The Axminster ruling contains a logical but novel analysis of underpayment claims, with food for thought about the balance between trustee and member protection.

Limitation and continuity

The current trustees have no limitation defence if they underpay in breach of trust. The remedy is equitable compensation. It seems claims can only go back to when the current trustees were appointed.

Ex-trustees are in a different position. In Axminster, the corporate trustee was replaced more than six years ago, meaning there could be no claim against it. That seems to open the door to abuse, or trustee protection, depending how you look at it. There is a ‘concealment’ extension though, defined in a way that may often apply.

This opens up new questions. What about individual trustees? Is a new trustee in breach for not ascertaining the correct benefits?

A claim for arrears is different, as is a debt, so member recovery (including interest) could depend on precisely how the claim was framed. What do we assume if trustees are proactively correcting, with no actual claim?

Forfeiture and trustees’ own benefits

If a mandatory forfeiture rule applies members can only recover a shortfall going back six years. That’s a short time in pensions.

Members rarely claim for underpayment because they don’t know about it. If there’s any discretion, the judge gave a pretty heavy steer that it should be used in favour of beneficiaries where they were not at fault and the trustees were.

In an apparent swipe at the trustees, who had ignored legal advice that they were underpaying, he said it might be different for their own benefits.

Some schemes won’t have a forfeiture rule, or only for some people or some periods of service. The Axminster clauses ultimately had little impact. It’s another drafting lottery and more unfair to members than RPI/CPI (they still get increases).

The real world

We’ve lived with uncertain defined benefit (DB) pensions for a long time. Trustees want to pay the right benefits but funding may be stretched, data is lacking and members are getting what they expected. If it turns out that benefits have been underpaid, trustees generally put them right.

That’s no longer possible with mandatory forfeiture; increasing the pressure to get it right first time. At the other extreme, it seems DB trustees who are members can only use discretionary forfeiture against themselves, possibly deterring them from taking legal advice.

We need a more coherent approach. Random forfeiture has no place in an ongoing DB scheme. Isn’t this what amendment powers are for?

It’s different on winding-up. Forfeiture and limitation may help to bring certainty before and after distributing the assets, specially for run-off insurance. Axminster shows forfeiture rules can be introduced by amendment.

GMP projects are developing, the dashboard will compel better data, buyout is within reach for many schemes. Now is the time to clean up DB liabilities in one ‘big bang’. Let’s make Axminster work for us and not get in the way.

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