In a case involving the industry-wide pension scheme for plumbers the Ombudsman has held that the scheme's trustee was not time barred from pursuing an employer debt under section 75 of the Pensions Act 1995 despite having allowed a period of years to elapse without even notifying the employer that a debt would be due (Mr S CAS-39170-Y5Q). However, the Ombudsman found that the Trustee was liable for a negligent misstatement when an administration manager had said that nothing would change as a result of Mr S incorporating his plumbing business when in fact this the change triggered an employer debt under the legislation, estimated to be £283,000.
Background
Mr S ran a plumbing business as a sole trader. He was admitted to the Plumbing & Mechanical Services (UK) Industry Pension Scheme (the Scheme) on that basis and was therefore personally liable for complying with the employer's obligations under the Scheme. The Scheme was a centralised multi-employer non-segregated defined benefit scheme providing benefits to employees in the plumbing and mechanical services industry.
In 2010, in connection with his plan to retire from the business, Mr S restructured the business so that it was operated by a company. Prior to this change, Mr S's wife had a telephone conversation with the Scheme's administration manager regarding the fact that the business was to be transferred to a limited company. Although there was no contemporaneous record of what was said during that conversation, the Ombudsman found on the balance of probabilities that the administration manager had assured Mrs S that the restructuring would not result in any change other than a change in employer name on the paperwork. In fact the cessation of Mr S's participation in the Scheme as a sole trader resulted in a statutory employer debt being triggered for which Mr S as a sole trader was personally liable. That debt was estimated at £283,000.
Trustee's delay in seeking payment of the debt
The event which triggered the debt took place in 2010 when Mr S's business was transferred to a company. However, it was not until November 2017 that the Trustee contacted Mr S regarding the triggering of the debt. The Ombudsman accepted that in 2010 the Trustee had hoped to be successful in lobbying for a change in the law to resolve the issue of section 75 debts being triggered in relation to the Scheme. However, by the time it was submitting its 2012 actuarial valuation to the Pensions Regulator, the Trustee had accepted that meaningful change to the employer debt legislation was unlikely to be forthcoming. The Trustee's failure to notify Mr S of the debt at this point amounted to maladministration.
The Ombudsman considered whether the Trustee was time barred from pursuing the debt. As the Scheme was governed by Scots law, the Ombudsman concluded that it was the prescription periods under Scots law (ie the Scots law equivalent of English law limitation periods) that were relevant. Under the Prescription and Limitation (Scotland) Act 1973 the prescription period was 20 years from the date the obligation became enforceable. This meant that the Trustee was not time barred from bringing a claim for the section 75 debt. The Ombudsman considered that the key case on this point was the High Court case of Phoenix Venture Holdings Ltd v Independent Trustee Services Ltd which held that a section 75 debt did not become enforceable until it had been calculated. Whilst this judgment was not binding on the Scottish courts, the Ombudsman took the view that it was appropriate to apply the ruling in this case on the basis that English High Court decisions have persuasive authority in the Scottish courts.
Final determination
The Ombudsman found that Mr S was in principle liable for the section 75 debt which was not time barred. However, he considered that the Trustee was liable for negligently informing Mr S that nothing would change as a result of his business being transferred to a company. The Ombudsman considered that, had Mr S been given the correct information, he would in practice have been able to avoid personal liability for the section 75 debt by entering into a statutory flexible apportionment arrangement under which the company succeeding to the business assumed liability for the section 75 debt. Mr S had been a shareholder and director of the company for several years following the transfer of the business to the company, but his involvement with the company had ceased by the time the Trustee notified Mr S of the debt. The Ombudsman therefore made an order whereby the section 75 debt which Mr S was actually liable to pay was largely offset by Trustee's liability to Mr S for the loss caused by its negligent misstatement, plus an additional award of £2500 for the non-financial injustice Mr S had suffered. However, Mr S was still required to pay a net amount in excess of £30,000 to the Scheme, broadly equating to the price Mr S had received on selling his shares in the company. The Ombudsman considered that Mr S would not have been able to sell his shares had the true position regarding the section 75 debt been known at the time. It was therefore appropriate to set off the amount of the sale proceeds against the Trustee's liability to Mr S.
Our thoughts
The Ombudsman accepted that the Trustee was not under a duty to warn Mr S about the section 75 debt being triggered. However, when it did provide information to Mr S about the consequences of the employer restructuring, it owed a duty to Mr S to take care to ensure that the information it provided was accurate. The Ombudsman commented that employers participating in a pension scheme would normally be expected to take their own legal advice on the pensions implications of a restructuring. However, the circumstances of the plumbers' pension scheme were unusual in that many of the participating employers were very small businesses.
There can be a significant time lag between a section 75 debt being triggered and a section 75 debt being calculated, so the principle that a section 75 debt does not become enforceable until it is calculated is potentially important.
