Judge holds that pension increase rules in 3 successive consolidating deeds can be rectified

In a recent judgment, the High Court ordered the rectification of the pension increase rule contained in 3 successive sets of rules of the Mitchells & Butlers Pension Plan. Mitchells & Butlers Pensions Limited, the sole corporate trustee of the Plan, brought the claim on behalf of members who stood to lose out as a result of unintended changes to the Plan's pension increase rule that were first made when a Plain English, consolidated version of the trust deed and rules was produced in 1996.

Although the decision to grant rectification is uncontroversial based on the evidence in this case, this judgment is noteworthy because:

• it is the first to consider whether a Principal Employer could rely on a bona fide purchaser without notice defence to resist a claim for rectification, and
• is likely to have wider implications where trustees are required under their schemes' amendment power to consult with the scheme actuary (or another third party) before they make an amendment to their schemes' rules or where they are required to obtain an actuarial certificate in respect of any changes under section 67 Pensions Act 1995.

Background

Prior to the introduction of a consolidated trust deed and rules in 1996, the rules of the Mitchells & Butlers Pension Plan (the Plan) provided for members to receive an annual increase on any part of their pension that exceeded the guaranteed minimum pension (GMP) at a rate equivalent to the Official Index of Retail Prices in the 12-month period ending on the 31 May immediately before the date of the increase or, if less, 5%. Under the Plan Rules the Official Index of Retail Prices was defined to mean:

“the index of retail prices published by the Department of Employment or any other index selected by the Trustees and approved for the purposes of the Main Scheme by the Commissioners of Inland Revenue”.

Although this definition specified the Retail Prices Index (RPI), it also meant the Plan's trustee had the power to select an alternative index.

The Rules also contained (in the form of Rule 18(A)) an augmentation provision for discretionary pension increases to be awarded at the request of Bass, the then Principal Employer, subject to the payment of any required additional contributions by each relevant participating employer. This Rule was used to satisfy an aspiration to award a discretionary increase of two-thirds of any amount by which RPI exceeded 5%, which was described in the judgment as the “Aim".

This position was reflected in the 1993 edition of the Plan's member Handbook (and subsequent editions) which stated:

"Pensions arising from AVCs, like pensions from the Plan, are guaranteed to be increased in line with the rise in the Retail Price Index (RPI) for the year ending 31st May preceding the increase, up to a maximum of 5%. Also, whilst not a promise, it is the Company's and the Trustees' present aim to pay additional increases of two-thirds of the amount that the rise in the RPI is above 5%. The aim has, in practice, been achieved in the past. The increases take place as from 1st October each year.”

In early 1996 Mitchells & Butlers Pensions Limited (the Trustee) instructed its legal advisers to prepare a new Plain English, consolidated version of the Plan's trust deed and rules (the 1996 Deed). It was agreed that the 1996 Deed would be based on the 1993 Plan Handbook, together with any subsequent documentation, and that the balance of power that existed between the Trustee and the Principal Employer under the Plan should remain unchanged. However, the pension increase power included in Rule 23(2) of the 1996 Deed (which was based on Allen & Ovary's standard form trust deed and rules) stated:

“That part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1st October in each year. The rate of increase is the percentage increase in the Retail Price Index during the year ending the previous 31st May but subject to a maximum increase of five per cent per year compound (or any other rate decided by the Principal Employer).”

Significantly, this meant that the 1996 Deed:

• removed the power for the Trustee to select an alternative index to RPI (the "index selection power"), and
• introduced a power for the Principal Employer to alter the default pension increase (of RPI up to 5%) (the "increase alteration power"), even though this element of the pension increases awarded under the Plan had always been understood by all stakeholders and expressed to members as being guaranteed .

This position was also reflected in a subsequent consolidating deed dated 17 December 2002 (the 2002 Deed) and the current governing deed and rules of the Plan dated 6 April 2006 (the 2006 Deed).

Therefore, the Trustee sought rectification of the rules which were annexed to the 1996, 2002 and the 2006 Deeds to remove the power for the Principal Employer to set an alternative rate of increase and to reinsert the power for the Trustee to select an alternative index to RPI, on the basis that neither the Trustee nor the Principal Employer at the relevant times had intended to make this change via any of the 1996, 2002 or 2006 Deeds. Though Mitchells & Butler ultimately conceded the fact that mistakes had been made during the drafting of the rules annexed to the 1996 and 2002 Deeds, it argued that they should not be rectifiable against it on the basis that, when Mitchells & Butler became the Principal Employer in 2003, it did so as a bona fide purchaser for value without notice of any equitable claim to rectification. It also disputed the Trustee's argument that there were rectifiable mistakes in the drafting of the 2006 Deed.

Rectification

By the end of the hearing, Mitchells & Butler conceded that there was a rectifiable mistake in the drafting of both the 1996 Deed and the 2002 Deed. Despite this concession, the judge considered the evidence in detail and concluded that Mitchells & Butler had been right to concede this. He held that the evidence clearly demonstrated that decision-makers for both the Trustee and the Principal Employer at the time of 1996 Deed, Bass, had not intended to change the Plan's pension increase provisions either by introducing the index alteration power or by deleting the Trustee's index selection power.

The judge was satisfied that the Trustee and Bass did not appreciate the effect of the wording within Rule 23 of the 1996 Deed, particularly as this change had not been specifically drawn to their attention by the Plan's legal advisers. He was also satisfied that those decision-makers all assumed that the substance of the pension increase provisions remained unchanged from those contained in the 1988 rules.

In relation to the 2002 Deed and the 2006 Deed, the judge was also satisfied on the evidence that the Trustee and Principal Employers at the relevant times had not intended to amend the pension increase rule and that they had still not appreciated the effect of the changes made by the 1996 Deed prior to executing these subsequent consolidating deeds.

Consequently, the judge was prepared to grant the rectification sought in relation to all three deeds, subject in the case of the 1996 and the 2002 Deeds to the merits Mitchell's and Butler's bona fide purchaser defence.

Bona fide purchaser defence

As part of its case, Mitchells & Butler ran a novel argument not previously pleaded in a pensions rectification case, in which it contended that when it became Principal Employer of the Plan in November 2003 it did so as a bona fide purchaser for value without notice of and thus free from any equitable claim for rectification in respect of the 1996 and 2002 Deeds.

After considering the context in which Mitchells & Butler had become the Principal Employer of the Plan (as part of a group reorganisation) and the terms of the 2002 Deed and the relevant deed of substitution, Mr Trower J rejected this argument on the basis that:

• the language contained within clause 3(1) of the 2002 deed made it clear that the primary purpose of the power is for the new Principal Employer to agree with the old Principal Employer (with the consent of the Trustee) to “assume its position”.
• the group reorganisation and related changes to the Plan (including the substitution of the Principal Employer) were undertaken on the basis that there would be no substantive changes to members' benefits under the Plan. If the substitution of the Principal Employer had, in fact, extinguished the equity of rectification that was required to be exercised in order to reflect the true nature of the benefits to which members were entitled under the Plan this would have been inconsistent with this principle.
• the assumption by Mitchells & Butler of the rights and powers under the 2002 Deed do not amount to a purchase of an interest in property for the purposes of a bona fide purchase defence.

Consultation with the Plan actuary

Alongside its claim for rectification, the Trustee also argued that the removal of the index selection power and the inclusion of the index alteration power infringed the terms of the power of amendment contained in the Plan and were therefore invalid. Clause 6 of the 1988 deed provided that:

"After consulting the Actuary, the Trustees may at any time and from time to time with the consent of the Principal Employer alter or modify all or any of the trusts powers or provisions of this Deed or of the Rules and any such alteration or modification may have retrospective effect.”

Proviso (iii) to Clause 6 further provided that:

“no alteration or modification shall be made which in the opinion of the Actuary shall operate substantially to prejudice the rights or interests in respect of service prior to the effective date of the alteration or modification of any person already a member at such date”.

As both parties accepted, consulting with the Plan actuary was a condition precedent that had to be satisfied before the Plan Rules could be amended. In addition, if the Plan actuary believed that an alteration would substantially prejudice the rights of members, the change could not be made.

Although the actuary was sent copies of the draft consolidating deeds, the relevant changes to the pension increase rule contained in all 3 deeds and their effect were, unsurprisingly given that they were unintended, not included in the schedule of changes prepared by the Trustee's legal advisers or specifically drawn to the attention of the actuary. On this basis, Trower J held that the Plan actuary had not be "consulted" for the purposes of the Plan's amendment power. As such, the alterations to the pension increase provisions purported to be made by the 1996, 2002 and 2006 Deeds were held to be invalid.

Section 67 PA95

The Trustee also argued that to the extent that the Plan Rules were amended by the 2002 and the 2006 Deeds, these changes were void as they did not satisfy the requirements of section 67 Pensions Act 1995, on the basis that the Plan actuary's section 67 certificate did not apply to the changes to the Plan's pension increase rule as the actuary did not have these changes in mind when signing the certificate. This argument could not be run in relation to the 1996 Deed as section 67 was not in force at the time that deed was executed.

In relation to the 2002 Deed, Trower J held that the introduction of the index alteration power and the deletion of the index selection power in the 2002 deed would have been void (had they not been rectifiable) as the requirements of section 67 had not been complied with.

In respect of the 2006 Deed, he noted that section 67 had by this time been amended such that an infringement would make any amendments voidable (at the behest of the Pensions Regulator) rather than void.  Although the Trustee still sort a declaration that the requirements of section 67 had not been complied with, Trower J did not provide any further declarations or comments on this point as he didn’t believe it would add any value to the conclusions he had already reached in this case.

Comment

The fact that rectification has been granted in this case seems uncontroversial given the overwhelming evidence that the decision-makers at the time the 1996, 2002 and 2006 Deeds were executed did not intend to change the balance of power under the Plan's pension increase rule or its effect.

This was the first case in which a Principal Employer has run a bona fide purchaser defence to a claim for rectification. However, it may be some time before we see it again given that it was dismissed on several grounds. Having said that it is conceivable that the argument may be resurrected in a different context such as where a company becomes the Principal Employer of a scheme it has acquired as part of a transaction, such as a corporate acquisition.

However, the most significant elements of this judgment are likely to be the judge's findings regarding the lack of consultation with the scheme actuary. Where a scheme's amendment power requires the trustees to consult with the scheme actuary (or another third party) it is clear that going forwards trustees (or, more likely, their legal advisers) will need to ensure that they draw all substantive changes (and their effect) to the actuary's (or third party's attention), particularly where a change is part of a consolidation exercise or there are a large number and/or complex changes being made to a scheme's rules. This is also important where an actuarial certificate is required for the purposes of section 67 Pensions Act 1995 and, by analogy, section 37 Pension Schemes Act 1993.

Additional checks may also need to be carried out when assessing the validity of historic changes to a scheme's rules to determine whether effective consultation with the scheme actuary has been carried out prior to a relevant amendment being made where consultation is required under a scheme's amendment power and/or for the purposes of section 67 and/or section 37.

If you wish to discuss how this judgement may impact your scheme or organisation please contact one of our specialists below or speak to your usual Herbert Smith Freehills’ contact.

 

 

 

 

 

 

 

 

 

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