Biggart Baillie Solicitors

Fred’s Pension – Enhancing or Reclaiming Pension Benefits?

Wednesday, April 15, 2009

by Iain Talman and Colin Greig and June Crombie

For many departing executives negotiating the right to have the pension they would have had had they continued to work to normal retirement date would be a very attractive element of a negotiated departure. 

For members of a defined benefit pension scheme the trust deed and rules will set out the basis on which the member and the employer make contributions. Many schemes for top executives are non-contributory by the member and only the employer pays in to the fund.

The scheme rules will also set out the basis on which the pension is to be paid. Normally for a defined benefit scheme the pension will be up to 1/60th for each year of service to a maximum of 40/60ths. Where the scheme is for executives this may be further increased to up to 1/30th per year of service up to a maximum of 20/30ths The scheme rules will also establish when the pension can be drawn, which will be at normal retirement date  (usually set at 60 for executives).  The trustees of the scheme are charged with the responsibility of ensuring that, following actuarial advice, the scheme is funded to meet the obligations to members.

However, it is not unusual for circumstances to arise in which an executive departs before normal retirement age, as a result of dismissal, resignation or early retirement. The rules of the scheme should deal with what pension entitlement under the scheme a member will have in each situation and whether and by whom any discretion may be exercised to alter the members entitlement from the normal rules.

In the case of resignation, the pension would normally be fixed at the amount calculated by reference to years of service to that date, and the final salary at which the member was employed prior to resigning. It would be payable as a deferred pension on the attainment of the normal retirement age. 

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This would also be the case in the event of dismissal. Pension entitlement is not lost due to dismissal, regardless of the reason - be that a so-called ‘good leaver’ such as redundancy, or a ‘bad leaver’ such as gross misconduct. The pension is an asset of the member and is not liable to be forfeited even if the member is sacked in circumstances when the company is entitled to do so.

The third possibility is early retirement, where, with the agreement of the employer, the member may be entitled to receive as from the date of retirement an immediate annual pension but normally reduced by such amount, if any, as the trustees after consultation with the scheme actuary determine. This would take account of the length of time between the date of early retirement and normal retirement age. Such a pension would therefore normally be reduced if taken at 50, to reflect the extra ten years of payments prior to normal retirement age at 60.

However, upon the payment by the employer of such additional contributions (if any) as the trustees (after consultation with the actuary) may consider appropriate, the trustees are usually allowed, with the consent of the employer, and must at the request of the employer, augment any of the benefits to which any person may be entitled under the pension scheme rules.  Such a provision may allow the employer to agree to pay a pension in excess of that which would be payable under the normal calculation of entitlement based on years of service, retirement age and final salary.

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So even if no trustees of the pension scheme were consulted, it would not be unusual for scheme rules to permit the employer to require the trustees to augment benefits, although this must not exceed relevant Inland Revenue limits for an exempt approved scheme. The very high level of Sir Fred Goodwin’s earning in the years prior to his departure would have meant that the relevant earning limits were unlikely to be triggered even by the very large pension he has been awarded.

The authority to agree the pension lay with the employer and is an exercise of a power under the scheme rules. The exercise of the power is not liable to be set aside provided it is within the rules, which it normally would be. An employer is usually entitled to exercise any power vested in it in relation to a scheme by reference solely to its own interests and in its absolute discretion and that notwithstanding that such power is or might otherwise have been a fiduciary power

Once the early retirement has been agreed and the pension augmented are there provisions that can claw back part of the pension? Harriet Harman’s ‘Court of Public Opinion‘ does not have the power to override the scheme rules and employers and trustees must follow the rules as regards forfeiture of benefits, or retentions or deductions from pension payments. Most scheme rules allow this only in extremely limited circumstances. In addition there is usually no provision for the surrender of pension benefits back to the pension fund.

A person entitled to any benefit under a scheme would normally only forfeit the right to benefit if:

1. the beneficiary becomes bankrupt, when the rights pass to his trustee in bankruptcy,
     
2. any other act has been or is done or event happens by which the benefit is legally vested in or payable to any other person (such as a security holder) or
   
3. the beneficiary has committed a criminal offence in relation to the scheme such as theft or dishonesty, so that the value of the assets of the scheme have been reduced

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The beneficial interest of any member, including any payment which may fall to be made to the member can usually also be reduced by the amount of any debts or liabilities of the member to the employer owing to and arising out of any criminal, negligent or fraudulent act or omission by such member. The amount deducted cannot exceed the value of the member’s interest in the fund as certified by an actuary and, if the member disputes liability, cannot be deducted unless such debt or liability has become enforceable under a court order. A court decree is required to exercise this right of set off.

The claw back of pension entitlement may therefore only be possible in the event that a claim of the employer company against the member in respect of fraudulent or negligent behaviour, giving rise to a liability of the member to the employer.  Even in these days when directors fiduciary duties have been clarified in statute, the task of establishing a claim and pursing it to the point of a court order which was not liable to further appeal should not be underestimated in terms of the likelihood of success, the time it could take and the cost involved. To justify taking such an action there would need to be some real prospect of success on the merits of the action itself, rather than as a mechanism of reducing pension benefit.

Contacts
For more information email a member of our Pensions Team: Iain Talman, June Crombie, Colin Greig or telephone 0141 228 8000.