Occupational Pension Schemes: amendments and overpayments

The High Court has recently ruled that there is no statutory limitation period in which to recover pension overpayment so long as recovery is by adjusting future overpayments.

One caveat with this is that this aspect of the judgment was in fact obiter and therefore not necessarily legally binding but it does give an indication of how the Court might approach this issue in the future.

In Burgess and others v Bic, the main issue in the case was whether introduction of pension increases had been validly introduced. The case also looked at whether the statutory limitation of six years applied to cases of equitable recoupment (in other words, only via adjustment to benefits rather than where a member is specifically required to make repayment). The question turned on whether increases in respect of pre-1997 pensionable service had been properly paid and if not, could they be recovered and if they had been properly paid, could they be stopped? For pensionable service before 6 April 1997, there is no general statutory requirement to increase pensions in payment.

The case considered the process by which increases to pensions in payment had been introduced. These were introduced following a trustee meeting in 1991 and had been communicated to members in various subsequent announcements to members. Arnold J considered the evidence in front of him to look at the basis on which pre-1997 increases were paid. For pensionable service after 6 April 1997, legislation requires pensions in payment to be increased.

Arnold J ran through the general principles of construction of Pension Schemes, in particular the following:

• Members are not volunteers - the pension benefits they receive are part of their remuneration package; this puts them in a different position to ordinary trust beneficiaries;
• The scheme documents should be construed to give reasonable and practical effect to the scheme. Arnold J describes how it would be "crying for the moon" to expect the draftsperson to have allowed for every eventuality in the scheme documents;
• He referred to the patchwork effect, essentially as a consequence of the layering of numbers of pension scheme changes over the years. Arnold J described how amending provisions should be considered at the time of their adoption and not at the time the original deed was signed;
• The rules should be interpreted in light of the factual situation;
• The court should interpret the rules without any predisposition to correct particular philosophical approaches;
• The rules should be interpreted as a whole.

Arnold J concluded that the 1993 definitive deed and rules could have valid retrospective effect. He cited Shannon v Viavi in which the judge concluded that there was no presumption against a retrospective change in the operation of a pension scheme. Arnold J observed that this did not mean that a breach of trust could be retrospectively validated, but that there was scope to give valid retrospective effect to the 1993 deed on the basis that this was permissible under the terms of the scheme governing documentation under which the 1993 deed was adopted.

In considering whether the increases in respect of pre-1997 pensionable service were properly paid, Arnold J went through a number of different points which had been contended by the claimants. He rejected some of the grounds raised but concluded that the decision to pay pre-1997 increases was validly made on a number of different grounds.

• By virtue of the surplus powers in the 1993 deed

The principal employer said that this was not a free standing power and that there was no evidence of any recommendation by the scheme actuary. Arnold J disagreed. He said that there was nothing to suggest the increase did not apply to new joiners in the scheme. He also concluded that the actuarial recommendation could be inferred from the 1991 minutes.

• By virtue of the free standing powers augmentation powers under Clause 9

The principal employer contended that this power did not permit across the board augmentation but instead only augmentation on a member by member basis. Additionally the principal employer's view was that the augmentation did not apply to new joiners. Arnold J disagreed.

• By virtue of Clause 4 of the deed

Clause 4 enable the Trustees to modify the rules by written resolution and with principal employer consent. Arnold J concluded that the Trustee minutes constituted a resolution in writing for these purposes.

Arnold J said that if the increases had been properly paid, then they could not now be stopped.

He then went on to consider the question of whether if the payment had not been properly made, could the trustees recover the overpayments. He recognised that this issue only arose if his judgment was wrong. He looked at the concept of equitable recoupment and also the limitation requirements. He cited a case (Weber v the Department of Education) where it was established that a six year limitation did apply.

He noted that if there were no specific limitation periods which applied to equitable recoupment, then one would have to look at whether members had an estoppel argument preventing recovery of the overpayments or whether the doctrine of laches would apply (this doctrine requires equitable remedies to be brought in a timely manner). He said that these needed to be looked at on an individual basis rather than a group basis.

Trustees should note that Arnold J's view on recoupment is not binding on future courts, but it may give an idea of how they can approach overpayments cases if appropriate. Schemes who are going through GMP reconciliation exercises may find that the reconciliation exercise uncovers overpayments which have been ongoing for some time. Use of the recoupment remedy may assist the trustees in recovering those overpayments.