Report by the Parliamentary Ombudsman of the results of an investigation of a complaint about the Pensions Regulator made by Mr L and referred by Graham Stuart MP

The complaint

Mr L complained that the Pensions Regulator, when deciding to decline to impose a Financial Support Direction (FSD) or Contribution Notice (CN) on the parent company of his former employer, which would have improved the funding position of his pension scheme, failed to exercise its statutory functions properly and its discretion reasonably.

Mr L contended that as a result he, and many other pensioners in the scheme, have been prevented from receiving the level of pension they could otherwise have rightfully expected. He seeks a full explanation of the reasons for the Pensions Regulator’s decisions and reconsideration of the relevant decisions.

The decision

I have not found maladministration in the Pensions Regulator’s handling of these matters. It follows that I do not uphold the complaint.

The Parliamentary Ombudsman’s jurisdiction and role

When deciding whether the Ombudsman should investigate any individual complaint we have to satisfy ourselves first that the body or bodies complained about are within our jurisdiction. Such bodies are generally listed in Schedules 2 and 4 to the Parliamentary Commissioner Act 1967 (the 1967 Act). The Pensions Regulator is so listed. Secondly, we must also be satisfied that the actions complained about were taken in the exercise of that body’s administrative functions and are not matters that the Ombudsman is precluded from investigating by the terms of Schedule 3 to the 1967 Act, which lists administrative matters over which she has no jurisdiction.

Section 5(2) of the 1967 Act prevents the Ombudsman from looking into any matter in respect of which there is a right of appeal to an independent tribunal or other legal remedy, unless she is satisfied that it is not reasonable to expect the complainant to resort or have resorted to it. (There is no right of appeal available to Mr L and the Ombudsman is satisfied that it would not be reasonable to have expected Mr L to have sought a remedy through the courts.)

The Ombudsman’s approach when conducting an investigation is to consider whether there is evidence to show that maladministration has occurred that has led to an injustice that has yet to be remedied. If there is an unremedied injustice, the Ombudsman will recommend that the public body in question provides the complainant with an appropriate remedy (in line with her Principles for Remedy). These recommendations may take a number of forms such as asking the body to issue an apology, or to consider making an award for any financial loss, inconvenience or worry caused. The Ombudsman may also make recommendations that the body in question reviews its practices to ensure that similar failings do not occur.

Under section 12(3) of the 1967 Act the Ombudsman can only question the merits of a decision taken by a government department (the Pensions Regulator in this instance) in the exercise of a discretion vested in that department where there is evidence of maladministration. She cannot question a decision on the grounds simply that she or someone else might have reached a different decision from the one that was actually made. If the Ombudsman does find maladministration in the way that a discretionary decision was reached, she cannot substitute her own judgment for that of the body concerned: she can only invite the department to take the decision afresh and without maladministration.

By virtue of her powers under section 8 of the 1967 Act, the Ombudsman may require any person who, in her opinion, is able to furnish information or documents relevant to the investigation to do so.

Basis for the Ombudsman’s determination of the complaint

In simple terms, when determining complaints that injustice or hardship has been sustained in consequence of service failure and/or maladministration, the Ombudsman generally begins by comparing what actually happened with what should have happened.

So, in addition to establishing the facts that are relevant to the complaint, we also need to establish a clear understanding of the standards, both of general application and which are specific to the circumstances of the case, which applied at the time the events complained about occurred, and which governed the exercise of the administrative and clinical functions of those bodies and individuals whose actions are the subject of the complaint. We call this establishing the overall standard.

The overall standard has two components: the general standard which is derived from general principles of good administration and, where applicable, of public law; and the specific standards which are derived from the legal, policy and administrative framework and the professional standards relevant to the events in question.

Having established the overall standard we then assess the facts in accordance with the standard. Specifically, we assess whether or not an act or omission on the part of the body or individual complained about constitutes a departure from the applicable standard. If so, we then assess whether, in all the circumstances, that act or omission falls so far short of the applicable standard as to constitute service failure or maladministration.

The overall standard which I have applied to this investigation is set out below.

The Ombudsman’s Principles

In February 2009 the Ombudsman republished her Principles of Good Administration, Principles of Good Complaint Handling and Principles for Remedy. These are broad statements of what she considers public bodies should do to deliver good administration and customer service, and how to respond when things go wrong.

The same six key Principles apply to each of the three documents. These six Principles are:

Getting it right

Being customer focused

Being open and accountable

Acting fairly and proportionately

Putting things right, and

Seeking continuous improvement.

The Principle of Good Administration particularly relevant to this complaint is:

‘Getting it right’ – a public body should take reasonable decisions based on all relevant considerations.

The remit of the Pensions Regulator

The Pensions Regulator is the UK regulator of work-based pension schemes.2 The Pensions Act 2004 (the 2004 Act) gives the Pensions Regulator a set of specific objectives:

to protect the benefits of members of work-based pension schemes;

to reduce the risk of situations arising that may lead to compensation being payable from the Pension Protection Fund; and

to promote, and improve the understanding of, good administration of work-based pension schemes.

Legislative and administrative background

The provisions of the 2004 Act which concern this complaint are part of the ‘moral hazard’ or ‘anti-avoidance’ provisions of that legislation, which were introduced towards the end of Parliamentary consideration of what became the 2004 Act. In the words of the press notice issued by the sponsoring government department, the Department for Work and Pensions (DWP) on 27 April 2004, which announced the introduction of these new provisions into the Bill following a period of consultation:

‘The new clauses introduced by the Government amendments in the pensions bill aim to address the risks of so-called “moral hazard”, particularly those posed by unscrupulous employers who might seek to use company structures and business transactions as a cover for avoiding their pension obligations and dumping their liabilities on the new Pension Protection Fund.’

After describing the rationale for the introduction of CNs, the notice continued, with regard to FSDs, by saying that:

‘There may also be circumstances where, as a result of legitimate actions, not aimed at avoiding pension liabilities, schemes with a solvent group of companies could end up with a sponsoring employer who is unable to meet its pension liabilities. So, the second provision announced today will give the Pensions Regulator the power to require that financial support arrangements are put in place in cases where restructuring has either left service companies or subsidiaries with pension obligations that they can’t meet.’

The Explanatory Note for what became section 43 of the 2004 Act said the following:

‘Clause 43 gives the Regulator power to issue a direction requiring that appropriate financial support must be put in place, where it concludes that the sponsoring employer of a scheme is a service company, or is insufficiently resourced when compared to the assets and/or revenues of other persons to whom it is connected for it to be appropriate for that company to bear the share of the group’s pension liabilities applying to it.’

The Note went on to say this provision was aimed ‘in particular [at] the debt on the employer under section 75 of the Pensions Act 1995 that would become due were the scheme to wind up’.

A CN places the person to whom such a notice is issued under a direct liability to make good the specified pension shortfall. Sections 38 to 42 of the 2004 Act govern the Pensions Regulator’s powers to issue CNs. Amongst other provisions, these provide that the Pensions Regulator has to be satisfied that the person to whom such a notice is to be issued was a party to an act, or a deliberate failure to act, which had as its main (or one of its main) purposes the prevention of the recovery by a pension scheme of a sum from the employer representing the statutory debt due to the scheme, as calculated under section 75 of the Pensions Act 1995. Further, the relevant act or failure to act must have taken place within the six years prior to the Pensions Regulator making its decision. In addition, the Pensions Regulator has to be satisfied that it would be reasonable in all the circumstances of the case to impose such a notice on the particular person.

The Pensions Regulator is empowered by section 43 of the 2004 Act to issue an FSD if it is of the opinion that the sponsoring employer is either a service company3 or if it is insufficiently resourced4 to enable it to discharge its responsibilities towards a pension scheme which it sponsors. These powers have only been available since April 2005, however, with the full commencement of the 2004 Act’s provisions.

Sections 43(5) and 43(6) of the 2004 Act provide that the Pensions Regulator may only issue an FSD:

(i) if the person to whom the direction is to be issued is the sponsoring employer of the scheme or someone who is or was connected with or an associate of the employer; and

(ii) where the Regulator is of the opinion that it would be reasonable to impose the requirements of the direction.

Section 43(7) of the 2004 Act sets out the factors that the Pensions Regulator must have regard to when deciding whether it is reasonable to impose the requirements of an FSD on a particular person. It says that:

‘43(7) The Regulator … must have regard to such matters as the Regulator considers relevant including, where relevant, the following matters –

(a) the relationship which the person has or has had with the employer (including… whether the person has or has had control of the employer…),

(b) in the case of a person [being an individual connected with the sponsoring employer or otherwise their associate], the value of any benefits received directly or indirectly by that person from the employer,

(c) any connection or involvement which the person has or has had with the scheme,

(d) the financial circumstances of the person, and

(e) such other matters as may be prescribed.’5

Section 43(7) of the 2004 Act lays down considerations that must be taken into account where relevant when the Pensions Regulator is determining whether it is reasonable to impose an FSD. These include whether the person on whom a direction is to be imposed has or had control of the sponsoring employer and also what are the financial circumstances of that person.

Section 45 of the 2004 Act sets out the types of arrangement that, pursuant to an FSD, may be put in place. Any arrangement established subsequent to the imposition of a direction has to be approved by the Pensions Regulator, and the Regulator must be satisfied that such an arrangement is reasonable in all the circumstances.

The ability of the Pensions Regulator to issue an FSD is only valid in respect of an existing scheme. Section 43(10) of the 2004 Act provides that a pension scheme is in existence until it is wound up.

Under sections 82 to 87 of the 2004 Act the use that the Pensions Regulator can make of the information it has obtained in the exercise of its functions is restricted. It can only be used by the Pensions Regulator for the purposes of, or for any purpose connected with or incidental to, the exercise of its functions. The Pensions Regulator is generally debarred from disclosing restricted information to any third party (which would generally include individual members of a pension scheme), unless one or more of the exemptions listed applies. However, restricted information6 may be disclosed with the consent of the person to whom it relates and (if different) the person from whom the Pensions Regulator obtained it.

Section 95 of the 2004 Act prescribes a ‘standard procedure’ which the Pensions Regulator must comply with when it considers that it may be appropriate to exercise a regulatory function: this includes the issue of a CN or FSD. The standard procedure begins when the Regulator’s regulatory staff issue a Warning Notice. If, after considering representations from the directly affected parties, the regulatory staff still consider that the use of one or more of the Pensions Regulator’s powers may be appropriate, then the case will be referred to the Determinations Panel, which carries out certain delegated Pensions Regulator functions. (The functions exercisable by the Determinations Panel are set out in section 10 of the 2004 Act.) The Determinations Panel, though a committee of the Pensions Regulator, is separate from the Regulator, in that it has a separately appointed membership, made up of people with relevant legal, business or pensions knowledge, and legal support. This enables it to make impartial decisions, based on evidence before it. The Pensions Regulator’s staff told me that, in essence, this means that they operate a two-stage process, the first stage being that the regulatory staff consider whether the exercise of the section 38 or 43 powers may be appropriate. If, and only if, the Pensions Regulator does consider that the exercise of these regulatory functions may be appropriate is a Warning Notice issued and, if appropriate, the matter put to the Determinations Panel to decide. The Determinations Panel’s decisions carry a right of appeal to a statutory tribunal, the Pensions Regulator Tribunal, and from there, on a point of law, to the Court of Appeal. This right of appeal is, however, only open to those directly affected by the issue of the CN or FSD. Trustees have no right of appeal against a decision by the regulatory arm of the Pensions Regulator not to exercise its regulatory powers (and therefore not to refer the case to the Determinations Panel), but they can seek judicial review of that decision.

In practice, therefore, the decision whether it is reasonable to issue a CN or FSD lies in the first instance with the team assigned to the case by the Pensions Regulator. Teams are generally made up of a business analyst, a case manager and a lawyer. In section 38 and 43 cases, key decisions are escalated to the business leader for the department in question and sometimes to the executive director responsible for that department.

One of the things the Pensions Regulator considers when deciding if it is reasonable to impose a CN is the relevant party’s involvement with the pension scheme. The Pensions Regulator would consider the circumstances and may choose to liaise with any or all of the relevant parties (e.g. the trustees, insolvency practitioner, employer or potential target) where relevant to determine if the issue of a CN or FSD might be appropriate.