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Revenger&#39s £175m tragedy for industry

George Chapman was born in 1559 and died in 1634. He was a playwright whose Jacobean tragedies graced the stage of his day.

So what does Chapman have to do with the pension review? Well, the answer is a simple one, for Chapman first uttered the words which the 21st Century financial world has echoed in response to the recent High Court decision in the case of Needler Financial Services vs Taber.

The words come from Act III of Chapman&#39s Revenge for Honour (a blockbuster of its time, no doubt) and they read: “I am ashamed, the law is such an ass.”

I had, of course, previously heard these words but did not know them to have been attributed to Chapman until my own financial adviser quoted them to me with a sense of rage (of the Jacobean kind, I would imagine). That rage was a consequence of my having explained the Needler decision to him, having told him that I was a solicitor by trade.

In the early 1990s, I said, Needler Financial Services had advised Ronald Taber to transfer the deferred benefits within his existing occupational pension plan to Norwich Union Life Assurance Society. Upon his retirement, Taber found the benefits to which he was entitled with Norwich Union were less than those to which he would have been entitled had he remained with his occupational scheme.

Taber complained to the PIA Ombudsman who, as part of the ongoing pension review, upheld the complaint and held that the advice to transfer was negligent and that Taber was entitled to compensation.

The effect of Section 62 of the Financial Services Act 1986 was that the compensation to which Taber was entitled was to be calculated by reference to the long established principles of English law. The overriding principle is that described by Lord Blackburn in Livingstone vs Raywards Coal Co (1880): “You should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting compensation.”

Accepting Lord Blackburn&#39s position as a starting point, Needler and Taber were able to agree that the basic measure of the loss in a pension review case was, in very broad terms, a sum equivalent to the difference in value between the occupational pension plan and the personal one. So far so good.

The question which the High Court was invited to consider was whether, in calculating the actual sum due to Taber, Needler was able to offset a significant windfall payment that Taber had received shortly before his retirement upon the demutualisation of Norwich Union, whereupon the society&#39s business had been transferred to Norwich Union Life Pensions. The sum was around £7,000.

At first blush, the answer to the question posed in Needler seemed an obvious one. My financial adviser was clear in his view that the windfall payment must surely be taken into account. How could Taber complain on the one hand that he should not have been advised to transfer to the Norwich Union plan while, on the other, say that he should, however, retain a benefit which he had clearly derived as a consequence of his having transferred to that plan?

So why did the High Court reach a contrary conclusion? Why did it hold that PIA regulatory update 33, which states that demutualisation windfall payments should be ignored when calculating financial redress in pension review cases, was correct? Why did the High Court reach a conclusion, the effect of which, it is said, will expose the industry to additional pension review compensation payments of £175m?

Is it because the law is such an ass? That was certainly the view expressed by my financial adviser. Well, the law may be an ass in many instances but this may not perhaps be such an instance.

What the High Court found in Needler was that the windfall payment should be disregarded because it was not a payment which was caused by or directly flowed from the negligent advice to transfer to the Norwich Union plan. The windfall payment was an event which was merely collateral to the negligence and could only be said to have been actually caused by the decision of the members of Norwich Union Life Assurance Society to demutualise. The effect of this analysis would presumably mean that, had Needler advised Taber to transfer in anticipation of demutualisation and a windfall payment, that anticipated payment could have applied to the credit of Needler when Taber&#39s loss came to be calculated.

The logic of the High Court&#39s approach can be seen if it is taken just one stage further. If Taber had taken his £7,000 windfall payment and placed the whole amount on the 2.30 at Kempton and come up trumps, would Needler have then still sought to argue that those winnings should be used to offset the loss caused by the initial advice to transfer? Of course not. Those winnings had nothing to do with the advice of Needler to transfer and were brought about by Taber&#39s independent decision to try his luck on the ponies.

Although the verdict of the High Court may well have been sound in law, that does not make it any more palatable. The decision is a financial body blow to IFAs and their insurers alike.

However, unlike Chapman&#39s Jacobean tragedies, the end of this story may not be all doom and gloom. There is a ray of sunlight in that I understand an appeal is being considered.

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