£5m Ombudsman ruling in pension liberation case

The Pensions Ombudsman has issued the second of two major determinations on pension scams. We covered the first in a recent blog post. In his latest ruling, the Ombudsman has again made substantial awards against individuals.

Background

Mr Kaigh and Mr McNally set up three occupational schemes (the Schemes). The trustees were, at different times, either Mr Kaigh or Mr McNally, or companies of which they were sole directors (the Trustee Companies). The trustees appointed another company (Brambles) to administer the schemes.

More than 100 people took transfers from their existing pension arrangements into the Schemes. In many cases, people were promised that they would receive an initial payment on completion of their transfer, even if they were below minimum pension age.

The trustees used a small proportion of the Schemes' assets to make initial payments. As to the remaining assets:

• The trustees made payments to Brambles of £3,000 per member, supposedly to cover administration (six years in advance, at £500 a year).
• The trustees invested in unlisted and unproven companies, most of which purported to be vehicles for holding or developing commercial property.

Behind the scenes, there were close links between the trustees, Brambles, and many of the investments.

The investments failed. Members seeking to take benefits or transfers from the Schemes found Brambles to be unresponsive.

Several members complained to the Ombudsman. After investigating, the Ombudsman held an oral hearing. Mr Kaigh, Mr McNally and Brambles chose not to attend.

Key findings

Much as in his other recent determination, the Ombudsman ruled as follows:

• There had been multiple failures of governance by the trustees. The failures amounted, variously, to maladministration, breach of fiduciary duty, and breach of the "internal controls" requirements of section 249A of the Pensions Act 2004.
• When investing, the trustees had breached their fiduciary duties, and the requirements of the Pensions Act 1995 as to diversification and advice.
• Mr Kaigh and Brambles were liable in respect of breaches of trust by the Trustee Companies, because they had dishonestly assisted in the breaches. The Ombudsman's jurisdiction extended to them in any case, on the basis that Mr Kaigh was a "constructive trustee", and Brambles was an administrator.
• Whilst members might have chosen to enter into some of the failed investments, they had been misinformed. The trustees could not rely on a defence of member consent or contributory negligence.
• Nor, as regards the investment breaches, could the trustees rely on exoneration clauses or indemnities. Section 33 of the Pensions Act 1995 says that liability cannot be excluded for breach of investment duties.

Additionally, the Ombudsman said:

• The initial payments amounted to pension liberation. The payments were in breach of the Schemes' rules and section 255 of the Pensions Act 2004, which says that trustees must ensure that schemes engage only in retirement benefit activities.
• The payments which the trustees had made to Brambles were grossly excessive. The trustees had breached the Trustee Act 2000, which says that trustees should not pay agents more than is reasonable.
• Brambles had not run the Schemes to the standard which would be expected of a competent administrator. That amount to maladministration.

Dishonesty test

The Schemes' exoneration clauses were expressed to protect trustees from liability except in cases of "wilful default" or "personal conscious bad faith" (the wording differed as between the Schemes). Whilst the exoneration clauses could not apply to investment breaches, they could in principle apply to other breaches. As to this, the Ombudsman said:

• There was no practical difference between "wilful default" and "personal conscious bad faith".
• In either case, as a matter of general law, a trustee could not be exonerated for dishonesty.
• Case-law suggested that honesty/dishonesty should be determined via two stages, one subjective and the other objective: (1) what was the individual's actual knowledge or belief; and (2) based on that knowledge or belief, was the individual's conduct honest or dishonest when judged by the standards of ordinary decent people.
• Assessed on that basis, various breaches committed by Mr Kaigh and Mr McNally were dishonest, meaning that they could not rely on the exoneration clauses. A similar conclusion would apply even if honesty/dishonesty was determined on an alternative basis, eg a basis which was purely subjective.

Outcome

The Ombudsman made a complex series of orders. Broadly:

• As former trustees, Mr Kaigh and Mr McNally were ordered to pay into the Schemes amounts totalling £2,286,000 and £1,312,000 respectively.
• Two Trustee Companies were ordered to pay in amounts of £1,146,000 and £463,000 respectively. Mr Kaigh and Brambles were jointly and severally liable for part, on the basis of their dishonest assistance.
• The trustees were ordered to make transfers-out for the complainants upon request, equal to their transfers-in less any payments which they had already received.
• Mr Kaigh, the Trustee Companies and Brambles were ordered (between them) to pay compensation for non-financial loss – £4,000 for some of the complainants, and £6,000 for others.

Comment

Once again the Ombudsman has sent a clear message to scammers. His ruling ends with a further warning: he has referred the matter on to The Pensions Regulator.

Whilst the two recent rulings cover similar ground, this latest includes extensive discussion of the basis on which honesty/dishonesty should be assessed, when determining whether a person can be exonerated for a breach trust. Notably, the Ombudsman concluded that the test was not purely subjective. It involves, in part, judging conduct by the standards of "ordinary decent people".