Timescales for investing pension contributions and other assets 2

In case G00543 the Ombudsman considered the question of how long trustees have to ensure that AVCs are invested. He decided that the repeated delays in investing AVCs of at least 10 days which had occurred in this case were unacceptable.

A member of the Merrill Lynch (UK) Final Salary Plan discovered that the AVCs deducted from his last two months' salary (September and October) had not been paid over to the insurance company for investment until December that year. When this was raised with his employer, the mistake was acknowledged and GBP 29.36 was added to his AVC fund to compensate for this delay. The Ombudsman accepted this as an appropriate way to deal with such a mistake.

However, the problems with those contributions brought a more general issue to the member's attention. For seven years AVCs had been deducted from his salary on the 25th of each month. When the member looked closely at his AVC statements, he noticed that these contributions had not been paid over to the insurance company, Legal and General, until the fifth day of the following month at the earliest.

The Ombudsman decided that this systematic delay of at least ten days was "an unnecessary and unreasonable delay which constituted maladministration causing injustice".

The time limit set out in the Pensions Act for payment to the trustees of employee contributions deducted from salary (by the nineteenth day of the month following deduction) had been raised to support the reasonableness of the Merrill Lynch scheme's arrangements. But the Ombudsman pointed out that this Pensions Act time limit was a date for identifying when criminal liability might be imposed (it is now also a civil offence). Its rationale was to safeguard what is essentially members' money from use by companies in financial difficulties. He said "the existence of such longstop sanctions does not absolve trustees or managers of their responsibility to ensure that good practices are established for all areas of pension scheme administration".

An indication of what he would consider acceptable can perhaps be taken from the directions which were made. Legal and General was ordered to recalculate the member's AVC fund on the basis that his contributions had been paid over to them on the first working day of each month i.e. 5 or 6 days after deduction from salary on the 25th of each month. The cost of increasing the AVC fund was to be borne equally by the trustees and Legal and General.

Should all trustees review arrangements for investment of AVCs? According to the Ombudsman's directions, they may have to be invested within 5 or 6 days of deduction from salary. The same logic would also seem to apply to contributions to any money purchase arrangement because as with AVCs (other than those which instead buy added service), the member's benefits are directly related to the investment return on contributions.

The Ombudsman's view that the Pensions Act time limit for handing over employee contributions is merely a longstop sanction illustrates a key feature of how the Ombudsman seems to be operating. Instead of simply analysing whether a given set of facts represents practice on the part of the respondents, he may in some cases be assessing whether they have come up to the standards of practice, and if they have not then this must equate to maladministration. If the Ombudsman has power to take this approach, and this seems to be arguable, it does highlight the role of ombudsmen generally not only to issue rulings but also to raise or even set appropriate industry standards. The difficulty is, of course, the pensions industry does not necessarily know what these best practice standards amount to and it seems unsatisfactory that the only way of finding out is to see whether the Ombudsman rules in favour of a complainant.

Investment of AVCs was subsequently considered in another case (J00119) where investment delays had ranged from 15 to 75 days, with the average delay being 32 days. A target of investment by the 5th day of the month after deduction was then introduced, but in practice actual investment was made between 12th and 19th of the next month. The Ombudsman ordered compensation for loss attributable to the delay beyond the target date of 5th day of each month after deduction. The employer and trustees were also directed to review their current practice to ensure they met their target.

The Ombudsman has since said that there are no hard and fast rules about how quickly AVCs should be invested.

In a recent case, the Ombudsman considered a failure of an adviser to quickly implement a switch of assets. RoSPA complained of maladministration on the part of a firm of actuaries in that they failed to arrange a transfer of assets from one investment vehicle to another in a timely manner resulting in a loss to the scheme. In the circumstances, the delay in transferring the investments did constitute maladministration and the Ombudsman upheld the complaint against the firm of actuaries, who would have to make good any loss found (J00226).