Edge v Pensions Ombudsman

Pension trustees dealing with an actuarial surplus must consider what is fair and equitable in all the circumstances. Beneficiaries have a right to proper consideration, rather than a right to increased benefits or a share of the fund. Trustees may prefer one interest over another if they exercise the power for its proper purpose, consider relevant matters and exclude irrelevant matters.

A court or ombudsman may intervene where trustees misdirect themselves, consider improper matters, omit relevant matters or reach a decision which no reasonable body of trustees could reach. It may not substitute its own assessment of fairness. The Pensions Ombudsman should decline an investigation where adversely affected interests cannot be represented and bound, leaving any resulting remedy ineffective.

The trustees of a defined-benefit occupational pension scheme used an actuarial surplus to award additional service credit to members remaining in service, reduce members’ contributions and facilitate a reduction in employers’ contributions. Former members complained that the allocation unfairly excluded them.

The Pensions Ombudsman found breach of trust and maladministration, invalidated the amendments and directed restoration of the former contribution and benefit arrangements. On the trustees’ appeal under section 151(4) of the Pension Schemes Act 1993, the Vice-Chancellor allowed the appeal in [1998] Ch 512.

The Ombudsman appealed. The central questions were the content and reviewability of the trustees’ duties when allocating a surplus, and whether the Ombudsman should investigate where his determination would prejudice persons who were neither represented nor bound.

1. Appeal dismissed unanimously. Lord Justice Chadwick delivered the judgment of the Court. Beneficiaries under a defined-benefit scheme have no proportionate interest in the fund and no right to insist that an actuarial surplus be used to increase benefits. They are entitled to have the question properly considered.

2. When considering whether and how to increase benefits, trustees must address what is fair and equitable in all the circumstances. Relevant matters may include the source of the surplus, the scheme’s purpose, the employers’ ability to fund it, continued participation by employers and members, comparative benefit levels, the attractiveness of the scheme and the protection of pensions against inflation. This was not an exhaustive or prescriptive list. The weight assigned to each matter was for the trustees.

3. The so-called duty of impartiality is the ordinary duty governing a discretionary power. Trustees must use the power for its proper purpose, consider relevant matters and disregard irrelevant matters. A proper exercise may prefer employers, current employees or pensioners. Neither the court nor the Ombudsman may substitute its own view of fairness. Intervention is available for legal misdirection, improper considerations, omission of relevant considerations, bad faith or a decision which no reasonable body of trustees could reach.

4. The trustees had considered increased benefits and rationally confined the additional service credit to continuing contributors. The employers’ position, the scheme’s continued viability, the tax consequences of excessive funding, existing protection for pensioners and the employers’ necessary consent were relevant. No relevant omission, misdirection or irrationality was established. The Ombudsman had therefore applied the wrong test and his finding of breach of trust could not stand.

5. The scheme’s prescribed composition did not reverse the ordinary burden of proof merely because different trustees were associated with employers, active members or the closed fund. A challenger bore the burden of establishing impropriety, although adverse inferences could be drawn where trustees failed to provide an explanation which was called for.

6. Part X of the Pension Schemes Act 1993 did not strictly remove jurisdiction over the complaint. Nevertheless, natural justice required adversely affected interests to have a fair opportunity to be represented. Persons claiming in their own right were not persons “claiming under” the trustees or complainant for section 151(3). Because the enhanced-benefit members could neither be joined representatively nor bound, and an effective remedy could not be given, the Ombudsman should have declined the investigation.

1. Court of Appeal: The Pensions Ombudsman’s appeal was dismissed. The Vice-Chancellor’s order setting aside the determination was upheld: [2000] Ch 602.

2. High Court: The Vice-Chancellor allowed the trustees’ appeal under section 151(4) of the Pension Schemes Act 1993. He held that the Ombudsman had applied the wrong test to the trustees’ discretion and could not give effective directions prejudicing unrepresented persons: [1998] Ch 512.

3. Pensions Ombudsman: The Ombudsman found breach of trust and maladministration, declared the scheme amendments invalid and directed administration under the former rules.