Hillsdown Holdings plc v Pensions Ombudsman 2

United Kingdom

Reference: (1996) OPLR 291

When Hillsdown took over the Fatstock Marketing Corporation in 1983 there was a large surplus in the FMC Pension Scheme. The rules of that Scheme prevented the trustees from paying any of the surplus to FMC or amending the rules to permit such a payment. In an attempt to overcome this restriction Hillsdown persuaded the trustees of the FMC Scheme to transfer the members and all the assets of the Scheme to another scheme - the HF Scheme, which had no such restriction. Hillsdown agreed that GBP 1.3 million of the surplus would be used to improve benefits for the FMC members.

Immediately after the transfer, the HF Scheme rules were amended to allow surplus assets to be paid to Hillsdown. The GBP 18.4 million surplus (less 40 per cent tax) was then paid to Hillsdown.

Members of the FMC Scheme were told about the merger of their scheme with the HF Scheme but not about the payment to Hillsdown. On learning about this they complained to the Pensions Ombudsman who ruled that the FMC trustees acted in breach of trust when they transferred the surplus to the HF Scheme. He found that this breach amounted to maladministration causing injustice. He also found that Hillsdown had breached its duty of good faith by inducing the FMC trustees to act in breach of trust. Accordingly the Ombudsman directed Hillsdown to return the money which was to be held by the HF Scheme trustees on the terms of the FMC Scheme rules (which had been wound up following the transfer).

Hillsdown's appeal failed. The unusual feature of the FMC Scheme rules was that the trustees had an unfettered discretion without any consent required from the employer to allow surplus to be used for an employer or member contribution holiday, to carry it forward as a reserve or to give benefit improvements or any combination of these. The trustees apparently did not realise that they had this power and they proceeded on the basis that the surplus was at the disposal of the employer. Although Hillsdown honestly believed itself to be entitled to do what it did, Knox J ruled that it was unjustly enriched by the receipt of GBP 18.4 million and the FMC Scheme was the poorer by the same amount. Hillsdown's techniques of persuasion were to threaten to do something which it was not entitled to do, namely to admit new employers to the scheme and suspend contributions.

The judge decided that the transfer from the FMC Scheme to the HF Scheme amounted to a fraud on a power. The FMC trustees exercised their power to make a bulk transfer for a collateral purpose ie to enable the refund to be made rather than for the efficient running of the scheme. Hillsdown itself, as an employer, was in breach of its obligation of good faith to its employees.