Pensions conundrum lies in a legal minefield

The revelations this week of what the top brass at banks get in their pensions sparked outrage. But the banks should not be swayed by public anger into pursuing former executives for recovery of funds lost, writes Kyran Fitzgerald

If a proposal that the Government drastically reduce the pensions payable to bank executives at taxpayer-funded Irish banks were to be put to the people in a referendum today, there would be little doubt about the popular verdict.

And there would be few concerns about the strength of the voter turnout.

One would expect the citizenry to deliver a similarly resounding thumbs-up to the proposition that executives at IBRC, the body established to extract flesh from the corpses of Anglo Irish Bank and Irish Nationwide, should also receive big cuts in their remuneration.

Ministers have been lining up to call on the retired bankers to fall on their financial swords, while the Tánaiste has led the way in calling for IBRC top brass to accept pay cuts. The bank’s Australian CEO, Mike Aynsley, has been quick to deliver a strong riposte. Put simply, Aynsley will not back down.

The politicians are no doubt aware that the law at this juncture favours those in possession of the fat pensions and salaries.

While legal proceedings are being brought against Sean FitzPatrick and two senior colleagues at Anglo, there are no allegations of misconduct against former top executives at the pillar banks, AIB and Bank of Ireland.

In effect, moral pressure is being exerted in the cases of men such as former AIB chief executive Eugene Sheehy and former Bank of Ireland chief Brian Goggin.

Mr Sheehy has responded to this moral pressure by accepting a cut in his annual pension in a move similar to that agreed to by the former CEO of Royal Bank of Scotland, Fred Goodwin.

Legal expert Adrian Twomey believes it would be difficult for either bank to sue any of the senior former executives for recovery of funds lost by the banks, their shareholders, and the State as a result of their negligent acts.

For a start, Messrs Goggin and Sheehy did not “go rogue” in the sense of acting against the stated wishes of their boards, though it could be argued that the directors were not kept fully informed as to the implications of the lending spree, or the adequacy of the capital buffers in place.

Adrian Twomey said: “The banks were quite happy in general with what their people were doing.”

Strictly speaking, it could be possible to sue on the basis of fundamental breach of contract, but in practice, “this is not an area that has been explored at any depth by the courts”, in Mr Twomey’s view.

There is, however, some interesting case law in the field.

In 1957, the House of Lords, Britain’s highest legal authority, upheld a majority decision of the Court of Appeal in favour of an insurance company which sued a son who injured his father while driving a van. Both men were employed by Romford Ice Cold Storage, the named party in the case.

The father sued his employer. The insurer paid up, but then sued the son in turn. The Court of Appeal held that the son, Martin Lister, had a contractual duty of care and skill.

Lord Denning delivered the dissenting judgment. He tried the case as if the employer, not the insurer, had sued Lister Jr. “Many a master has been made responsible for the mistakes of his servants, but never has he sought to get contributions or indemnity from his servants.”

The House of Lords ruled that there is an implied term that an employee owes a duty to take reasonable care.

The judgment provoked a storm and legislation was eventually passed reversing the effects of the judgment.

It is arguable, however, that the duty of care owed by senior employees in highly paid positions is far higher than that of ordinary van drivers.

Currently, the emphasis is on including clawback provisions in the employment contracts of bankers and other highly paid financiers.

However, clawback cannot be made retrospective.

In the US, the Dodd-Frank Act mandates the regulatory body, the SEC, to require that US corporates include a clawback provision in executive remuneration contracts while the UK group, Policy Exchange, has proposed that bonus clawbacks be included in all director contracts.

But all this is of little use in the case of damage caused in the past by executives whose contracts did not contain such clauses.

The State has already legislated to reduce the take-home pay of its employees, while large numbers of private employers have secured agreement from staff to reductions in their pay packages, with those involved left in no doubt that the alternative would be job losses.

Legislation introducing further cuts, targeted perhaps at bankers, could be open to constitutional challenge or to legal challenge for breach of contract.

Such a challenge would be unlikely to succeed, as the court would look to what is the common good, according to one senior legal opinion.

Should the State move against IBRC top brass, it would be open to some, such as Mr Aynsley, to bring a claim for constructive dismissal to the High Court or Employment Appeals Tribunal, or to sue for breach of contract.

Such a move might dampen down righteous public anger, but would also risk damage to the country’s reputation overseas.

While some consider that the IBRC is a “glorified debt collection agency”, there are others who believe that Mr Aynsley and his team are more akin to a high-powered corporate insolvency team. Encouraging the break-up of this team is hardly likely to bring the State closer to the holy grail of a reduction in the ultimate Anglo Irish Bank liability.

Legal experts tend to believe that the position at law of the bank pensioners, many of whose actions in office have contributed in large measure to the collapse of the economy, is actually stronger than that of the executives at IBRC who were, after all, brought on board to try and clear up the huge mess left behind them by FitzPatrick, Fingleton, et al.

One alternative mooted is that the State should take the fiscal route, imposing a swinging marginal tax on all annual pensions in excess of, say €100,000.

It is hard to disagree with the view that tax subsidies allowing high earners to accumulate pension pots worth millions were a poor investment of taxpayer money, but any major increase in the tax rate could be interpreted as an attack on people’s private property rights.

Clearly, harsh lessons have been learned. However, seeking to apply such lessons retrospectively may simply compound the error, leading to expensive litigation and defeats before the highest court in the land.

One thing seems clear, though. The legal battles arising from the great pension promises offered to public and private employees alike may only be beginning. Most State and corporate pension systems are quite simply bust.

If pension liabilities were added to the national fiscal equation, the resulting indebtedness would push most OECD nation states into recognised insolvency.

People have been shocked at revelations about the capitalised values of pensions available to politicians, top civil servants, and bankers — the latter two categories being the most expensive in the long run. Tackling the huge cost of top pensions may become a political imperative.

Few economists believe Europe or the US can fulfil promises made to their public servants, particularly those at senior levels, without causing massive tensions and economic dislocation across society.

Across the US, municip-alities have been going bust and, in some cases, the pension arrangements on offer to city employees are under challenge.

In California, the state pension fund is fiercely resisting any modifications to existing arrangements and a challenge by financially strapped cities to the federal courts is in prospect.

As populations age, and the hollow nature of the promise of deferred income becomes apparent, such challenges will only grow in number, generating plenty of work for legal experts.

The political ramifications could be huge, as hard-pressed private sector employees, forced to witness the end of the era of guaranteed defined benefit pensions, baulk at stumping up ever increasing amounts of cash towards better padded public sector counterparts.

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