A surplus in the Employee’s Superannuation (Pension) Fund is a tempting target for senior executives of the Principal Employer of an Employer-Sponsored final salary Defined Benefit Fund. This is especially the case when the same senior executives are also Directors of the corporate Trustee or have appointed a “friendly” corporate Trustee.
The Trust Deed and Governing Rules of some Funds does allow legal transfers of part of the surplus from time to time to the Principal Employer, while the Trust Deed and Rules of other funds stipulates any surplus is to be used for the benefits of current and former members of the Fund.
Some times attempts have been made to amend the Rules of the Fund to allow the Employer to capture the surplus.
Hillsdown Holdings plc v Pensions Ombudsman and others (1997) 1 All ER 662 is a typical example of such as attempt.
The particular pensions scheme, the FMC scheme, had a substantial actuarial surplus but there was no provision under the Rules of the scheme to repay surplus funds to the Principal or other participating Employers, and the Rules could not be amended to confer such a power.
However an arrangement was put into effect, after obtaining legal advice, to transfer the funds assets into a new scheme where the Rules of the new scheme where the Rules of the new Scheme, the HF scheme, did allow surplus funds to be returned to the Employer.
Thereafter a payment of £11 m after tax was transferred to the Principal Employer.
A pensioner, supported by 51 other complainants, complained to the UK Pensions Ombudsman that the transfer of assets from the FMC scheme to the HF scheme to enable the payment of the surplus to the Principal Employer was in breach of trust.
The Pensions Ombudsman ruled that the sole purpose of the transfer was to secure a payment of the surplus to the Principal Employer which was prohibited by the FMC trust deed and rules and that therefore the trustees were in breach of trust for undertaking the transfer.
Knox J in the Queen’s Bench Division of the UK High Court concluded that the Principal Employer could have been held liable by a court (cf the Pensions Ombudsman) as a constructive trustee of the sums which it received from the Trustee and would therefore be liable to repay the fund with interest.
Alternative legal remedies also mentioned by Knox J were:
- unjust enrichment
- mistake and
- a tracing claim
Knox J stated: “In my view, the Pensions Ombudsman had ample material before him upon which to conclude that to transfer the entire assets of the fund to another set of trustees by a transaction which was ineffectual because it amounted to an exercise of a power at least in part for a collateral and unauthorised purpose (a fraud on a power) was an act of maladministration although it was done with the advise and concurrence of an appropriately experienced solicitor”.
Knox J concluded that the Principal Employer was unjustly enriched by the receipt of the £10.4m less 40% tax and the Employee’s trust fund was the poorer by the same sum gross of that tax. “There can be no doubt about the enrichment save possibly as regards quantum. As to it being unjust, in my view one only has to compare the position of the Principal Employer who successfully wielded a big but misguided stick with that of the members of the pension scheme who were never told anything of what was being done as regards the payment of the surplus to the Principal Employer to see which way the scales of justice fall.”
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