From time to time trustees may find one of their advisers has made a mistake. Claire Carroll and Richard Bacon highlight the key issues that need to be considered if you are considering legal action.
It shouldn't happen, but it does: trustees revisit advice they received in the past, scrutinise the provisions of their scheme, or review member payments, and realise that an adviser has made a mistake.
If you're a trustee who is considering legal action against an adviser, past or present, there are a number of key points to consider:
Are you out of time? Broadly, actions for breach of contract and professional negligence must be brought within six years of the date that the advice was given. However, where it takes time for an error to come to light, the time limit for bringing a claim in negligence can be extended to 15 years, but only if the action is brought within three years of the date that the trustees knew – or ought reasonably to have known – about the issue.
Even if this 15-year limit has passed, it is still possible to bring a claim against an adviser (be it the one responsible for the original error or otherwise) that had cause to revisit the advice within that period and failed to point out the mistake as part of its review. For this reason lawyers are still - despite Barber being decided more than 20 years ago - dealing with claims relating to the equalisation of benefits between the sexes.
Who was involved? Advisers who are being sued will often try to join other professionals to a claim (e.g. previous advisers fulfilling the same role, or lawyers adding pensions consultants and vice-versa) in an attempt to spread any liability. It is important to identify the correct legal entity in relation to each potential defendant. Has its legal status changed (e.g. following incorporation of a partnership), has it been taken over by, or merged into, another entity, and/or has it become insolvent?
Where's the proof? Who holds the relevant documents (including scheme documents issued to members and trustee meeting minutes), and who could provide witness evidence regarding how the error occurred? It is particularly important to locate the contract with the adviser, which might set out the limits of their role (and the standard of service they were expected to provide). It may also cap their liability to a fixed sum, or shorten the time period for bringing a claim. Importantly for DB schemes, this contract should also set out whether the contract was with the scheme's trustees or sponsoring employer (see below).
What have you lost? Before you can bring a claim against an adviser, you'll need to show that the scheme (or, for DB schemes, its sponsoring employer - see below) has suffered a loss. It will be helpful if an actuary can provide an estimate of this loss at an early stage. You should also keep note of professional fees incurred while exploring the issue, as this might form part of the claim.
DB schemes: should the claim be brought by the scheme's sponsoring employer, as well as its trustees? Broadly, a claim in negligence against a professional adviser can only be brought by a party that both (a) is owed a "duty" by that adviser and (b) suffers loss as a result of the adviser's mistake.
A common argument arising in relation to "balance of cost" DB schemes is that advisers are usually retained by (and so owe a "duty" to) the scheme's trustees, but any losses are ultimately suffered by the scheme's sponsoring employer, so neither party has both of the elements required to bring a claim. If this might be an issue, you should consider bringing a claim jointly with the scheme's sponsoring employer.
How can you minimise your losses? Claimants are required to take reasonable steps to minimise ("mitigate") their losses, and cannot claim for damages that could easily have been avoided. Are there steps you can take now to limit the scheme's losses, for example, where an error has arisen in a scheme's rules, by executing a deed in respect of future accrual and correcting members' benefits going forwards?
Who else needs to know? You may be required to report a breach of law to The Pensions Regulator, or want (e.g. where an administrator has made unauthorised payments) to self-report to HMRC. You could also consider issuing communications to the affected members.
Claire Carroll is partner, and Richard Bacon is an associate at Eversheds LLP
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