Local Government Pension Scheme – confiscating employee’s pensions for misconduct or negligence during employment

Under certain circumstances, a Local Government Pension Scheme (LGPS) employer can apply to forfeit the employee’s pension or to recover some or all of their pension benefits. These steps can only be taken if the employee leaves that employment as a result of committing serious misconduct, a negligent act or omission.

As these rights to forfeit or recover benefits are only meant to be used in exceptional circumstances, they are, understandably, subject to strict tests. A recent pension ombudsman decision highlights these limits but is also a useful reminder of the right to recover benefits where appropriate.

The right to recover/forfeit

Under regulation 93 of the Local Government Pension Scheme Regulations 2013 (the Regulations), the former employer of a LGPS member can apply to the relevant LGPS Fund to recover or retain money owed in the following circumstances:

• The pension scheme member has committed an act of grave misconduct or a criminal, negligent or fraudulent act, or omission;
• The member has, as a result, left the employment through which they were a member; or
• The member owes money as a result of their misconduct, act or omission to their former scheme employer.

The former LGPS employer can recover that money or, if less, the value of all the employee’s pension benefits (subject to a few exceptions).  The employer must give at least three months’ notice of the amount it intends to recover and show how this is calculated

Under regulation 91 of the Regulations, an LGPS member’s former employer can also apply to the Secretary of State for that member’s pension to be forfeited where:

• The member has been convicted of an offence;
• The offence was committed in connection with the employment through which the person is a member of the LGPS;
• The member has left employment because of that offence;
• The offence was “gravely injurious” to the State or is liable to lead a to serious loss of confidence in the public service; and
• Where the former employer suffered loss, it is not able to recover that loss in another way (including under regulation 93), except after an unreasonable delay or at a disproportionate cost.

The application needs to be made within three months of conviction and there are various other formalities that need to be satisfied.

Facts

Mr A worked for Enfield Council as the Head of Finance and was a member of the LGPS. On 31 December 2010, Mr A was made redundant due to restructuring in the Council. Following an investigation in 2011, the police discovered that Mr A had fraudulently moved sums of money from the Council’s agency staff provider account into his personal bank account. Between June 2008 and December 2010, he had moved sums totalling £448,207.

The Council petitioned for Mr A’s bankruptcy, and in 2012 he was declared bankrupt. Mr A was also convicted of fraud in July 2012 and sentenced to imprisonment for four years. The Council wrote to Mr A seeking to recover the money owed from Mr A’s pension benefits.

Mr A’s legal representative wrote to the Council in April 2013 arguing that the Council was not entitled to recover money from Mr A’s pension benefits under (what is now) regulation 93. Mr A had left employment due to redundancy and the Council had not become aware of the fraud until after he had left. Mr A, therefore, had not left employment in consequence of a fraudulent act.

The Council argued that a literal reading of what is now regulation would produce an “absurd result”. If the regulations were to be applied in a literal way that prevented recovery, the Council argued it would “conflict with the statutory purposes of protecting scheme members and public funds”.

Decision

The Pensions Ombudsman found in favour of Mr A that he had left his employment as a result of redundancy rather than his fraud. The Pensions Ombudsman found that the wording of the regulation was clear and does not leave room for wording to be implied.

Comment

This case is a useful reminder of the rights to recover benefits, although it highlights the narrow circumstances in which an individual’s pension rights may be forfeited or benefits recovered. Not only does there need to be serious misconduct or negligence, but the individual must have left employment as a result of that misconduct or negligence. An employer in the LGPS may be unable to recover pension benefits or apply for forfeiture, if the wrongdoing employee conceals their fraud until leaving employment.

That said, there are other potential ways of recovering the money owed. Mr A was still required to pay back the stolen funds by way of a judgment against him, possibly under an attachment of future earnings.

More information

For further advice concerning pension forfeiture and a range of other LGPS matters please contact Doug Mullen.

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