West Law Report

KEMP v SIMS & ANR

Posted in Westlaw Reports by mrkooenglish on August 1, 2008

Chancery Division Norris J July 22, 2008

Last Updated: 8:59PM BST 30 Jul 2008

Breach of trust – Insured pension schemes – Pension contributions – Pension funds – Trustees’ powers and duties – Pension schemes – Diversion of demutualisation monies from pension scheme members to principal employer – s. 61 Trustee Act 1925

FACTS

The appellant (K) appealed against a decision of the Pensions Ombudsman that his actions in relation to a pension scheme constituted a breach of trust. K was a lawyer and had been the trustee of a pension scheme provided by an employer (R) to its employees. R was obliged by the terms of the scheme’s governing rules to pay into the scheme in order that the trustees might purchase necessary investments. One such investment was an insurance policy provided for by Scottish Widows, the premiums of which had always been met by R. Scottish Widows informed the trustees of its intention to demutualise and offered to compensate the trustees for the loss of their membership rights in return for their compliance with the demutualisation process. The trustees agreed to comply with the process and Scottish Widows sent them a cheque for the agreed sum of money. Subsequently, K persuaded his fellow trustees to pass a resolution diverting the demutualisation monies to R as a return of premium. The money was returned to R who utilised it to reduce its debts and increase its liquidity. The ombudsman received a complaint relating to the diversion of those funds and, having heard argument, determined that the diversion of the money from the trustees of the scheme to R and so from the scheme members to the principal employer, constituted a breach of trust because it was not a power warranted to the trustees and, furthermore, that K, as a qualified lawyer, could not avail himself of any of the defences in the Trustee Act 1925 s. 61. K submitted that (1) the ombudsman had proceeded on the erroneous assumption that K stood to gain some indirect benefit from diverting the demutualisation funds to R; (2) R was the correct owner of the Scottish Widows insurance policy having paid all the premiums thereupon, the demutualisation funds were, consequently, the property of R and it had been entitled to have them back; (3) in any event, the ombudsman did not have the jurisdiction to deal with the issue as to which party was entitled to ownership of the demutualisation assets, that decision fell squarely within the purview of the Financial Services Ombudsman.

ISSUES

(i) Whether the ombudsman had proceeded on the erroneous assumption that K stood to gain some indirect benefit from diverting the demutualisation funds to R.

(ii) Whether R was the correct owner of the Scottish Widows insurance policy having paid all the premiums thereupon, the demutualisation funds were, consequently, the property of R and it had been entitled to have them back.

(iii) Whether, in any event, the ombudsman did not have the jurisdiction to deal with the issue as to which party was entitled to ownership of the demutualisation assets, that decision fell squarely within the purview of the Financial Services Ombudsman.

HELD (appeal dismissed)

(1) Although the ombudsman had been wrong, as a matter of fact and law, to observe in his decision that K did stand to gain some indirect benefit by a reduction in the debit of R’s bank account, that error did not vitiate his overall decision nor did it undermine the factual basis upon which the complaint had been advanced.

(2) The ombudsman had not been wrong to treat the demutualisation funds as belonging to the trustees of the pension scheme. It was the trustees who were the members of the Scottish Widows mutual society and it was their rights as members which Scottish Widows were buying out when they demutualised. By the pension scheme’s governing rules R was obliged to contribute into the scheme to fund the benefits but that requirement did not mean that R owned the investment. Accordingly, the payment of the cheque to R constituted a plain breach of trust.

(3) Whilst it was true that the ombudsman had no jurisdiction to solve a dispute arising between rival claimants as to their respective ownership of demutualisation funds, it was also true that the Financial Services Ombudsman had no jurisdiction to solve disputes arising between pension scheme members and principal employers. The instant case fell squarely within the latter category and K’s attack on the jurisdiction of the ombudsman was destined to fail. Accordingly, the ombudsman was wholly correct to uphold the complaint against K.

The appellant appeared in person. James Rickards (instructed by Pinsent Masons) for the respondent.

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