One of the difficult questions we get asked is – how far do trustees have to go in checking how employers exercise their powers under pension scheme’s rules? Normally trustees can accept what the employer says at face value – and indeed many schemes’ rules tell them to do just that. They routinely do it on, for example, information about what a member earns. On straightforward factual information like this, I do not see that trustees need look further – unless there is something drawn to their attention which casts doubt on what the employer has said. It is in cases where a degree of judgment is involved that trustees are expected to check what the employer has said.
Recent Ombudsman cases support this view. The technical point is that the trustees have to administer the scheme in accordance with the scheme’s rules, and so need to be sure that the rules are being properly followed. The question is – how far do they have to go?
Two complaints to the Ombudsman illustrate the issue. Both involved ill-health early retirement pensions where entitlement usually turns on the reason for retirement. Schemes rules often say that this is decided by the employer. Both cases show that trustees cannot accept the reason which the employer has notified at face value.
In the first case (Anderson) the qualification condition for the pension was termination of employment “in the interests of efficiency” as decided by the employer. The employer, Yell, told the trustees that this didn’t apply (the member’s employment having been terminated for performance reasons) and so the trustees refused the pension. The case came before the Ombudsman twice. At the first stage he upheld the complaint on the ground that the trustees had failed to look behind the employer’s decision and give their reasons for accepting it. Yell’s position that the efficiency ground did not apply in this case was potentially irrational. So, the trustees should have challenged it.
Following the Ombudsman’s direction, the trustees looked into the case again (in some detail) and concluded that Yell had acted in good faith – not capriciously or irrationally – and that they could accept its decision. On a further complaint by the employee, the Ombudsman agreed that the trustees had – second time around – met their responsibilities.
The second case (Green) involved an ill-health pension rule with a condition that the member must not have refused ‘appropriate’ alternative employment. Before she became ill, the employee had worked for British Airways on ground duties near Liverpool where she lived. Her contract said that she could be employed at any location worldwide, and BA offered an alternative job at Heathrow, having not been able to find her a job near her home. The Ombudsman found the trustees guilty of maladministration for having accepted the employer’s decision that the job offered was appropriate. BA had not properly assessed whether the employee could have done the Heathrow job – it should have taken expert advice on the employee’s ability to cope with the travel involved. While, under the scheme rules, the decision rested with BA, the trustees had a duty to check BA had reached its decision properly.
So trustees need to be aware that in some situations they will need to examine critically how employers have reached their decisions under scheme rules. With case law still emerging, it’s difficult to formulate a hard-and fast rule. So on this one I’ll be cautious and just pose some questions to suggest the general approach for trustees, gleaned from the decided cases.
First, are there plausible grounds for believing that the employer’s decision has been arrived at after following a proper procedure – assessing all the evidence and taking expert advice where appropriate? Second, does the decision appear to be rational and consistent in its reasoning? Third, does it stack up with the scheme’s rules? And, last but not least, does it seem to be in good faith (sometimes called the ‘smell test’). If so, the trustees should be able to leave it there: but if in doubt – it’s best to investigate.
Jonathan Goodwin is a consultant at Allen & Overy LLPPrint This Post