Ending the drip is problematic

This month I would like to look at some of the issues arising in relation to the trustees' power to suspend pension payments in view of losses caused to the employer by reason of the member's criminal, fraudulent or negligent acts or omissions and the grounds upon which such a suspension can be effected.

Mr D was employed by Alhco Ltd and was a member of the Alhco retirement and death benefits scheme. Mr D retired in April 2005 and in June 2005 signed a compromise agreement under which the group managing director of the company stated that he was “prepared to draw a line under your conspiracy to defraud Alhco of significant funds” subject to Mr D handing over various assets to the company. In November 2005, the company made Mr D a defendant in proceedings it had brought in the High Court for recovery of £442,302. Following payment of Mr D’s pension in June 2006, the trustees of the scheme stopped future payments of his pension.

Rule 10.1 of the scheme rules provided that:

10.1 If a Member:

10.1.1 commits a criminal, negligent or fraudulent act or omission and

10.1.2 as a result an employer suffers loss, the trustees, with the agreement of the principal employer, shall reduce benefits payable in respect of him … by the value of the loss.

Mr D complained to the ombudsman in November 2006, at which point the court proceedings were still continuing. Mr D claimed that the trustees’ actions in withholding his pension were contrary to the provisions of section 91 of the Pensions Act 1995 as a disputed lien over pension payments arising from a member’s criminal, negligent or fraudulent act or omission may not be exercised until it is enforceable under a Court order. Mr D further claimed that the compromise agreement was in full and final settlement of all claims by the company against him and the company had not therefore suffered any loss, meaning that the requirements of Rule 10.1 were not met.

The trustees and the company argued, among other things, that under Rule 10.1, if a member committed a criminal, negligent or fraudulent act or omission which resulted in a loss to the employer, the trustees were obliged, with the agreement of the company to reduce benefits payable to the member by the value of the loss. The trustees and the company further argued that they had been presented with evidence on the basis of which they had reached a properly reasoned decision that Mr D had committed such an act or omission, obliging them to reduce Mr D’s pension payments by the value of the loss to the company. The trustees and the company also argued that Mr D had committed further criminal, negligent or fraudulent acts or omissions over and above those covered by the compromise agreement and that holding pension payments in escrow pending enforceability as to the amount did not amount to a lien over the monies and therefore did not constitute a breach of section 91.