PENSIONS LITIGATION: An Introduction

Pensions Litigation Overview 

It has been a busy time in the pensions litigation sphere, with another year of tough economic conditions impacting all aspects of the pensions world. As a result, we have seen a significant rise in pension risk transfers, member demand for more favourable pension increases, and greater scrutiny of trustees from all angles. All of this has resulted in a rise in pensions litigation, and a heightened risk of it.

Whilst there has been no let-up for the courts and The Pensions Ombudsman (“TPO”), there have been no radical changes or surprises either, with greater clarification of the legal landscape being the main upshot. That has not, however, necessarily translated into an easier life for trustees or those involved in administering pension schemes.

A busy year 

Pension risk transfers 

There has been a continuing trend of trustees taking advantage of scheme-specific and broader market opportunities by choosing to buy out liabilities with insurers or to adopt other risk transfer vehicles.

Partly driven by the current uncertain economic environment, whilst not always straightforward, finding the right opportunities and acting quickly is key in the risk transfer market. Essential due diligence prior to transacting can unearth historical errors requiring robust solutions. As a result, more rectification and construction claims are making their way through the judicial process, often accompanied by associated claims for professional liability.

Although the law associated with rectification and construction claims is now reasonably well settled, claims remain costly to pursue because of the need to carefully scrutinise and provide detailed evidence as to events that often took place many years ago.

Commercial options for addressing the risks associated with these transactions more efficiently continue to be explored. But, at least for now, pension risk transfer exercises continue to fuel much of the current litigation trend.

The Pensions Regulator’s new powers 

Although there was much concern in the pensions industry about the new powers granted to The Pensions Regulator (“TPR”) under the Pension Schemes Act 2021 (“PSA21”), they have largely been unfounded to date. Instead, TPR has focused much of its efforts on the most egregious breaches, particularly where there has been an element of fraud or dishonesty.

The same has been true of TPR’s investigation and enforcement activity more generally. For example, although employers’ auto-enrolment (“AE”) obligations have always been firmly on TPR’s radar, the pandemic resulted in TPR putting in place enforcement easements in this regard. However, they have now come to an end, with TPR resuming its pre-pandemic approach to inspections and enforcement in relation to AE. In TPR’s words, it will be "steering a firm strategic course that keeps good saver outcomes permanently in our sights".

Member complaints 

It has been another busy year for the office of TPO, which has been marked by the stepping down of Anthony Arter as TPO and by the appointment of Dominic Harris in his place.

Over the course of Anthony Arter’s time in office, the number of member complaints investigated increased nearly five-fold, with almost a quarter of those relating to pension transfers. In order to deal with these very significant increases, the total staff at TPO also rose from 45 to 109 and other operational efficiencies were achieved. But the strain of such increased numbers continued to restrict the speed at which justice was delivered, with the time taken to bring investigations to a resolution remaining stubbornly long – 30% not being resolved within 12 months.

Numbers aside, notable highlights of Anthony Arter’s tenure were the simplification of “the customer journey” and the establishment of the Pensions Dishonesty Unit – a pilot scheme designed to investigate cases of suspected trustee dishonesty, aimed at recovering funds from the perpetrators for the benefit of affected pension schemes and their members.

Only time will tell what Dominic Harris will bring to the role, but it certainly remains a busy and challenging environment for him and all those associated with it.

Economic environment 

Against the backdrop of the developing cost of living crisis and further inflation rises, there has been increased scrutiny of pensions inflation measures.

Although its impact might also be felt outside the pensions industry, it was notable that the high-profile judicial review proceedings concerning changes designed to align pension increases with the CPIH inflation index from 2030 was brought by the trustees of three pension schemes.

At the time of writing, the outcome of the case is unknown and, of course, could in any event be the subject of an appeal. There are a number of potential implications for pension schemes depending on the outcome itself, and their particular circumstances. But should the Government’s decision to align RPI with CPIH be upheld, it could conceivably lead to member pressure on trustees of defined benefit (“DB”) schemes to award uncapped discretionary increases.

Trustees should be prepared for heavy scrutiny of their decisions in any event, as ever, needing to balance the long-term funding of their DB schemes with maintaining the value of members’ benefits. In the same way as for any discretionary decision, trustees will need to ensure their decisions are properly considered and documented, as well as clearly communicated to minimise the risk of criticism from TPO and/or the courts.

Trustee conduct 

Enhanced member engagement means that an even brighter spotlight is also being shone on steps taken by trustees and their advisers to comply with ongoing legal obligations.

The recent McGaughy v Universities Superannuation Scheme case in the High Court is an example of this trend. The case was brought by two members against the trustee of the USS in respect of alleged breaches of fiduciary and/or statutory duty concerning the USS's 2020 actuarial valuation, which led to benefit and contribution level changes, and the continued investment in fossil fuels.

The Court dismissed the claim, holding that the members had failed to show that there had been a deliberate breach of duty, or that the trustee directors had benefited themselves at the expense of the trustee company. But the claim was apparently ”crowd-funded” by over 1,700 individual contributions – perhaps reflecting a strength of feeling amongst the wider membership.

Although the Court refused to grant permission to allow the claim to progress, this is a timely reminder of the importance of effective engagement and communication with members, as well as the need to ensure trustees’ duties are carried out properly.

ESG  

An increasing number of members are taking an interest in how their own pension savings are invested. Organisations like “Make My Money Matter” have been successfully campaigning to get members more engaged with their pensions savings and to ask questions about responsible investment.

TPO has already determined a member complaint concerning the conduct of trustees in relation to climate change. But with the introduction of the new climate reporting obligations under PSA21, investigatory and enforcement actions from TPR might soon be added to the increased scrutiny and potential claims from members.

What’s next? 

Trustees will need to be prepared for more numerous and frequent enquiries or even challenges, and should seek to resolve any issues swiftly and robustly, whilst remaining as pragmatic as the circumstances allow. Understanding and managing risk will be the key to that. For those pension schemes on their journey to buy-out, these issues might be most acute.

But challenges will not be limited to dealing with historical errors. Although none of us have a crystal ball to predict the future, we can be sure that the dynamic pensions market will continue to challenge everyone involved.