Trustees may not be able to rely on forfeiture rules to limit GMP equalisation back payments

A recent judgment concerning scheme liabilities and the interpretation and operation of a scheme's forfeiture rules in the context of a benefit correction exercise may impact the scope for trustees to rely on their scheme's forfeiture rule to limit back payments in the context of GMP equalisation or where back payments are due for other reasons, where the trustees have a discretion over whether or not to apply the forfeiture rule.

The case in question concerned back payments that were due to members of the Axminister Carpets Group Retirement Benefits Plan (the Plan) following a compromise that had been agreed on issues relating to the proper calculation of historic pension increases.

Background

Punter Southall Governance Services (the Trustee), had been appointed to act as trustee of the Plan in 2013, on the entry of the Plan into a Pension Protection Fund (PPF) assessment period following the insolvency of the Plan's sponsoring employers.

After its appointment, the Trustee identified a number of issues relating to the validity and effect of certain deeds and other documents which purported to fix the rates of increases for pensions under the Plan. As a result, it decided to seek the Court's directions on how to resolve those issues.

Prior to the hearing, the parties reached a compromise, the effect of which was that members would be entitled to payment of arrears on the basis that the pension increases they had historically received did not reflect the increases to which they were legally entitled.

In relation to this compromise, the Court was asked to determine (amongst other things):

• whether members' claims for arrears were time-barred under the Limitation Act 1980
• whether the arrears could be forfeited under the Plan's rules, and
• what rate of interest should be payable on the arrears.

The judge, Mr Justice Morgan, was the same judge who heard the Lloyds Bank GMP equalisation cases, in which some of the same issues were considered.

In Lloyds, Morgan J had held that claims for arrears of pension were not subject to a statutory limitation period. However, there had been limited argument on this point in Lloyds and so he decided that he would reconsider the issue in this case with the benefit of full arguments from Counsel for both parties. As a result, this judgment is now the leading authority on this issue. Morgan J was also asked to rule on a number of additional points which he had not had to consider in Lloyds.

The key issues and the wider implications for pension schemes are set out below.

Limitation period

Morgan J was asked whether a claim by a member or other beneficiary under the Plan to arrears of pension increase payments was subject to a statutory limitation period.

Having had the benefit of full argument on this point, Morgan J reached the same conclusion as he had in Lloyds holding that a claim made by a beneficiary against the current Trustee of the Scheme for payment of arrears of pension increase payments would be "an action to recover from the trustee trust property in the possession of the trustee" which fell within section 21(1)(b) Limitation Act 1980. This meant that the potential claims were not subject to a statutory limitation period.

It was confirmed, however, that a beneficiary would not be able to rely on this section in a claim against a predecessor trustee, as the predecessor trustee would not be in possession of trust property at the time of the claim. Consequently, a claim against a predecessor trustee would be treated as a claim for breach of trust which was subject to a six year limitation period (which could be extended where the predecessor trustee was found to have committed a deliberate breach of trust or to have deliberately concealed a breach).

Forfeiture

Morgan J was asked to rule whether provisions contained in Clause 25 of the 1992 Definitive Deed or Rule 36 of the Rules introduced by the 2001 Definitive Deed (which replaced Clause 25) operated as a forfeiture clause (meaning that member claims could potentially be time-barred).

Clause 25 provided that:

25. Power to apply unclaimed moneys

Any monies payable out of the Plan and not claimed within six years from the date on which they were due to be paid may (at the Trustees' discretion) be applied:

• in augmenting the benefits of those Members still in Service;
• in reducing the Employer's contributions to the Plan; or
• in payment of the expenses of the management and administration of the Plan.

Morgan J held that Clause 25 did not operate as a forfeiture rule on the basis that it did not contain any wording which directly provided for the forfeiture of a member's entitlement to benefits. Instead, he found it was likely that the clause was intended to deal with orphaned money which ought to have been paid, but which could not be paid, to a missing beneficiary.

As such, the Trustee could not rely on Clause 25 to limit back payments of pension increase arrears.

Rule 36 was similar to Clause 25, but provided that:

36 Unclaimed Money

36.1 If a Beneficiary fails to claim a benefit within six years of its becoming due, it shall be forfeited but the Trustees may at their discretion subsequently apply all or any part of such benefit:

(a) to the Beneficiary notwithstanding the forfeiture;

(b) in augmenting the benefits of Members still in Service;

(c) in reducing the Employer's contributions to the Scheme under Rule 10; or

(d) in payment of the expenses of the management and administration of the Scheme under Rule 41.

Unlike Clause 25, Morgan J held that Rule 36 did constitute a forfeiture rule, as it expressly provided for benefits to be forfeited automatically where a beneficiary failed to make a claim within six years of a benefit becoming due. The Trustee then had a discretion to pay all or any part of the unpaid sum to the beneficiary (notwithstanding the failure to claim) or to apply the same for the other specified purposes.

Failure to claim

As in Lloyds, Morgan J was asked to determine what constituted a "claim" for the purposes of Rule 36. Reaching a similar conclusion, he confirmed that a member requesting their pension be put into payment at retirement was not a claim for the purpose of determining liability to pay arrears of pension increases. Instead, a claim in this context must relate to the missing part of each instalment of pension that is underpaid and it must be made after the relevant instalment has become due for payment.

In addition, the word “fails”, in "fails to claim", refers simply to the fact that a claim has not been made and does not require the trustee to show that a beneficiary was at fault in some way, or that the trustee was free from fault. However, the absence (or presence) of fault on the part of the member (and the trustee) are relevant considerations when a trustee is deciding how to exercise any discretion they may have under a forfeiture rule.

Should the trustee exercise its discretion to reinstate any forfeited benefits?

Morgan J was asked to give guidance on what factors the Trustee should take into account when exercising the discretion under Rule 36 and, in essence, whether the Trustee was obliged to exercise its discretion so as to reinstate any benefits that may have been forfeited. He was also asked whether the fact that forfeiture was not caused by any fault on the part of the members and other beneficiaries was relevant when considering the exercise of the Trustee's discretion.

Notably, Morgan J held that in a case where the beneficiaries are not in any sense at fault and the trustee could be open to criticism, "the first reaction of the Trustee should be to make good the earlier underpayments without further delay". He went on to say that, in this case, "the beneficiaries were not in a position to know that they were being underpaid over the years. Therefore, they were not in a position to make a claim to prevent time running under Rule 36. It can therefore be said that the forfeiture of their benefits under Rule 36 is wholly undeserved. It can then be said that the Trustee ought to exercise its discretion to restore those benefits under Rule 36.1(a) unless there are other considerations which override that approach."

This suggests that, where there is an element of trustee discretion under a forfeiture rule, such as where a trustee has a discretion to decide whether or not a member's benefits should be forfeited, or if forfeiture happens automatically, where a trustee has a discretion to decide whether the benefits should be reinstated, the trustee's starting point should be to exercise the discretion so as to make good all of the underpayments (where the member was not at fault) unless there are compelling reasons not to do so.

Morgan J indicated that reasons for not exercising the discretion so as to reinstate member's benefits might include:

• administrative difficulties in calculating and making good the underpayments, and/or
• if the amount of the underpayments are small relative to the costs associated with calculating them and making good the arrears.

He also held that in this case the Trustee was entitled to consider:

• how the situation had arisen
• the consequences of the discretion being exercised or not
• the absence of fault on the part of the beneficiaries and the presence of fault on the part of the trustees, and
• the fact that (in this case) the Plan would transfer into the PPF.

Interest

As in Lloyds, Morgan J decided that the appropriate rate of interest that should be applied to the back payments was simple interest at 1% above base rate for all beneficiaries.

Implications

This decision may have important implications in situations where trustees are considering whether to rely on their scheme's forfeiture rule to limit back payments. This may be relevant in the context of GMP equalisation exercises or where benefits need to be corrected for other reasons.

The key implications for these purposes are that:

• If a scheme contains a provision that is similar to Clause 25 above, it may be that it does not operate as a forfeiture rule and so cannot be used to limit back payments. If a scheme has relied on a rule that is similar to Clause 25 to limit back payments in the past the trustees may need to revisit their decision and consider whether they were entitled to do so. Trustees may also need to consider whether they are able to rely on such a rule to limit back payments in the context of GMP equalisation where they are minded to do so.
• If a scheme has a discretionary forfeiture rule and the trustee is planning to rely upon this to limit back payments in the context of GMP equalisation (or any other benefit correction exercise), they should consider whether it is appropriate to exercise their discretion in this way in light of this judgment and the guidance given by Morgan J as to the starting point for trustees in exercising any such discretion. They may also need to re-assess any previous decisions that might have been made in reliance on such a rule.

Comment

While some practitioners had hoped that Morgan J would depart from some of his findings in the first Lloyds judgment regarding limitation and the operation of forfeiture rules in this judgment (and after having had the benefit of fuller argument), he has instead taken the opportunity to reaffirm many of his conclusions. This makes it less likely that those findings will be successfully challenged, certainly without a relevant case going before the Court of Appeal or beyond.

In this latest judgment, Morgan J has gone further than he did in Lloyds in holding that where trustees have discretion over whether or not a members' benefits should be forfeited, the starting point should be to decide not to forfeit the benefits, in the absence of any fault by members, unless there are compelling reasons to the contrary. Schemes with discretionary forfeiture rules should take note of this. It may also mean that trustees need to reconsider their approach to forfeiture in the context of GMP equalisation and other benefit correction exercises.