In a case concerning the validity and effect of certain deeds relating to pension increases, the High Court has handed down its judgement. The case also considers the application of scheme forfeiture clauses to arrears of underpayments.
The case, concerning the Axminster pension scheme (‘Scheme’), was brought by the Scheme’s independent trustee. Many of the original issues were compromised by the parties, meaning that the court was asked to approve the compromise. The judgement and points considered by this article relate to issues regarding arrears of benefits which would then be calculated and payable. The arrears arose as a result of underpayments in relation to pensions increase calculations and in relation to equalisation of benefits under the Scheme. The key questions considered by the Judge centred on statutory limitation periods as well as the application of the Scheme forfeiture rules.
It is worth noting that Morgan J was the judge in the Lloyds proceedings on GMP equalisation and that some of the issues under consideration in the Axminster case were considered by him in the Lloyds’ judgements.
Limitation Act 1980
Morgan J considered whether claims for arrears of pensions increased payments were subject to the Limitation Act 1980.
In the Lloyds case, Morgan J had concluded that members could rely on provisions in the Limitation Act 1980 to defeat attempts by the trustee to rely on the six year limitation period set out in that legislation. The Limitation Act 1980 provides that in actions by beneficiaries to reclaim trust property, the six year limitation period does not apply.
Perhaps unsurprisingly, the same conclusion was reached in this case. A claim for arrears of pension will be regarded by the courts as an action to recover trust property.
Therefore the standard six year limitation period under the legislation does not apply. Morgan J then turned to consideration of the forfeiture rules under the Scheme governing documents.
Forfeiture under the Axminster Scheme Rules
The forfeiture rule under the 1992 Trust Deed and Rules provided that money payable out of the Scheme and not claimed within six years of the date due to be paid could be applied at the trustees’ discretion in one or more of the following ways:
- augmenting members benefits where those members were still in service;
- reducing employer contributions; or
- payment of Scheme expenses.
Morgan J concluded that the clause did not operate as a forfeiture clause regarding arrears nor did it serve to provide a time-bar for claims on payment of arrears. He concluded that instead the clause was intended to deal with ‘orphaned money’ in respect of a missing beneficiary.
A subsequent version of this clause was introduced in the 2001 Trust Deed and Rules. This clause was similar to the clause in the 1992 rules. A key difference was that it specifically said that unclaimed benefits shall be forfeited. The amended version also introduced discretion for the trustees to pay the otherwise forfeited benefit to the member. The other discretions outlined above were also retained. The amended version therefore provided for automatic forfeiture of arrears of benefits that were more than six years old.
Morgan J also considered whether introduction of the amended forfeiture clause was permissible under the terms of the Scheme amendment power. A restriction in the amendment power prohibited any amendment which would result in the “diminution of benefits already accrued.” Morgan J concluded that the alteration did not operate to diminish accrued benefits as members entitlements were unaffected by introduction of the rule. The rule only resulted in forfeiture of benefits which were unclaimed, it was not necessarily the case that this would happen to members’ benefits in all instances.
In common with the line of case law concerning the interpretation of pensions increase rules and indexation, this case demonstrates that there is something of a drafting lottery in the application of the forfeiture rules to arrears payments. Had the Scheme rule been retained as per the 1990 trust deed and rules, arrears payments would not automatically have been forfeited.
One has to ask the question whether it was ever the intention that a forfeiture rule was intended to be used for this purpose, but it seems from the Axminster case and the Lloyds case, that where a scheme forfeiture rule provides the unclaimed benefits shall be forfeited then that is the automatic effect. Rules should always be examined carefully to check how they apply. Additionally, the question of when arrears of benefits are payable may be relevant – did they become payable at the time of the original payment or at the time the underpayment was identified and quantified?
Trustee discretion to pay forfeited benefits
The 2001 rule gave the trustee discretion to pay otherwise forfeited benefits to a member and the court was asked to consider what factors could be included when deciding whether or not to exercise such discretion.
Morgan J said that particular factors to consider were whether there was any fault on the part of the member and whether there was any fault on the part of the trustees. He said that trustees should look at how the situation has arisen and the consequences of the discretion being exercised or not being exercised. In this case members did not know that their benefits were being underpaid and therefore they were not in a position to make a claim. Morgan J recognised that the forfeiture was therefore undeserved.
The judge’s view was that the trustees ought to exercise their discretion to pay the member the forfeited arrears, unless there were other considerations which would override such a conclusion. His view was that the discretion should be exercised to restore beneficiaries to the to the position they should always have been in under the Scheme.
The case therefore demonstrates that the wording of forfeiture clauses should be considered extremely carefully when looking at arrears of benefits cases. There are often subtle differences in the way such clauses are worded. The expectation in this case seems to be that discretion to pay forfeited benefits to members would be exercised by trustees in the members’ favour. Fundamentally this is still a trustee discretion so there may be other factors.
The case will be of particular interest given that many schemes will now be turning to look at GMP equalisation and how to address historic underpayments arising as a result of GMP equalisation.
For more information please contact Suzanne Burrell or your usual pensions contact.