Pension buy-outs: claim limitation periods post winding-up

It’s a question we are often asked by trustees and sponsoring employers alike, sometimes with a view to how long an insurance policy or employer indemnity should last for.

Most people have heard there are time limits for bringing claims. Limitation, as it is often called, is a matter of public policy, and the idea is that individuals cannot be liable for acts they have committed indefinitely. Claimants therefore have to bring claims within specific time limits, which are generally set out in legislation. Failure to bring a claim “in time” means a defendant has an absolute defence to the claim.

Different limitation periods may apply to some of the most foreseeable types of claim post-winding up. Trustees should take these into consideration when seeking to secure benefits with an insurer and then winding up.

Typical limitation periods

Time limits for member complaints

Firstly, there might be member complaints about securing benefits or about an element of the wind up.  If so, the most obvious arena for member complaints is the Pensions Ombudsman, as the service is free and complaints are relatively easy to bring.

Typically, members need to bring a complaint to the Ombudsman within three years from the act complained of. The Ombudsman does have discretion to detemine a complaint outside of that period, although he is subject to statutory periods and cannot give substantive compensation for a claim which would be time barred by the courts.

Time limits for negligence claims

Another likely area for claims could be in negligence. Although it is difficult to see how a well-advised trustee could be negligent, there is more scope for such claims in the era of professional trusteeship as it likely a professional would be held to higher standards than a ‘lay’ trustee.

Negligence claims need to be brought within six years of when the damage is suffered. Where the damage is not known about at the time, the usual six year rule can be disapplied, and the claimant has a period of three years from the date of knowledge of the claim in order to commence it, which means it can be some time after the original six year period. However, there is also then an ultimate back-stop of a 15 year ‘long stop’ that prevents claims from being commenced more than 15 years from the negligent act.

Time limits for breach of trust claims

Claims may also be raised for breach of trust. This is a wide area of claim and doesn’t necessarily require any element of wrongdoing – just an act not in accordance with the terms and duties of the trust. The time limit for a breach of trust claim, is usually six years from the breach, provided there is no fraud.

So far so good, but what about indefinite time limits? In 2021, in a case brought by the trustee of the Axminster Carpets pension scheme, the High Court in England ruled that if a claim is for recovering trust property from a trustee – or the proceeds of trust property in a trustee’s possession, potentially there is no period of limitation. If the trustees don’t have the assets, the limitation period remains six years. The case was all about underpayments and so is relevant to all schemes, given an underpayment may arise accidentally.

Logic suggests that, following a wind-up, the trustees have no assets in their possession and so the six year limitation period should apply. However, if the trustees get an indemnity from the sponsoring employer that continues post wind-up, it might be argued that the trustees retain the ‘asset’ of being able to make a claim against the sponsor – a point the judge floated as a possibility, but did not rule upon, in the Axminster case. That way, a beneficiary may have a claim for trustee property by virtue of the fact they can still make a claim against the trustees that might, in turn, be satisfied by the assets of the sponsor.

Negotiating the post wind-up indemnity

Bearing this in mind, the safest bet for  trustees or a sponsoring employer looking to negotiate an indemnity is to cover a period of at least 15 years given the 15 year long stop, or potentially to have a fixed time period. You can’t be absolutely sure even then that will guard against every conceivable claim but it should reduce the risk significantly, and it is not an unreasonable timeframe to seek to have covered. The sponsoring employer might also consider making the indemnity to the trustees personal – in which case it might not form part of the trust, particularly if the trustees are a corporate trustee.

As to from when this 15 year period could run: it could be from buy-in, the move to buy-out or any return of surplus or some other date. Ultimately, this is likely to be a matter of negotiation between trustees and the sponsoring employer.

Read more on pension buy-outs

• Pension buy-outs: trustee liability post winding up 
• Pension buy-outs: communicating with members about winding-up
• Pension buy-outs: concluding the winding-up
• Pension buy-outs: deciding how to use surplus on winding-up
• Pension buy-outs: discharging DC assets on winding-up
• Pension buy-outs: endgame issues for sponsors
• Pension buy-outs: employer indemnities on winding-up
• Pension buy-outs: incorporating pension scheme trustees before winding-up
• Pension buy-outs: issuing individual policies using assignment before winding up
• Pension buy-outs: making the decision to fully buy-in
• Pension buy-outs: managing a surplus on winding-up
• Pension buy-outs: relevance of FCA’s Consumer Duty when winding-up
• Pension buy-outs: residual risks cover for winding-up pension schemes
• Pension buy-outs: managing the risk of ‘trapped surplus’ on winding-up