Pensions: You've earned it...

Few people have received such negative press in recent years as Sir Fred Goodwin, the former CEO of the Royal Bank of Scotland (RBS). He refused to surrender an annual pension of £703,000, even though RBS was rescued by the Government and suffered the largest-ever yearly loss in UK corporate history. The latest reports indicate that the Government is taking legal action to clawback some of the pension.

Similarly, Bob Quick, the former head of anti-terrorism for the Metropolitan Police, was criticised when it was revealed he would receive a pension of £110,000 a year despite the circumstances of his resignation. (He resigned from his post after allowing top secret documents to be photographed.)

The size of the pensions in question - vastly in excess of what the average pensioner would receive from an occupational pension scheme - has obviously contributed to the controversy.

But it must be remembered that a pension is earned by past service and so the law restricts the circumstances in which an employee's pension can be forfeited. This follows the line recommended by the influential 1993 Goode Report on Pension Law Reform which, while not favouring complete abolition of the ability for pension benefits to be forfeited, suggested that forfeiture should be narrowly defined by legislation.

The consequent Pensions Act 1995 allows forfeiture only in the following circumstances, but the rules of the specific scheme would also have to allow the forfeiture to occur:

• Where a person has been convicted of offences of treason or under the Official Secrets Acts 1911 to 1989 (and in the later case has been sentenced to a term of imprisonment of at least 10 years), the pension scheme can allow complete forfeiture of his or her pension. The last treason case in the UK was in 1984 and no one has been imprisoned for 10 years under the Official Secrets Act since the Pensions Act 1995 came into force.
• Where someone is convicted of murder or manslaughter of a member of a pension scheme and that person would get a pension from the scheme because of that death - for example, a wife murdering her husband and then getting a spouse's pension from his pension scheme.
• Where a pension scheme member has caused monetary loss to the pension scheme as a result of a "criminal, negligent or fraudulent act or omission" by him or her or by a "breach of trust" where the member was also a trustee of the scheme. An example of this would be where a pension scheme trustee stole money from the pension scheme.
• In the case of a public service pension scheme, where a scheme member is convicted of an offence committed in connection with his service as a public servant and a government minister certifies that the commission of that offence has been gravely "injurious" to the interests of the state or is liable to lead to a serious loss of confidence in the public service. The recent Scottish case of policeman Adam Carruthers, who was jailed for 11 years in 2001 for raping two women, with one of the offences occurring while on duty, is liked to have invoked this. Legal aid has been granted for a challenge to the decision by Dumfries and Galloway Police Board to withhold two-thirds of his pension.
• In the case of the Armed Forces Pension Scheme, where a scheme member is convicted of an offence committed in connection with his service as a member of the Armed Forces, and the defence secretary considers the offence to have been gravely "injurious" to the defence, security or other interests of the state.
• The failure of a pension scheme member to make a claim for pension within a limitation period or within six years of a benefit becoming due under the scheme. An example of this would be where a pension scheme member's contact details have been lost and the member is not found for six years after that date.
• In addition, it is possible for an employer to reduce or take away an employee's pension benefits to satisfy a monetary obligation due to the employer which arose out of a "criminal, negligent or fraudulent act or omission" committed by the member. Where there is a dispute about the amount of the debt, this cannot take place unless the debt has become enforceable under a court order. This is the area where perhaps most forfeitures arise: an employee has stolen money or defrauded the employer in some way and the employer looks to the employee's pension - which could easily be the only substantial asset to make good the loss. As cases of fraud tend to rise in recessions, this may become more common.

In addition, there may be circumstances where it may not be possible to forfeit a member's contracted-out rights - the rights the scheme must provide in lieu of the state second pension - or a contingent dependant's pension payable on death.

Whether a pension can be forfeited will obviously depend on the facts of the particular case, but given the limited circumstances above, it is clearly not an easy option.

Interestingly, it does seem from press reports as though the debate about Sir Fred's pension has moved away from forfeiture. Instead, the focus is on the specific circumstances in which his pension was granted in the first place by RBS and, in particular, the exact terms of the enhancement he received and who authorised it. One suspects that debate will run for some time.

Mark Howard is a partner and Paul Hodges an associate in the pensions team at Barlow Lyde & Gilbert.