The Pensions Ombudsman (TPO) has ruled Enfield Council cannot withhold pension benefits for a man who embezzled nearly £500,000, due to the Local Government Pension Scheme (LGPS) rules.
Mr A, who was previously head of finance for the council, paid £448,207 across 104 payments to his personal bank accounts between June 2008 and 2010. He then deleted his bank account details from the council's system in a bid to cover his tracks.
At the end of 2010, Mr A was made redundant as part of a council restructuring programme, named ‘the LEANER review', without his fraudulent activity being known.
However, in 2011, Mr A was investigated by the City of London Police for a fraudulent property investment, at which point they also discovered his embezzlement. In March 2011, the police notified the council and in July 2012, Mr A was convicted of fraud, sentenced to four years in prison, and ordered to pay the council around £510,000.
Later in 2012, the council successfully petitioned that Mr A be declared bankrupt, and the council wrote to Mr A notifying him it was seeking to retain £476,300 of his pension rights as a part-payment towards his debt to the council.
The council relied on section 74 of the LGPS (Administration) Regulations 2008, which allows recovery or retention of pension rights where an employee "has left an employment, in which he was or had at some time been a member, in consequence of a criminal, negligent or fraudulent act or omission on his part in connection with that employment".
However, Mr A claimed the rules required a causal link between his criminal activity and the end of employment, which was not the case in his situation, as his fraud was only discovered afterwards.
The council argued that if Mr A's fraud had been discovered one day before the end of his employment, it would be able to recover or retain his pension rights, and Mr A would have been dismissed then. Therefore, if the rule was taken literally, it would provide an "absurd result".
However, ombudsman Anthony Arter dismissed this argument, stating: "Both of these scenarios are hypothetical and do not apply to the situation I have been presented with here. Further, if the legislation does not provide for these differing outcomes, it is not the role of the council to imply its own wording to remedy the supposed flaw or weakness of the wording."
Arter also disputed that reading the legislation literally, with "plain and ordinary meaning" applied, would provide an absurd result. He therefore agreed there was a causative element to the rules and said "while it is not my intention for Mr A to benefit from his fraud, I do not consider that regulation 74 allows the retention of Mr A's pension rights".
TPO gave the council three months to reassess its method to recover Mr A's debt or it would have to allow Mr A to access his pension rights.
ARC Pensions Law partner Rosalind Connor said other schemes face the same problems, due to section 91 of the Pensions Act 1995.
Under this legislation, pension funds are untouchable in cases of debt, although there is an exemption where there have been "criminal, negligent or fraudulent" acts against an employer. However, this rule also relies on the construction of a scheme's rules.
"The ombudmsan must be right here, but it is a good reminder of the right under a lot of schemes to recover money from a member's benefit if the member has caused the employer a loss," Connor said.
"Particularly in fraud cases, it can be easy to sue the errant employee, but quite hard to recover the money - which has often been spent - so the pensions pot is a good source to recover losses from criminal activity."
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