High Court in 'ground-breaking' pension scheme forfeiture and limitation judgment

The High Court has handed down its judgment on the Axminster Carpets Group Retirement Benefits Plan in relation to forfeiture and limitation in pension schemes, which is expected to provide clarity to pension scheme trustees.

The “ground-breaking” judgment in Punter Southall Governance Services Limited v Jonathan Hazlett is expected to be useful for any schemes facing past underpayments, including as part of a guaranteed minimum pension (GMP) equalisation exercise, and particularly those planning to wind-up in near future.

The case was prompted after scheme trustees identified legal uncertainties with various instruments historically executed in relation to the scheme.

The trustees reached a compromise with the representative defendant, which saw members, at first sight, owed arrears, primarily because the pension increases they had historically received did not reflect the increases to which they were legally entitled.

However, there were concerns as to whether those arrears could or should be forfeit under the scheme's rules and whether, in any event, claims for arrears were time-barred under the Limitation Act 1980.

Whilst Justice Morgan had previously decided in the Lloyds case that claims for arrears were not statute-barred, he also heard extensive argument on limitation in Axminster Carpets, with this case now viewed as “the leading judgment on this area of practice”.

Morgan did, however, affirm his conclusion in Lloyds, ruling that it was not enough that a member had asked for their pension to be paid before their pension came into payment, but that it was necessary for members specifically to make a claim for the arrears to which they were entitled.

Furthermore, in relation to the scheme specific rules, Morgan concluded that Clause 25 of the 1992 scheme deed did not operate as a forfeiture clause as it does not contain wording that directly deals with the forfeiture of an entitlement to arrears.

Rule 36 of the 2001 scheme deed, however, was found to operate to forfeit underpaid pensions, with Morgan taking a similar approach to that seen in the Lloyds case, and concluding that the words "a benefit" in Rule 36 do not refer to the right to a pension from retirement.

Instead, he concluded that if an instalment was due on a date and part of the instalment was paid but part not, the relevant "benefit" for Rule 36 is the part that was not paid.

The judgment has also offered further guidance as to how to apply forfeited benefits, including the extent to which historic breaches of trust should influence how forfeited benefits should be applied.

The representative defendant for the case, in the absence of a representative beneficiary being identified, was Osborne Clarke head of pensions advisory team, Jonathan Hazlett.

Commenting on the judgement, Osborne Clarke stated: "Where trustees discover past underpayments of pension scheme benefits, including as part of their GMP equalisation project, the position on limitation is now very clear; no limitation period applies and as such historic claims may still be valid.

"While the decision on the purported forfeiture provisions is scheme specific, the judgment provides helpful guidance on interpreting provisions which purport to remove a member's right to unclaimed pension.

"The guidance on how trustees should exercise a discretionary power to forfeit is of general relevance and application.

"Trustees should consider taking legal advice on how the decision affects the underpayments they are responding to."

Gowling WLG head of pensions disputes, Ian Gordon, also emphasised that, short of a decision of the Court of Appeal, the issue of whether claims for arrears fall within section 21(1)(b) of the Limitation Act, to which no limitation period applies, appears to have been "definitively resolved" as a result of the judgement.

He stated: "Axminster Carpets is now the leading judgment on this area of practice.

"Mr Justice Morgan has affirmed many of the conclusions he had reached in Lloyds on the operation of forfeiture clauses.

"However, in addition, he addressed issues not considered or resolved in Lloyds, for example, whether the introduction of a forfeiture clause might contravene the fetter in a scheme's amendment power.

"Usefully, he also considered what factors a trustee might take into account in considering how to exercise any discretion given to it under a scheme's forfeiture rules.

"The court having decided that one of the provisions it had to consider did not permit forfeiture, it is clear that, as with 'RPI v CPI' pension increase cases, the devil will be in the detail and care needs to be taken in construing the precise wording of scheme rules to determine whether they permit or require forfeiture."

He continued: "The judgment in Axminster Carpets confirms that the usual scenario of a member not being responsible for having been underpaid, and not being to blame in not claiming arrears earlier, is likely to be irrelevant in deciding whether a clause is a forfeiture provision.

"However, Mr Justice Morgan indicated that it would be significant when it comes to whether a discretionary power to forfeit should be exercised, an indication he did not give in Lloyds.

"Interesting questions remain as to the interest to be paid in 'arrears cases' which were not resolved by the judgment."

Barnett Waddingham principal and head of GMP equalisation, John Cormell, also highlighted the ruling as "eagerly awaited" by GMP equalisation practitioners, who were hoping that some of the points of detail not covered in the Lloyds case would now be addressed.

“Today’s judgement will be a boon to the lawyers, focusing on the need to consider specific scheme rules on whether forfeiture and limitation provisions will prevent members claiming their backpayments from the scheme trustees," he stated.

“Ultimately it seems likely that there will be a ‘rules lottery’ on these issues rather than a single industry practice unless trustees can exercise their discretionary powers.

“The judgement will be useful for schemes in wind-up, who are desperate for clarity on what will happen if they cannot find data to equalise past transfers out.”

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