PENSIONS LITIGATION: An Introduction to UK-wide

The pensions industry is a vital, yet complex, environment where there can be legal uncertainty and where, inevitably, mistakes are made from time to time. Litigation has an important role to play in resolving these situations.

In 2024, pensions litigation has continued to experience high levels of activity. In particular, in relation to the following:

• Risk transfers – Many schemes are preparing for “risk transfers”, some are unearthing historical problems with their governing documentation and administration. Although some are “one-offs”, others are being faced by schemes across the industry. The appeal in the Virgin Media v NTL Pension Trustees II Limited (the “Virgin Media case”) being an example of the latter
• Professional negligence – Professional negligence claims often run alongside efforts to resolve historical problems, but even with the absence of any final court decisions in this space, settlements are being achieved, often through the effective use of mediation and other ADR techniques.
• The Liability-Driven Investment (LDI) crisis – Whilst this is a distant memory for many, some schemes suffered financially and are looking to seek redress for those adverse consequences.
• Cyber-risk – This is one of the biggest challenges facing pension schemes today and, sadly, no one is immune from an attack. Again, litigation often has a role to play in the aftermath of an attack, but this is very much a situation where prevention is better than cure.

The Pensions Regulator (TPR), the Pensions Protections Fund (PPF) and the Pensions Ombudsman (TPO)

The activities of these three important bodies often provide a good indication of key areas of focus for the pensions industry.

TPR

TPR’s recent investigatory and enforcement focus has, again, been on efforts to ensure that employers are complying with their auto-enrolment obligations. It has also focussed on value offered by smaller schemes, carrying out a compliance review with rules for value for members in smaller schemes, resulting in financial penalties for certain non-compliant schemes. It has also continued with its anti-avoidance work in relation to defined benefit pension schemes, although seemingly not to the extent that it has in the past.

PPF

The PPF was involved in the case of Brass Trustees v Goldstone, where the trustee sought the court’s approval to seek to wind up the scheme’s employers to avoid both the proportionate level of funding worsening over time (“scheme drift”) and the amount of compensation payable by the PPF increasing (“PPF drift”). The PPF accepted the trustee’s invitation to be joined as a party, using it as an opportunity to reinforce its position that trustees cannot seek to take advantage of the existence of the PPF to justify acting in a way which would otherwise be improper.

TPO

The number of complaints received by TPO has continued to increase, with over 7,000 complaints received over 2022/23. This is a 17.1% increase in demand since 2021/22. When compared to last year’s figures, the top five issues have remained the same, including issues on administration, pension transfers and misquotes. However, there were increases in the proportion of overall closures regarding contribution issues, automatic enrolment and pension liberation.

As well as tackling a large backlog in its caseload, the TPO is also expecting demand for its services to continue. In its attempts to address these issues, it is planning to tighten the conditions that must be met before it investigates a complaint and whether a de minimis threshold should be applied in some circumstances. It will be interesting to see the impact this has on schemes’ workloads in relation to member complaints.

Historical Scheme Problems

The due diligence work associated with risk transfers continues to identify historical issues or uncertainties with scheme documentation. Their route to a resolution will sometimes involve court proceedings and, where this route is used, there is a strong sense that it is being done so more efficiently and co-operatively than ever before using the court’s “Part 8” procedure.

The decision of the High Court in the Virgin Media case was, however, regarded by many in the pensions industry as unwelcome news. In that case, the Court considered the legal effect of a deed of amendment (dealing with a salary-related contracted-out scheme) without the required actuarial confirmation. The judge noted that the issues surrounding these actuarial confirmations had been the subject of considerable uncertainty for some time, and went on to hold that an amendment introduced without the actuarial confirmation was void and ineffective. The decision has been appealed and the outcome will be awaited with much interest.

The LDI Crisis

A week is a long time in politics and, as we know all too well, the LDI crisis was triggered by political events. But two years is not a long time in pensions, or in litigation, and the ramifications of the LDI crisis are still playing out.

We are yet to see the “group litigation” claim that many had predicted. But there is still plenty of time for one to develop. In the meantime, there are individual claims being investigated and pursued. Only time will tell whether these will encourage or deter others from following a similar path. Whatever the outcome, we can surely all hope that lessons will be learned.

Cyber-Risk

The pensions industry was shaken by the Capita cyber incident in 2023 that exposed the personal data of potentially hundreds of thousands of pension scheme members. It served as a cautionary reminder to the pensions industry that cybercrime could happen to anyone.

The immediate flurry of activity in the aftermath of the incident has been followed by further, more considered, actions. TPR issued a report that explained its role in dealing with the incident and set out learnings for trustees to consider in similar situations.  It also recently published updated cyber guidance and its new General Code of Practice, which sets out its expectations for trustees in respect of cyber-risk. Whilst much of the focus of the guidance is of course on prevention, it also makes clear that TPR expects trustees to have an incident response plan in place.

For schemes affected by the Capita incident, it has put trustees in an invidious position. They have had to deal with member complaints to the Information Commissioner and the Pensions Ombudsman, often with limited information, whilst also considering their own reporting requirements and whether there has been loss to their scheme for which they should pursue a claim. Perhaps the one positive outcome is that, again, lessons are likely to be learned by all involved.

Looking Ahead

In what might be seen by some as a return to the 1990s, some trustees and employers are grappling with the rather more positive subject of scheme surpluses. The use of surplus drove a number of court cases in the past, and don’t be surprised if we see more in the near future.