Kemp v Sims & Anor

By section 151(4) of the Pension Schemes Act 1993 it is provided that:

“an appeal on a point of law shall lie to the High Court…from a determination or direction of the Pensions Ombudsman…”

There is before me an appeal brought by Mr Michael Kemp against a decision of the Deputy Pensions Ombudsman dated 7^th March 2008, whereby the Pensions Ombudsman directed Mr Kemp to pay to the trustees of a scheme the sum of £86,818 plus interest, such interest to be calculated from 29^th August 2000 until the date of payment.

This being an appeal on point of law only, the facts on which the appeal must be determined are those set out in the decision. In summary they are these.

The Powage Press Cash Benefits Scheme was established by a deed dated 18^th September 1973 made between Royston Recording Systems Limited (“Royston”), which was the principal employer under the scheme, and the appellant and other persons as trustees. It was correctly described in the appellant’s response to the complaint as an “exempt approved occupational pension scheme providing final salary-related retirement and death benefits”. Royston was itself a subsidiary of Ashbolt Limited (“Ashbolt”). Royston traded with the benefit of an operating overdraft that was guaranteed from 1995 by Ashbolt and had from 1972 been guaranteed by Mr Kemp under an unlimited personal guarantee.

The scheme rules were amended in 1980. Under the scheme rules (as amended) the benefits provided by the scheme were a death in service benefit and a cash benefit payable on termination of employment. By clause 4(e) of the deed establishing the scheme it was provided that any monies or assets at any time held by the trustees should not in any circumstances be repayable or transferable to Royston except that the trustees might pay to Royston any monies which were not required for securing the benefits on termination of the scheme. During the continuation of the scheme there was accordingly no power in the trustees to return monies to Royston.

The 1980 scheme rules contain two provisions under which, on termination, monies could be returned to Royston: under rule 5 in Part III and under rule 17(c)(3) in Part III. The latter provision provided that, if the whole or a portion of the scheme was to be terminated, then any balance remaining after providing for scheme benefits should, at the discretion of the trustees, either be applied to increase the cash benefits conferred by the rules on scheme members, or alternatively be paid to the employer. Save for such repayments on termination, the manner in which Royston could benefit from an over-funded scheme would principally be by the reduction or suspension of contributions to the scheme. Such a contributions holiday had in fact occurred and Royston’s contributions had been reduced from in excess of 3% to about 1.8% in view of the state of funding of the scheme.

Clause 2 of Part III of the 1980 scheme rules provided that the whole of the monies received by the trustees insofar as not required to meet current liabilities in respect of benefits should be invested in the names of the trustees in any lawful investment and, in particular, in a policy or policies of assurance affected with the Scottish Widows Society. The scheme assets accordingly included the benefit of an insurance policy issued by Scottish Widows, the premium on which was paid by Royston.

The scheme was administered at all material times by Mr Kemp, who was a qualified lawyer.

On 26^th April 2000 Scottish Widows informed the scheme trustees, writing care of Mr Kemp, of the prospective demutualization of the Society. They sought the consent of the trustees as policy holders to the demutualization proposals and they offered a sum, originally £50,000 but subsequently £75,000-odd, as compensation in respect of loss of members’ rights in Scottish Widows.

On 21^st August 2000 a cheque in favour of the trustees of the Powage Press Cash Benefits Scheme in the sum of £86,818 was sent to the trustees care of Mr Kemp. The Pensions Ombudsman found, and it is not open to challenge on the appeal, that on the balance of probabilities the cheque was accompanied by a booklet explaining what could be done with the compensation payment. The booklet directed that the trustees must reinvest the compensation. It pointed out that the vast majority of pension schemes administered by Scottish Widows had insured scheme status and accordingly such reinvestment must be in a suitable insurance policy if the scheme was to retain that categorisation. The booklet drew attention to the fact that the trustees could not do anything with the compensation which was not authorised by the scheme’s governing documents or by the law or the appropriate regulatory requirements. It specifically stated that the trustees were not permitted to distribute compensation directly to employers other than in circumstances permitted by the scheme’s governing documents and the applicable law and regulations.

The scheme did not have its own bank account. Mr Kemp made arrangements for the cheque to be passed through Royston’s account. He also placed before his co-trustees a resolution, the minute of which records:

“It was agreed that this sum [the compensation] should be paid to Powage Press as compensation for all the premiums paid to Scottish Widows.”

On 29^th August the Scottish Widows cheque was credited to Royston’s business loan account with Barclays, reducing the debit balance on that account from £100,750 to £20,750. The excess over £80,000, namely £6,818, was credited to Royston’s current business account. It appears from the valuation evidence, as recorded by the Pensions Ombudsman, that as at 18^th September 2000 the Powage Press Cash Benefits Scheme was 73.5% funded on a buy-out basis, i.e. if the benefits provided by the scheme under the Scottish Widows policy had to be replaced by insured benefits bought for the members, the scheme had only 73.5% of the funds required for that notional exercise. However, on a discontinuance basis, i.e. on the footing that Royston ceased to contribute premiums to the scheme and the scheme benefits had to be provided internally on termination, the scheme was 147% funded.

Royston ceased trading in February 2001 and an administrative receiver was appointed. Royston’s business was acquired by connected persons through the medium of a company called Pepbury Limited on 31^st March 2001. In July 2001 Pepbury entered into a deed in which it assumed the obligations of the principal employer under the Powage Press Cash Benefits Scheme, which was renamed “the Pepbury Cash Benefits Scheme”.

On 10^th January 2003 in consideration of a payment of £12,000 being made to Barclays, Mr Kemp was released from his guarantee to Barclays. The only other matter to record is that since the date of the determination that he should pay £86,818 to the scheme trustees Mr Kemp has petitioned for his own bankruptcy.

Those are the facts on which the points of law that arise on this appeal must be determined. In his courteous and comprehensive submissions Mr Kemp has essentially taken four categories of points on the appeal, though his grounds of appeal and skeleton argument and summary of the points of law list a greater number.

The first group of points may be taken together under the heading that “the factual basis for the complaint did not in fact exist”.

In paragraph 62 of his decision the Pensions Ombudsman observed of the payment of the Scottish Widows cheque into the Royston account:

“Mr Kemp has given no justifiable reason for making this payment and for persuading the other trustees to agree to it. Even he himself did not stand to benefit directly, the fact that he did, if only indirectly, whether as guarantor or shareholder, is relevant.”

It is important to understand the basis of the Ombudsman’s decision before examining the significance of that observation. The Ombudsman found and held that the diversion of the cheque from the trustees of the scheme to Royston and so from the scheme members to the principal employer was a breach of trust because it was not warranted by any power granted to the trustees in the governing documents and was not otherwise justified. Having held Mr Kemp responsible for a breach of trust, he then went on to consider whether Mr Kemp should be relieved from liability for that breach under section 61 of the Trustee Act. The passage I have quoted relates to a preliminary summary of the position leading up to the actual ground for the decision not to afford Mr Kemp the relief accorded by section 61. The ground for the decision not to afford relief is set out in paragraph 63 and is:

“I do not see how he can be said to have acted reasonably in acting as he did.”

Whether Mr Kemp stood to benefit directly or indirectly was not therefore the actual ground for the decision. Nonetheless, it is a matter which is articulated by the Pensions Ombudsman as something which he thought relevant. Mr Kemp submits that he was not at any relevant date a shareholder, and in fact at the beginning of the decision the Pensions Ombudsman acknowledges that to be the case. The observation that Mr Kemp may indirectly as shareholder have benefited from the reduction of the Barclays loan is therefore mistaken. I do not consider that that error vitiates the decision taken by the Pensions Ombudsman. Although he described it as “relevant”, when he actually came to state his decision the ground for his decision was simple, that Mr Kemp cannot be said, as a qualified lawyer who had administered the scheme and received the booklet that accompanied the cheque, be thought to have acted reasonably in diverting the cheque to Royston.

Mr Kemp secondly submits that he was not a guarantor. He acknowledges that he entered into a guarantee of Royston’s indebtedness to Barclays in 1972, but he says that when the Ashbolt guarantee was put in place in 1995 his security was looked at as a secondary security standing behind that of Ashbolt, and Ashbolt was at all material times good for any sum demanded under its guarantee. Accordingly, he was not a guarantor. In submissions, however, he acknowledged that until he was released in 2003 he technically was a guarantor. The evidence before the Pensions Ombudsman does not appear to have been directed as to the priorities in which Barclays would call upon the securities available to them, or to the creditworthiness of Ashbolt at the date in August 2000 when the cheque was diverted.

I therefore do not consider that the Pensions Ombudsman was wrong as a matter of fact, let alone as a matter of law, to observe that Mr Kemp did stand to benefit indirectly as guarantor by the reduction of the Barclays loan account using the Scottish Widows demutualization monies. This point, therefore, does not undermine the factual basis for the complaint.

Thirdly, Mr Kemp submitted that the Pensions Ombudsman had proceeded on the footing that the Powage Press Cash Benefits Scheme was an insured scheme and that is why he held that that paragraph in the Scottish Widows booklet which drew attention to insured schemes and to the need to reinvest the compensation in an insurance policy was relevant. Mr Kemp argued that the scheme was not an insured scheme. He relied on the actuarial valuations. In August 2001 the scheme actuary prepared a report in which he addressed the question of minimum funding. In the course of that report he observed:

“In practice your scheme holds deferred cash benefits which are now backed mainly by bonds.”

From this Mr Kemp derives the proposition that the assets held by the scheme were not the benefit of an insurance policy, so making it an insured scheme, but were real assets, namely bonds.

I am satisfied, although there is no specific finding to this effect in the decision, that the scheme was an insured scheme. If one reads on in the actuarial report from which Mr Kemp has quoted one finds an appendix which deals with changes to investments. It states the following:

“The assets underlying the cash benefit contract in which you are invested have changed. Your scheme is now backed mainly by fixed interest securities whereas in the past it was backed mainly by equities. This means that the prospect for bonuses to be earned by your scheme is very low for the foreseeable future.”

To my mind that makes abundantly clear that the scheme assets consist of the benefit of a insurance contract (being that contemplated in the investment clause in the 1980 Rules, which I have quoted), and it is the underlying nature of the insured fund that is being addressed in the passage to which Mr Kemp refers. So I do not consider that in proceeding on the footing implicitly that this was an insured scheme, and that the Scottish Widows booklet was relevant, the Pensions Ombudsman erred. He was entitled, in my judgment, to proceed on that footing.

Insofar as the complaint is made that the factual foundation for the complaint did not exist, that ground of appeal in my judgment is not made out. Although there was one small error in the Pensions Ombudsman’s determination, it does not undermine his finding and holding that Mr Kemp was not entitled to the benefit of the relieving provisions of section 61.

This brings me to the second group of points which Mr Kemp advanced as points of law on which the Pensions Ombudsman erred. They relate to the ownership of the demutualization monies. Mr Kemp submitted that it was clear on the evidence and on the underlying documents which were before the Pensions Ombudsman that Royston had paid all of the premiums on the Scottish Widows policy. He submitted that this made Royston the owner of the policy and the owner of the fruits of the policy. He said that no reliance could be placed on the fact that the demutualization monies were paid by means of a cheque addressed to the trustees because the practice of Scottish Widows showed that the person named on the cheque as payee was not necessarily intended to be the ultimate recipient of the money. He said, though this had not apparently been in evidence before the Pensions Ombudsman, that a cash benefit in the sum of £5,400-odd payable to an employee had been met by Scottish Widows by a cheque drawn in favour of the trustees, not in favour of the employee, which the trustees had had to pass through Royston’s bank account. He submitted that since the £86,000-odd was (on his analysis of the funding) surplus to requirements, it effectively belonged to Royston because it amounted to a return of premiums, and he pointed to one other instance where Royston had overpaid a premium which had been repaid by means of a cheque payable to the trustees which again had been paid into Royston’s bank account.

In my judgment, the Pensions Ombudsman was not wrong to treat the demutualization compensation as belonging to the trustees. It seems to me plain that the owners of the policy were the trustees and not Royston. Although the policy document could not be produced, the scheme would only work if it was the trustees who owned the policy purchased with monies passed to them for investment under the investment provision which I have cited from the 1980 Rules. They were the policy owners. They were the persons who were members of the Scottish Widows Mutual Society. It was their rights as members that were being bought out by the compensation payment, and the compensation in my judgment plainly belonged to them. The fact that under the rules, in particular clause 3(c) of Part 1 and clause 3 of Part II, Royston was obliged to pay into the scheme sufficient monies to fund the death in service and cash retirement benefits does not mean that Royston owned the investments purchased with those contributions. They belonged to the trustees and were to be applied by them under the terms of the trust and the rules for the benefit of the scheme members who were beneficiaries. The rules provide for no means of returning monies to Royston as principal employer save on a termination of the scheme or by reduction in contributions to an over-funded scheme.

In my judgment, the Pensions Ombudsman was right in law to hold that the demutualization payment belonged to the trustees and he was right in law to hold that they had no power and did not purport to exercise any relevant power to transfer those scheme funds to Royston. Accordingly, the payment of the cheque into Royston’s bank account and its utilisation in reduction of its borrowing from Barclays was a plain breach of trust.

The third group of points taken by Mr Kemp was that he denied that the Pensions Ombudsman had jurisdiction to deal with the complaint before him. Mr Kemp advanced this argument in two separate limbs, but it is right to observe that neither of them was advanced before the Pensions Ombudsman so that Mr Kemp faces considerable difficulties in establishing that the tribunal was wrong in failing to address the arguments.

The first limb turns on who owns the demutualization benefit. It was Mr Kemp’s repeated submission under this head that the demutualization benefit did not belong to the trustees. It ultimately belonged to the person who had paid the contributions under the policy from which the demutualization benefit arose. I have addressed this argument in the context of who owned the policy, but I observe that the case had been argued throughout on the footing that the power of disposal over the demutualization monies was vested in the trustees and not in anyone else. That is why Mr Kemp placed before the trustees the resolution that he did containing the decision that the compensation monies should be returned to Royston in effect as a return of premium. Mr Kemp in a thoughtful passage recognised that in essence what he was arguing was that the Pensions Ombudsman had no power to adjudicate who, as between Royston and the trustees, owned the relevant monies, and that in effect he was arguing that that decision fell to be made by the Financial Services Ombudsman, but he recognised that the Financial Services Ombudsman himself may have no jurisdiction to determine a dispute between rival claimants to the demutualization monies as opposed to a dispute between a financial institution and the person to whom the monies were paid. I think in this passage of his argument Mr Kemp was making a correct analysis. The Financial Services Ombudsman cannot decide who, as between two rival claimants, is entitled to the policy monies. That is a decision for the Pensions Ombudsman who was deciding the matter as between the scheme members, on the one hand, and the principal employer, on the other.

Accordingly, this challenge to the jurisdiction of the Pensions Ombudsman fails.

The second challenge to the jurisdiction of the Pensions Ombudsman was that the Powage Press Cash Benefits Scheme was not in truth a pension scheme at all. Mr Kemp submitted that the scheme rules provided for two forms of benefit: one in effect an endowment policy payable at a specific date, and the other a term assurance policy payable in the event of failure to survive to a particular date. He said that no one, if those two rights were bundled together, would think of them as constituting a pension scheme, and accordingly the Royston scheme could not be so categorised either.

He relied also on the fact that the benefits payable under the scheme were a single cash payment on death or termination of employment, whereas he said that a pension according to the Oxford English Dictionary was:

“A regular payment made by an employer on the retirement of an employee.”

In my judgment, this is a bad point. The Pension Schemes Act 1993 deals with occupational pension schemes, amongst other things, and defines such schemes as

“…any scheme or arrangement…which has, or is capable of having, effect in relation to one or more descriptions or categories of employments so as to provide benefits, in the form of pensions or otherwise, payable on termination of service or on death or retirement…”

That is precisely what this scheme does.

I consider that Mr Kemp correctly described the scheme in his response to the complaint, which description I have already cited at the outset of this judgment. I accordingly dismiss this appeal so far as it proceeds on the footing that the Pensions Ombudsman had no jurisdiction to deal with it because the scheme is not a pensions scheme within his jurisdiction.

The final group of points may be gathered together under the heading that “the complaint adjudicated upon by the Ombudsman was unsustainable, having regard to subsequent events”. I have already recounted how Royston went into liquidation and how Pepbury became the principal employer under the scheme by means of a deed entered into in July 2001. Mr Kemp argued that the deed by which Pepbury took over the obligations of the principal employer under the scheme was invalid. He said that what should have happened is that the scheme should have been terminated on Royston’s liquidation, which is what is provided for in the 1980 Rules in Part III clause 16. This rule provides that if “the company” goes into liquidation the whole of the scheme will be terminated unless any company or firm succeeding to the business of the company undertakes in writing the obligations of the company under the scheme. That did not happen on the occasion of Royston’s liquidation. Accordingly, Mr Kemp argued, the scheme should have been terminated. The relevant benefits should have been paid to members. Mr Kemp submitted that, on the footing that the scheme had a 147% funding level in 2000, there would have been a surplus available to the creditors of Royston. On that footing, he said that what this complaint against him was really about was compelling him to make an additional contribution to the scheme so as to relieve Pepbury of its ongoing obligations to fund the scheme.

In my judgment, ingenious as this argument was, it has no substance. There are no grounds for thinking that the deed by which Pepbury undertook the obligations as principal employer for the purposes of the scheme was invalid. There are no grounds for thinking that if at the liquidation of Royston arrangements had had to be made by the trustees for the ongoing funding of the scheme there would have been a surplus available for Royston’s creditors. According to the actuarial report relating to the position in September 2000, if a conservative approach were taken, namely the purchase of policies to replace the benefits provided under the scheme for members was adopted, the scheme was only 73.5% funded.

It may well be unfortunate that Mr Kemp finds himself as the one party to the diversion of the Scottish Widows cheque who is found both liable for breach of trust and unable to avail himself of the relieving provisions of section 61. But I see no escape from the conclusion that the Pensions Ombudsman was right in law to reach that result on the facts as he found them. There is no doubt in my mind that the diversion of the demutualization monies was a breach of trust not authorised by the governing deed and not approved by any regulatory authority. Equally, I am satisfied that the conclusion is compelled that section 61 was not available to Mr Kemp (because, as a qualified lawyer who had received the Scottish Widows booklet, it was not reasonable to adopt the course he did in placing before the trustees a resolution for the diversion of those monies for the company’s benefit ostensibly as a repayment of premiums).

The result is that I must dismiss Mr Kemp’s appeal and uphold the direction of the Pensions Ombudsman to the effect that Mr Kemp should pay the sum of £86,818 plus interest in respect of that breach of trust.