We often receive initial approaches by companies or trustees who are involved with final salary pension schemes who are concerned that there is a disconnect between two or three of the following:
- what their scheme documentation provides;
- what legislation requires; and
- what is being done in practice (i.e. the level of benefits being paid out to beneficiaries).
Given the manner in which pension provision and governing legislation has developed over the decades it is no wonder there are problems and errors, some of which can take decades to identify. It is, however, very frustrating when these unintended errors result in significant extra benefits for beneficiaries which:
- the trustees didn’t think were payable;
- the employer never expected to have to fund; and
- the beneficiaries never expected to receive.
Sometimes there are solutions. We work very hard with our clients to find the most pragmatic solutions possible to ensure any such extra liabilities are kept as low as possible.
One potential solution where there is a difference between the provisions in the documents and actual practice is rectification.
We have reported on various rectification cases over the years including:
- Hogg Robinson plc v Harvey – where rectification was granted by the court in an uncontensted application regarding a drafting error; please see our 16 March 2020 article
- IBM which involved a rectification brought by the Trustees please see our 10 December 2012 article
- Please see Clive’s September 2020 podcast entitled RIP for RPI?
We now look at this subject in greater detail:
Rectification can only be achieved where it is granted by a court. It is not something the employer or the trustees can simply agree to apply. Court applications for rectification have not been especially common over the years, the reason being the hurdles which need to be jumped in order to succeed in a claim and the costs which result from a full court hearing.
However, where the circumstances permit, it may be possible to take a cost-saving approach to a rectification application, by applying for summary judgement. This will only be possible where the application is uncontested – i.e. the members agree with trustees and employer. Such an approach was taken this year in SPS Technologies where an application was made to rectify the provisions in three documents which inadvertently removed the requirement to apply an actuarial reduction to early retirement provisions for members who had transferred to the scheme from previous schemes if they retired from deferred status after attaining age 60. The original error crept in via a 1998 set of rules and was then replicated in a subsequent set of rules in 1999 and a deed in 2003. The effect of the error was to create a severe imbalance between:
- Members who retired from pensionable service (whose benefits would have an actuarial reduction applied to them); and
- Members who retired from deferred status (whose benefits would not have an actuarial reduction applied to them).
The application was not contested by the scheme members and the request for rectification was granted by the court.
In recent months we have also seen the high-profile application for rectification in Univar v Smith, the first contested rectification case in 8 years. We expect that the application was made, despite the fact it was contested, because of the potential liabilities involved – circa £23m.
Historically the rules of the Univar scheme had provided for increases and revaluation to be paid in line with the statutory minimum level. However, on 3 March 2008 a new set of rules was adopted, and those rules specified that increases and revaluation be paid in line with the retail prices index. The retail prices index (RPI) was indeed the index being used for the purposes of statutory revaluation and increases at the time the 2008 rules were adopted. However, just under three years later the basis for statutory revaluation and increases was changed from the RPI to the consumer prices index (CPI). For many schemes this shift resulted in a reduction to the cost of revaluation and increases – as the consumer prices index has, since 2009, resulted in lower levels of revaluation and increases. The question raised in Univar was whether the change in the 2008 rules, which in effect hard-coded RPI irrespective of any changes to the statutory minimum basis, was intentional or was it an error. Did they mean to move away from tracking the statutory minimum level of revaluation and increases? The employer claimed it was an error in the documentation and there had been no intention to move away from tracking the statutory minimum level of revaluation and increases. The members disagreed, and the trustees remained neutral. It fell to the court to decide whether rectification could and should be granted.
One of the key messages from
the judgment is that the understanding of the parties, at the time of making
their rule amendment, is critical. This
is a subjective test. Whilst it was
widely accepted that the trustees and the employer understood the words which
referred to RPI in the 2008 rules, it was found that they didn’t understand the
legal effect of those words – i.e. they didn’t understand that the legal
effect of those words was that:
- they were moving towards a hard-coded index for revaluation and increases; and that
- this represented a change to their benefit structure.
Another important aspect is that the requirement for documentary evidence in rectification cases is demanding. In this case, the documents produced around the time of the hardcoding of RPI in the 2008 rules supported the employer’s argument that there was no intention to make a change to this aspect of the scheme’s benefits. It isn’t necessarily the case that an absence of documentary evidence will result in the failure of a rectification application – but in this case the documentary evidence significantly helped the employer’s application.
The employer’s application was successful and rectification was granted in this case. Along with this judgment there are key lesson for trustees and employers, two of the most important being:
- engage with your professional advisers – when adopting new sets of rules ensure that you and your lawyers are aligned with the intentions and ensure you read and understand the documents you are signing; and
- ensure that backing documents (such as briefing papers, minutes, file notes of conversations, copies of correspondence and supporting documents such as benefit specifications and balance of powers tables) are properly written and retained safely – they could be invaluable in the future!
We pride ourselves in having a thorough understanding of the legal issues in this area, a wealth of experience in advising clients (both trustees and employers) on such matters, and a pragmatic approach with good commercial awareness – we focus on the solutions which will help you move forward, rather than the detail of the technical difficulties often presented by such cases.
If you have any concerns about potential errors in the documentation of your scheme, no matter how historic those documents or potential errors may be, please do not hesitate to contact us. Dealing with such matters can help to limit further liabilities in the future and where an employer and/or trustee board has buy-out in their sights it is always beneficial to address issues such as this as early as possible so any movement in liabilities can be properly anticipated.