When a good employee goes bad… is their pension at risk?

Helen Powell

The Pensions Ombudsman has recently had to consider the case of a convicted fraudster, Mr A, who had embezzled around £500,000 from his former employer, but had been made redundant in a separate exercise before his fraud was discovered. Mr A had been made bankrupt on the employer’s petition, but this did not give the employer access as a creditor to his uncrystallised pension rights. Was there any other route for the employer to recover monies owed to it by retaining an amount from Mr A’s pension rights? Well – yes and no.

UK pensions law provides significant protections to an individual’s right to a present or future pension under an occupational pension scheme – protections both from the individual’s own actions and from those of third parties. The individual’s right is ‘inalienable’: it cannot be ‘assigned, commuted or surrendered’; the right cannot be charged or made subject to set-off; and an agreement to do any of these things is unenforceable. A pension may only be forfeited in specific situations (including treason and offences under the Official Secrets Act).

However, there are some exceptions to this general prohibition. In particular, subject to what your scheme rules say, a member’s rights may be subject to a charge, set-off or forfeiture in respect of a ‘monetary obligation due to the employer and arising out of a criminal, negligent or fraudulent act or omission’ by the individual. The amount must not exceed the lesser of the monetary obligation and the individual’s entitlement under the scheme, and if the amount is disputed, the charge or set-off cannot be enforced or the pension forfeited without a court order.

In Mr A’s case, the rules had been written slightly differently, providing that a retention could only be made where a member had left employment ‘in consequence of’ a criminal, negligent or fraudulent act or omission. The Ombudsman held that the ‘in consequence of’ test was not met in this case – even though the employer argued that it would be ‘absurd to reward the better fraudster [who managed to conceal his fraud beyond termination] over the less effective fraudster [who got found out sooner]’.

The legislation itself does not include an ‘in consequence of’ test, and it may be worth checking that the wording of your scheme rules is no narrower than the regulations. As well as providing a potential solution in a case like Mr A’s, it could help to discourage certain types of breach (for example, data theft) which might only be discovered post-termination.

This may not be the end of the road for Mr A’s employer. It would clearly have preferred a more immediate and complete solution, but there is still the potential for it to enforce the debt using an attachment of earnings order once Mr A’s pension comes into payment.

Helen Powell is a PSL Counsel at Allen & Overy LLP

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment

Leave a comment