The High Court's recent judgment in the case of the Axminster Carpets Group Retirement Benefits Plan (Punter Southall Governance Services Limited v Hazlett) has clarified the law on pension scheme trustees' duties where it turns out that benefits have been underpaid for many years.
Much of the judgment considers the law on forfeiture of unclaimed benefits. This is currently an important issue for many schemes dealing with GMP equalisation where trustees will need to reach a view on whether any right to back payments of underpaid benefits has been or could be forfeited.
The scheme's sponsoring employers were insolvent and the scheme was due to enter the Pension Protection Fund. Various issues regarding the rates of increases applicable to scheme pensions had arisen. This was due to a combination of ambiguous amendments and issues over whether some amendments had been validly made. The parties agreed a compromise on most of the issues. The court was asked to sanction the compromise and rule on some of the issues that flowed from it. In particular the court had to consider whether the trustees were required to make good all underpayments or whether members' claims were time barred or their rights forfeited.
The judge in the Axminster case was the same judge as in the landmark Lloyds Bank GMP equalisation case. In the Lloyds case, the judge held that where the trustee still holds the scheme assets, there is no time bar under legislation for making a claim to back payments. In the Axminster case, the judge looked at the issue afresh and reached the same conclusion. A key difference between the two judgments is that the Axminster judgment considers the issue in much more detail than the Lloyds judgment. We think that makes it less likely that another court will reach a different decision on this issue.
Forfeiture of underpaid benefits that haven't been claimed within six years
The wording of schemes' forfeiture rules has received a lot of attention since the Lloyds Bank GMP equalisation judgment. In the Lloyds case, the judge held that for some of the schemes involved, the members' right to claim back payments of underpaid pension was limited by the schemes' forfeiture rules which required the trustees to forfeit any right to benefit payments which hadn't been claimed within six years of falling due. The issue of the impact of forfeiture clauses on back payments arose again in the Axminster case.
What did the Axminster scheme's forfeiture clause say?
The Axminster scheme's rules provided that if a beneficiary failed to claim a benefit within six years of its becoming due, it would be forfeited, but the Trustees could at their discretion apply all or any part of such benefit (a) to the beneficiary notwithstanding the forfeiture, (b) in augmenting benefits of members still in service, (c) in reducing the employer's contributions to the scheme under the rules, or (d) in paying the scheme's management or administration expenses.
What amounts to a failure to claim a benefit?
The judge held that the forfeiture clause applied where there had been a failure to claim part of the benefit, ie it wasn't limited to cases where a beneficiary hadn't claimed any benefits at all from the scheme.
The judge also considered what amounted to a "failure" to claim for the purposes of the clause. He held that the clause was referring to any circumstances where no claim was made. The word "failure" did not require any fault on the part of the beneficiary who hadn't made a claim for the full benefit. Any fault on the Trustees' part was irrelevant to the question of whether there had been a failure to claim or not. However, the question of whether there had been any fault on the part of the beneficiary or Trustees was relevant to the question of how the Trustee should exercise its discretion once a forfeiture had occurred.
The judge held that a "claim" could generally only occur after the point when a payment had fallen due and remained unpaid. This was important because it meant that underpayments of benefit could be classed as "unclaimed" even though the member was receiving a pension.
How should trustees exercise their discretion under a forfeiture clause?
The Axminster scheme's forfeiture clause provided that benefits unclaimed after six years were automatically forfeited. However, it gave the trustees discretion whether to reinstate the benefits or apply the relevant funds in a different way. The Trustee did not ask the court to make that decision itself, but did seek the court's guidance on relevant factors which the Trustee should take into account. The judge said that in a case where the beneficiaries had no reason to know they were being underpaid, but the Trustee was open to some degree of criticism, these were relevant factors which would indicate that the "first reaction of the Trustee should be to make good the underpayments without further delay". He also said that whether members could reasonably be expected to have made claims sooner was a relevant consideration.
Although the comments made by the judge gave the Trustee a strong "steer" towards reinstating the forfeited benefits, the judge recognised that the Trustee was not obliged to do that. He suggested that possible reasons for the Trustee choosing to act in a different way might be if other permitted uses of the money were "more compelling" or there were administrative difficulties to such an extent as to justify not exercising the power to reinstate the benefits.
On the question of any administrative difficulties with reinstating the benefits, the judge said that what was needed was "a rational and proportionate response". Administrative difficulties with reinstating the benefits for one beneficiary did not justify declining to do so for another, though "generic" administrative difficulties might mean it was not appropriate to examine every case individually.
When is a "forfeiture clause" not a forfeiture clause?
In the Axminster case, the forfeiture clause discussed above was introduced in 2001 in place of a very similar clause. The previous clause provided that any monies payable out of the scheme and not claimed within six years from the date on which they were due could be applied in various other ways (augmenting benefits, reducing employer contributions or paying expenses) at the Trustees' discretion. The judge noted that the clause did not expressly provide for benefits to be forfeited or expressly say that members were barred from claiming benefits after six years had elapsed. The judge held that such a clause did not allow for benefits to be forfeited.
Interest on pension arrears
Taking the same approach as in the Lloyds Bank case, the judge awarded simple interest at 1% above base rate on arrears of pension. He said that this took into account that arrears were likely to be modest in individual cases, but also that base rate has been historically low in recent years so that an award of base rate interest alone would be inadequate compensation. The parties had not asked the judge to rule on the period of time for which any interest would be awarded. However, based on technical arguments about the legal basis of any claim for interest, the judge said he was not convinced that beneficiaries would be able to claim interest on all arrears for the full period for which they had been outstanding. In other words, it was arguable that interest should only be payable on instalments for the past six years. He left open the possibility of hearing further arguments from the parties on that point after he had handed down his judgment.
What does the judgment say about failure to obtain a "section 37 certificate"?
When proceedings were first issued in the Axminster case, the parties thought it might be necessary to ask the court to rule on the legal effect of a failure to obtain a "section 37 certificate" in relation to various amendments. In the period from 6 April 1997 to the abolition of contracting-out, the rules of a defined benefit contracted-out scheme could not be altered in relation to any "section 9(2B) rights" unless the actuary had confirmed in writing that the scheme would continue to meet the statutory requirements for a contracted-out scheme following the alteration. The courts have not as yet been asked to rule on the question of the legal effect of a failure to obtain such a certificate, eg would it invalidate an amendment even if it was one where the actuary could clearly have given his confirmation?
Because of the compromise reached in the Axminster case, the judge did not in the end have to rule on the section 37 certificate issue. In approving the compromise, the judge commented that survivors' benefits other than those payable to widows or widowers were not section 9(2B) rights.
This judgment is an important one both for schemes dealing with GMP equalisation and for schemes dealing with past underpayments of benefits for any other reason. The implication is that forfeiture rules will apply to limit back payments to six years where the forfeiture is automatic. However, where there is Trustee discretion, it seems likely that trustees will often conclude that it is appropriate to exercise their discretion not to forfeit the benefits.
In relation to the section 37 certificate, we think this is a relatively narrow interpretation of what falls within the definition of section 9(2B) rights. However, it is not obvious to what extent the judge heard arguments on the section 37 certificate point, and we therefore think any comments made by the judge in this case need to be treated with a degree of caution when considering how the courts might rule in future on this issue.