points in turn.

COMPLAINTS AGAINST FMC TRUSTEE

13. The Complainant has alleged that FMC Trustee wrongfully transferred the entire assets and membership of the FMC Scheme to the HF Scheme in the knowledge that it was intended that HF Trustee should make a payment of surplus to Hillsdown. I have to consider whether it is wrongful because it was contrary to the relevant power and whether FMC Trustee did not act in the best interests of FMC Scheme members and dependants.

a. Was the transfer contrary to the FMC Scheme trust deed and rules?

(i) Express restrictions on the use of rule 21

The relevant rule is rule 21 which is set out in Schedule V to the Deed of Amendment dated 21 March 1983 -

“Rule 21 - TRANSFERS OF OBLIGATION

(a) The Trustees may at any time or times with the consent of the Corporation and the Employers concerned and after obtaining the advice of the Actuary but otherwise in their discretion make arrangements upon such terms as they shall think fit for the transfer to some other retirement benefits scheme ... of which the then Members concerned are or will thereupon become members of the total or partial responsibility for securing and making payment of all or any particular benefits under the Scheme in respect of all or some of the Members ...

Provided always that:-

(i) no such transfer shall without his consent increase the liability of any Member to make contributions;

and (ii) the Trustees shall not implement any transfer under this Rule which in their opinion after obtaining the advice of the Actuary will or may seriously prejudice any person who is a Member or pensioner at the proposed transfer date.”

The provision that transfers should not `seriously prejudice' members could be read to refer not simply to the members' existing entitlements, but also to the possibility of their receiving benefit increases if the scheme was in surplus. The reality of that possibility depended upon the ability of Hillsdown to absorb the surplus in the near future. To decide whether the chance of benefit increases had been `seriously prejudiced', FMC Trustee would have to consider the same matters as applied to its decision as to whether the transfer was in the members' best interests. If the benefit increases adequately compensated for the loss of surplus, the members' were not `seriously prejudiced' by the transfer. I conclude that if the transfer was in the members' best interests, the express terms of rule 21 did not prevent payments being made to the HF Scheme for the express purpose of effecting a payment of surplus to Hillsdown.

(ii) Implied restrictions on the use of rule 21

If restrictions are to be implied into rule 21, they would arise from its relation to clause 14 of the original Deed dated 24 July 1957. This provides that amendments shall be made by the trustees with the consent of the employers -

“Provided that no such alteration modification or addition shall:-

(c) cause any of the assets held by the Trustees under the trusts hereof to be used otherwise than for the purposes of the Scheme, or

(d) result in the transfer of any of the assets held by the Trustees under the trusts hereof to any of the Employers...”

The 1957 rules contained no equivalent of rule 21. Rule 21 was introduced before 1979 and was thus not introduced for the purpose of effecting a payment of surplus and so is not void. The question which remains is "Is rule 21 limited by an implied restriction whereby it cannot be used to achieve a purpose which could not have been carried out through an amendment to the FMC Scheme".

In their legal advice to FMC Trustee, the solicitors acting referred to the decision in Re Vauxhall Motor Fund, Bullard -v- Randall [1989] 1 PLR 52, and concluded that such a restriction should not be read into a rule of this sort. Vauxhall involved an almost identical fact situation to this complaint. The Vauxhall company asked its scheme trustees to transfer assets from a scheme which prohibited payments of surplus to an employer to a new scheme which allowed such payments. The power of amendment prohibited amendments which could lead to a payment of surplus being paid to Vauxhall. The court decided that the trustees were allowed to make the proposed transfer and were not required to seek undertakings from the receiving trustees which would prevent the receiving scheme from paying the surplus to the Vauxhall company.

Although the fact situations are similar, the precise point of principle in this complaint was not addressed by the Vice Chancellor in Vauxhall. He was asked, and agreed to consider what he described as a `short point of construction', namely the meaning of a particular proviso to the power of transfer which required transferring trustees to inform receiving trustees of "restrictions" on the transferred assets, in particular whether the restrictions included the prohibition on payments of surplus to an employer. He decided that this proviso related to the Inland Revenue prohibition on returning a member's own contributions to him, and not to the limitations set out in the power of amendment. He rejected the argument that the transferred assets could be the subject of a general restriction generated by the power of amendment.

The transaction in Vauxhall would not have been valid if the transfer power was subject to an implied restriction that it would not be used to circumvent the restriction on payments to employers set out in the power of amendment. This was not the `short point of construction' which the Vice Chancellor was required to decide. In my view it was misleading for the solicitors acting to have advised FMC Trustee that “Following the Vauxhall decision ... it is now clear that the Trustee have the power, even where there is no power to return the surplus to the employer, to transfer in bulk fashion to another scheme which does have such a power, in certain circumstances.” (my emphasis). I am comforted in taking this view by the primary editorial comment on the decision in Pensions Law Reports, as follows: