Pensions Managers: How they are becoming more accountable for their actions

United Kingdom
Following the Pensions Act 1995 much has been written about how trusteeship is becoming increasingly onerous; but we must not forget about pensions managers. Mark Grant considers ways in which they are becoming more accountable for their actions

Maladministration

Pensions managers now fall within the jurisdiction of the Pensions Ombudsman. The Personal and Occupational Pension Schemes (Pensions Ombudsman) Amendment Regulations 1996 extended the Ombudsman's jurisdiction with effect from 1 July 1996 to "the administrator of the scheme" in relation to "any complaint in relation to the administration" of the scheme. The terms "maladministration" and "injustice" were notable by their absence.

The term "administrator" was defined as "any person, other than the trustees or managers of a scheme or the employer to which the scheme relates or has related, concerned with the administration of the scheme".

The regulations were replaced by the Personal and Occupational Pension Schemes (Pensions Ombudsman) Regulations 1996 with effect from 6 April 1997. Regulation 2(1) of the new regulations corrects the omission of the references to "maladministration" and "injustice". The Ombudsman pointed out in his Annual Report 1996/97 that the new regulations also refer to a complaint being made against "an administrator" whereas the previous regulations referred to "the administrator". Presumably the Ombudsman thinks this may be significant as it may encompass multiple administrators of a scheme.

The Ombudsman went on to say:


"The definition of an administrator - 'any person ... concerned with the administration of the scheme' - appears extremely wide. There is no requirement of day-to-day administration, so a one-off act could lead to a complaint. There is no mention of 'outsourcing', so in-house administration may be investigated at all levels. Indeed the definition expressly catches persons who are not themselves trustees or managers or employers. It follows that the Pensions Ombudsman can investigate and, when considered appropriate, make directions against individuals, e.g. officers or employees of the trustees or managers or employers.

So such people as the Finance Director or Pensions Manager and even their staff might find themselves personally in jeopardy. Indeed they may already have been in jeopardy, since the complaint could be about past acts or omissions ..."

This will not provide much comfort for pensions managers, or even their assistants.

In July 1998 the former pensions manager of an occupational scheme with an insolvent employer was ordered to pay £500 compensation to a member following his maladministration. This was the first case in which the Ombudsman applied his extended jurisdiction in a way that imposed personal liability on a pensions manager. The Ombudsman's casework director, Tony King, is reported as saying "I don't think that pension managers should be quaking in their boots." However, the case will hardly help them sleep more easily at night. Admittedly the maladministration in the case was quite extreme, and the manager was found knowingly to have acted outside his authority, but it does highlight the extent of accountability.

Some commentators have downplayed the case because the employer was insolvent and so could not have paid the award on the pensions manager's behalf. However, even where the pensions manager is not personally liable because a solvent employer will pickup the bill for maladministration, the pensions manager's career prospects will hardly be enhanced. If such a case was publicised, what confidence would the members have when dealing with the pensions manager in the future?

The publicity about this case may lead to more complainants naming the pensions manager and even support staff as respondents in addition to the trustees or employer.

Contract binding the employer

The pensions manager may often communicate or even negotiate with an employee about pension rights. A contract may arise where there is offer and acceptance, an intention to create legal relations, consideration given by the employee and certainty of terms. The most likely scenario is where an employee is negotiating a severance package which includes pension rights. The pensions manager may well be acting as an agent for the employer in respect of the pensions element of the package deal and so could bind the employer even if a mistakenly generous pension deal is offered.

Even if the manager was acting outside his authority, the employee would usually be entitled to rely on what the agent said because he appeared to have authority to communicate on the employer's behalf.

Contract binding the trustees

As far as trustees are concerned, it is less obvious that a contractual relationship can arise with beneficiaries. Their rights in relation to scheme benefits flow from the terms of the trust rather than from a contract (although there is case law on the point either way).

The position is different where trustees are dealing with third parties. In Nicol & Andrew Ltd v Brinkley (1996) Sir John Vinelott upheld an Ombudsman determination that a contract had arisen where the trustee of a scheme (who also happened to be the employer) had told employees that they would be credited with generous pensionable service if they transferred into their scheme following a takeover. The Ombudsman analysed the case in terms of offer, acceptance and consideration, thus creating a contract. As Sir John Vinelott said:


"the offer and acceptance of the offer, in my judgment, clearly gave rise to a contract. It is absurd to suppose that the terms of that contract can now be altered. The transferring members have given up the right which they had to retain their benefits under the apparently soundly funded SUITS Scheme. The distinction which it is sought to draw between the position of N&A (Nicol & Andrew) as employer and as trustee of the interim deed is, in my judgment, artificial and unreal. The offer was made by N&A as trustee so as to bind future trustees."

The same analysis could apply to an employee who is already a member but who wishes to transfer benefits in from a previous employer's scheme or policy; the same contractual elements would be present.

A pensions manager acting as agent of the trustees could bind a scheme in a similar way when telling employees what benefits can be secured by a transfer (even when acting outside his authority, where the transferring individuals consider that he is authorised to communicate on behalf of the trustees).

The only limitation would seem to be that a pensions manager cannot bind the trustees to pay benefits beyond Revenue limits. This proposition was accepted by the Ombudsman in a determination made in August 1997.

Negligence

The possibility of liability for negligent misstatements has gradually grown over the years. In Spring v Guardian Insurance plc (1994) the House of Lords held that an employer giving a reference for a former employee owed a duty of care in its preparation. Lord Goff referred to the leading case, Hedley Byrne, in which it was held that a duty of care will arise where someone with a special skill applies it for the assistance of another person who relies upon that skill. He went on to say:


"...the principle may apply in a case in which the defendant has access to information and fails to exercise due care (and skill, to the extent that this is relevant) in drawing on that source of information for the purposes of communicating it to another..."

If there is special skill and knowledge involved in giving a reference to the prospective employer of a former employee, there seems no reason why the pensions knowledge and expertise of a pensions manager or other administrator cannot also be said to be sufficiently "special".

The employer will be vicariously liable for damages resulting from the pensions manager's negligence, provided that he was acting "in the course of his employment".

Pensions Act 1995

Although pensions managers as such are not exposed to fines under the Pensions Act, if they act as company secretary to a corporate trustee they may be fined because of the wide provisions of section 10 of the Act.

Implications

Given the increasing possibility of liability arising in relation to the activities of pensions managers, the employer's Directors and Officers insurance policy should be reviewed to see whether the manager's activities are covered. If not, thought should be given to extending the scope of the policy.

From the point of view of trustees, it should be made clear that where a pensions manager is provided by the employer, the employer is responsible for any loss caused by the manager.

Trustees should also consider having the administration of the scheme audited to check whether procedures are being carried out properly and whether the pensions manager and other staff are adequately resourced. In the long run it could be more costly for the employer, scheme and members if the administration is run on a shoestring budget.