Role of the Ombudsman: a critique 1

Guardian angel, necessary evil or waste of time? All three of these descriptions of the Ombudsman might be obtained by asking any three particular trustees, members, employers, lawyers or pension managers. Why does the Ombudsman provoke such strong feelings? Is he a despot, dishing out excessive and irrational punishment? Or is he a latter day Robin Hood, putting bread on abused pensioners' tables by repatriating looted surpluses?

To properly assess the role of the Ombudsman one must start by looking at why we have one. Unlike many ombudsmen, he was created by legislation, so lots of people at some point in time must have thought it was a pretty good idea. However, the people in the know may have preferred an alternative. A hand-picked body of pension experts, the Occupational Pensions Board, wrote a wide-ranging report in 1989 on some key pension issues after canvassing opinion from dozens of organisations. Their conclusion on dispute resolution was that a tribunal would be better than an ombudsman. This was at least ostensibly rejected by the then government. The Social Security Act 1990 gave us an ombudsman, not a tribunal. Or did it?

Many of the key functions which the OPB wanted a tribunal to have were given to the Ombudsman anyway. He has the powers of a court in relation to evidence and his directions can be enforced through the courts. He is more powerful than a court when it comes to compensation because he can remedy injustice caused by "maladministration". This led Robert Walker J in to remark that pension scheme trustees could now be regarded as being under a statutory duty not to cause injustice by maladministration. This does not make life any easier for trustees; no statute in the land has attempted to define maladministration. Like the proverbial elephant it is assumed that everyone knows it when they see it.

A few judges have had profound philosophical difficulties with the idea that Parliament thought there might sometimes be better forums than the law courts for resolving disputes. Carnwath J only grudgingly accepts the ruling by Walker J (in ) that the Ombudsman can order financial compensation for distress and inconvenience. The courts can only make such awards in limited cases e.g. where a dream holiday goes disastrously wrong through the incompetence of a tour operator.

Litigation is an incredibly painstaking forensic process which is supposed to minimise the risk of the judge getting an inaccurate view of the facts. But because it is so thorough and governed by a mass of arcane rules it is painfully expensive and slow. Cases are often settled not strictly on the merits but to avoid further cost and delay.

Lord Woolf reviewed the civil justice process in his report Access to Justice and came out on the side of the ombudsmen. In the Tom Sargant Memorial Lecture in November 1996 he said:

"The importance of the ombudsman system is that it demonstrates that disputes can be resolved in a non- confrontational manner very different from the all-out warfare which all too frequently afflicts our courts."

In his interim report Lord Woolf highlighted the other important ability of ombudsmen to set and maintain standards of good practice within their specialist sectors. Therefore the Pensions Ombudsman's impact should not simply be gauged by the numbers of cases dealt with each year or the size of financial awards. An ombudsman could eventually measure his success by how few disputes are referred to him. The macro effects of the Ombudsman's activities are impossible to quantify but there is definitely a more cautious mood among advisers and clued up trustees and employers. This was not caused completely by the reforms introduced by the Pensions Act 1995. Advisers are certainly very conscious that proposed courses of action must now be Ombudsman proof.

Employers and trustees usually just want to know what they can and cannot do. They do not want to go to the trouble of merging schemes, changing rules, improving benefits or granting a contributions holiday if it might all be unwound. Lawyers also relish certainty and some have been critical of the Ombudsman's willingness to explore and develop the law.

In the case the Ombudsman surprised many pension lawyers by his expansive (and potentially expensive) attitude to the duties of an employer in a pensions context. He decided that where an employer has sole power to deal with surplus, this may give rise "to an obligation of good faith approaching a fiduciary duty which called for an exercise in the best interests of the scheme without preferring the Principal Employer's other interests". On appeal Walker J restored orthodoxy over the extent of the duty of good faith compared to fiduciary duties, ruling that the duty "does not prevent the employer from looking after its own financial interests, even where they conflict with those of the members and pensioners."

In the Ombudsman's defence, he deals with an extraordinary diversity of legal problems. And plenty of High Court judges get overruled on points of law by higher courts. What else is he supposed to do when faced with legal conundrums? Well, the Ombudsman does have power to get the court's directions on a difficult legal question before making his determination (s.150(7) of the Pension Schemes Act 1993) but to date he has not utilised it. Obviously it would destroy the point of having an ombudsman if the courts became involved in most of his cases, but it might be more cost- effective for the small minority of big- ticket cases to be dealt with in this way. If the Ombudsman's preliminary view of the law was that an employer or trustees had mis-used surplus or improperly terminated a scheme then rather than issue a determination and have the inevitable appeal (where the Ombudsman would be at risk as to some of the costs if he was involved) a judge could instead answer the key legal questions.