Confiscation of pension arrears – a drafting lottery?
In a case concerning the validity and effect of certain acts relating to pension increases, the High Court delivered its judgment. The case also examines the application of the plan’s forfeiture clauses to insufficient payment arrears.
The case, concerning the Axminster pension scheme (‘the scheme’), was brought by the independent administrator of the scheme. Many of the initial issues were compromised by the parties, meaning the court was asked to approve the compromise. The judgment and the points examined by this article concern questions relating to arrears of benefits which would then be calculated and payable. The arrears are due to underpayments related to the calculation of the increase in pensions and the equalization of benefits under the Scheme. The key questions examined by the judge concerned the limitation periods as well as the application of the regime’s forfeiture rules.
It should be noted that Morgan J was the judge in the Lloyds GMP Equalization proceedings and that some of the issues under consideration in the Axminster case were considered by him in the Lloyds judgments.
Limitation law 1980
Morgan J examined whether claims for pension arrears increased payments were subject to the Limitation Act 1980.
In Lloyds, Morgan J. found that members could rely on the provisions of the Limitation Act 1980 to defeat the trustee’s attempts to rely on the six-year limitation period provided for in that legislation. The Limitation Act 1980 provides that in actions by beneficiaries to recover trust property, the six-year limitation period does not apply.
Not surprisingly, the same conclusion was drawn in this case. A claim for pension arrears will be considered by the courts as an action for the recovery of trust property.
Therefore, the standard statute of limitations of six years does not apply. Morgan J then moved on to review the forfeiture rules under the regime’s documents.
Forfeiture under the rules of the Axminster regime
The forfeiture rule under the Trust Deed and the 1992 Rules provided that amounts payable out of the plan and not claimed within six years of the due date could be applied at the discretion of the trustees of one or more several of the following ways:
- increase member benefits where those members were still in service;
- reduce employer contributions; or
- payment of the expenses of the Plan.
Morgan J concluded that the clause did not function as an arrears forfeiture clause or serve to provide a time limit for claims on payment of arrears. He concluded that instead, the clause was intended to deal with “orphan money” with respect to a missing beneficiary.
A later version of this clause was introduced in the trust deed and the 2001 rules. This clause was similar to the clause in the 1992 rules. One of the main differences was that it specifically stated that unclaimed benefits must be confiscated. The amended version also introduced discretionary power for trustees to pay benefits otherwise lost to the member. The other discretionary powers described above have also been retained. The amended version therefore provided for the automatic forfeiture of arrears of benefits older than six years.
Morgan J also considered whether the introduction of the amended forfeiture clause was permitted under the regime’s amendment power. A restriction on the power to modify prohibited any modification that would result in the “reduction of benefits already accrued”. Morgan J. concluded that the amendment did not have the effect of reducing the accrued benefits, as the rights of the members were not affected by the introduction of the rule. The rule only resulted in the forfeiture of unclaimed benefits, this was not necessarily the case for member benefits in all cases.
Like the case law relating to the interpretation of the rules for increasing pensions and indexation, this case shows that there is a sort of drawing of lots in the application of the forfeiture rules to payments of arrears. Had the plan rule been retained in accordance with the trust deed and the 1990 rules, the arrears payments would not have been automatically lost.
It is questionable whether it was ever intended that a forfeiture rule be used for this purpose, but it appears from the Axminster and Lloyds cases that when a regime’s forfeiture rule provides that unclaimed benefits will be forfeited. then this is the automatic effect. Rules should always be carefully reviewed to see how they apply. In addition, the question of when arrears of benefits are payable may be relevant – did they become payable at the time of initial payment or when the underpayment was identified and quantified?
Trustee’s discretion to pay for lost benefits
The 2001 rule gave the trustee discretion to pay a member otherwise lost benefits and the court was asked to consider what factors might be included when deciding whether or not to exercise such discretion.
Justice Morgan stated that the particular factors to be considered were whether there had been fault on the part of the member and whether there had been fault on the part of the trustees. He said trustees should look at how the situation came about and the consequences of discretion exercised or not. In this case, the members were unaware that their benefits were underpaid and, therefore, were unable to submit a claim. Justice Morgan conceded that the forfeiture was therefore undeserved.
The judge was of the opinion that the trustees should exercise their discretion to pay the member for the arrears confiscated, unless other considerations outweigh such a finding. His view was that discretion should be exercised to put beneficiaries back into the position they always should have been under the plan.
The case therefore demonstrates that the wording of forfeiture clauses must be considered with extreme caution when examining cases of arrears of benefits. There are often subtle differences in the way these clauses are worded. The expectation in this case appears to be that the discretion to pay for lost member benefits would be exercised by the trustees in favor of the members. Basically, this is always a discretionary power of the trustee, so there may be other factors.
The case will be particularly interesting given that many regimes will now turn to GMP equalization and how to deal with historical underpayments resulting from GMP equalization.
For more information, please contact Suzanne Burrell or your usual retirement contact.