Pensions update caselaw special

Transcription

1 Pensions update caselaw special Newsletter January 2008 The end of 2007 saw a flurry of court cases involving pension schemes. We have gathered some of them together into a special edition of Pensions update. The cases cover a broad range of issues and scheme type and we hope you find them of interest. HEADLINES Correcting mistakes made even harder Smithson v Hamilton Role of actuary in scheme funding Allied Domecq Remedy for misquoted benefits Royal Mail v Gosling Time limits for mis-selling claims Shore v Sedgwick Ombudsman s approach to ill-health complaints Chittoo v BT Definition of employing authority in the LGPS South Tyneside CORRECTING MISTAKES MADE EVEN HARDER SMITHSON V HAMILTON This case emphasises the importance of clear, accurate drafting and is a good example of the difficulties which will be encountered if a mistake does occur. Summary of facts A mistake had been made in the drafting of the scheme allowing deferred members aged 60 to take an unreduced early pension (the normal retirement date was 65). The equivalent rule for active members required actuarial reduction for anyone drawing a pension from 60. The scheme actuary estimated that this mistake could cost the scheme (and ultimately the participating companies) up to 1.8m. The mistake was spotted and, with effect from 25 May 2001, benefits accrued after that date were reduced for early payment. Section 67 of the Pensions Act 1995 prevented the scheme being amended with retrospective effect so the trustees applied to the court for assistance. The main claim was based upon what is generally referred to as the "principle in Hastings- Bass". That principle is that the court will interfere in the action of a trustee if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account, or taken into account considerations which he ought not to have taken into account. In this case, the basic argument was that had the trustees realised that the rule allowed deferred members to take unreduced early retirement they would not have adopted it. They asked the court to declare it void.

2 Decision of the court The judge held that the rule in Hastings-Bass did not apply here and he would not declare the provision void. The effect of the decision to include the rule was to increase the costs of the employers. It had no detrimental impact on members (indeed it was of benefit to many) and there was no suggestion that the employers (now members of the Siemens group) could not afford to pay the additional sums required. He declared that the correct way to solve this mistake would have been to apply for an order of rectification. No clear reasons were given as to why the trustees had not sought an order for rectification - the judge took this as a tacit concession that rectification would not have succeeded. He disapproved of what he saw as "rectification by the back door". A second reason why the judge did not apply Hastings-Bass is that he concluded the driving force behind the adoption of the rules was the principal employer, not the trustees, and the rule applies only to things done by trustees in respect of which they have responsibilities to the members. He said that scheme design is essentially a matter for the employer, albeit that the trustees indicate their acceptance of it by executing the deed. It is a proper part of the trustees role for them to consider the proposed structure of the scheme, and, if there are any aspects of it with which they are unhappy, to say so.however, it remains true that the scheme is essentially the employer's scheme. The incorrect drafting of the rule was a consideration for the employers and not the trustees and thus did not fall within the scope of the rule in Hastings- Bass. The court was then asked to consider whether the rule could be struck down using the doctrine of mistake. The judge found that (despite suggestions to the contrary in other recent cases) the equitable doctrine of mistake could not be used in the context of occupational pension schemes. The judge s comments on the different roles of the employer and trustees are interesting. He made it clear that scheme design was essentially for the employer, largely because it was the employer who would bear the cost of benefits. The decision may have been different had he been looking at an amending deed where the employer and trustees were exercising a joint power of amendment. He went on to say that trustees ought not to disregard the impact on the employer of something which they contemplate doing but trustees are in place essentially to look after the interests of members of the scheme, not the employers. This is a slight move away from a body of opinion (largely based on comments in the Edge case) that trustees are bound to take into account the interests of the employer when exercising discretions. Smithson v Hamilton suggests that the trustees must always look first to the interests of the members. This case also demonstrates the importance of taking the right case to court. The judge clearly felt that an application for rectification would have been the correct route although the suggestion is that the trustees were advised that this would not have succeeded. The comments on the unavailability of the doctrine of mistake are not binding but may make it more difficult for mistakes in pension scheme documents to be struck down in this way in future. David Smithson & Others v David Hamilton [2007] EWHC 2900 (Ch)

3 ROLE OF ACTUARY IN SCHEME FUNDING ALLIED DOMECQ Only the second case on the new scheme funding regime, this gives a useful insight into the interaction between the legislation and individual scheme rules. Summary of facts The main issue was whether the rates of contribution under the scheme rules where determined by the actuary without the agreement of the employer. The importance of this is that under the statutory scheme funding requirements, if scheme rules provide for rates of contribution to be determined in that way, the scheme actuary is required to provide a special certificate confirming that the rates of contribution agreed by the trustees and employer are no lower than the rates he would have provided for if he, rather than the trustees or managers of the scheme, had the responsibility for making the decisions. Effectively this would give the actuary a veto over the contribution rates. The scheme rule for ongoing contributions provided for the employers to pay the trustees such contributions as would, in the opinion of the actuary, enable the trustees to pay the benefits. It then allowed the trustees to determine the respective proportion of contribution each participating employer would pay. It was argued that this second limb of the rule meant that the scheme actuary did not have power to determine the rates of contributions. The court also had to look at a second rule concerning contributions in relation to past service deficit. That provided for the employers to pay a sum certified by the actuary aimed at restoring the solvency of the fund in such proportions and over such period as the trustees determined. Again, it was argued that the second limb of the rule meant that the actuary was not responsible for determining the rates of contribution. Decision of the court The judge decided that both rules did provide for the rates of contribution to be determined by the scheme actuary and the special certificate would be required. The right of the trustees to apportion the contributions between employers and to set the time period for the past service contributions did not affect this. In the judge s view the words without the agreement of the employer are key. The special certificate will only be required in schemes where the employer has no veto under the scheme rules over the contribution rates, it matters not if others have a veto or right to be consulted. It is helpful to have a court decision on the complex provisions of the scheme funding regulations, particularly on the modifications to the main statutory requirements. This case of course turns on the exact wording of the rules in the Allied Domecq schemes but the judge s approach, and some of his comments on interpreting pension scheme documents, will be of general assistance for many schemes. It is essential that trustees, employers and the scheme actuary are clear on their exact roles in the statutory scheme funding regime from a very early stage in the process. In most schemes the trustees will be required to obtain employer consent and to take advice from the scheme actuary however, the statutory requirements may be modified depending on the exact provisions of the scheme rules. Allied Domecq (Holdings) Limited v Allied Domecq First Pensions Trust [2007] EWHC 2911 (Ch)

4 REMEDY FOR MISQUOTED BENEFITS ROYAL MAIL V GOSLING The usual remedy where a benefit is misquoted is for the member to be paid only the correct level of benefit, with a modest award for distress and inconvenience. There may be exceptional cases where the member can show that he relied to his detriment on the misquotation (perhaps by taking early retirement) where the remedy may include a sum to compensate for loss of earnings. This case is slightly unusual in that the Pensions Ombudsman departed from his usual practice and found the member had a contractual right to the misquoted benefit. This was reversed by the High Court. Summary of facts Mrs Gosling had received an illustration stating that if she contributed 9% of pensionable pay she would receive 4 years and 183 days added years in the Post Office Pension Scheme. The illustration stated that further detail could be found in the scheme booklet and a leaflet. Mrs Gosling completed an application and started paying the increased contributions. In fact, because Mrs Gosling was a part time employee, the added years were reduced pro rata and she accrued only 1 year 42 days. Mrs Gosling complained to the Pensions Ombudsman who upheld her complaint. He found that she had entered into a contract which entitled her to 4 years and 183 days added years. Decision of the court The judge ruled that the Pensions Ombudsman had been wrong to find that there was a contract the parties had no intention of providing Mrs Gosling with benefits in accordance with the illustration rather than under the terms of the scheme. He went on to consider whether the illustration amounted to maladministration. He held that it did not. Had Mrs Gosling or her professional advisers looked at the booklet or leaflet, to which they had been referred, it would have been clear that her added years would be reduced pro rata. The finding of the Pensions Ombudsman that a misquotation had given rise to contractual rights goes against the general thrust of Ombudsman s decisions in such cases. Not surprisingly, the court reversed that finding. The basis on which the court rejected the maladministration argument is that although the illustration was arguably incorrect or incomplete, Mrs Gosling could not reasonably have relied on it as she should have read the booklet and leaflet referred to. This failure on Mrs Gosling s part effectively cancelled out the original mistake in the illustration. Scheme members who have received a misquotation of benefits often think that they have gained the right to be paid at the higher level. This case is a useful reminder that this is unlikely to be the outcome. Royal Mail Pensions Trustees Limited v Gosling [2007] EWHC 2871 (Ch) TIME LIMITS FOR MIS-SELLING CLAIMS SHORE V SEDGWICK This case involves detailed consideration of how statutory limitation may be applied to pensions mis-selling cases.

5 Summary of facts Mr Shore was given negligent financial advice, pursuant to which he retained assets in an income drawdown policy rather than purchasing an annuity. The income drawdown policy itself had been purchased following a transfer payment from an occupational pension scheme. Decision of the court The judge found that the financial adviser had breached his duty to Mr Shore in failing to advise him to purchase an annuity rather than take income drawdown. Once this had been decided, the crucial issue in the case became one of limitation. The advice had been given in 1997 and the legal proceedings were instituted in September The relevant statutory limitation in cases such as this is six years from the date on which the individual first suffered "relevant damage" - or three years from the date on which he had knowledge of the relevant damage, if later. The difficulty was in identifying the date on which Mr Shore suffered damage. The damage was not the date of the transfer to the income drawdown fund, but the date (sometime later) on which he would have been better off had he purchased an annuity. Being exposed to risk is not the same as suffering damage. The judge held that the loss materialised sometime during 1997 when there was a substantial fall in annuity rates (at that point Mr Shore would actually have been better off purchasing an annuity rather than retaining his drawdown policy). It was found that he knew this by December 1999 and the claim was therefore out of time both on the six year and three year basis. This is a useful reminder to consultants and advisers that mis-selling is not a thing of the past. Interestingly, the problem was not the transfer out of an occupational pension scheme (which itself has many pitfalls for the financial adviser) but in relation to the subsequent advice to retain the income drawdown policy. It also acts as a reminder to individuals who think they have been given the wrong advice that they should not delay taking action - initially by contacting the adviser and subsequently the Financial Services Authority or Financial Ombudsman Service. Shore v Sedgwick Financial Services Limited & Others [2007] EWHC 2509 (Admin) OMBUDSMAN S APPROACH TO ILL-HEALTH COMPLAINTS CHITTOO V BT This was a fairly straightforward appeal of a PO determination in an ill-health case. The slightly unusual point is that the appeal was made by the member, a rarity due to the risk as to costs. The interesting point of this case is that the court approved the Ombudsman's approach to illhealth cases. As with most cases, he looked at the decision-making process (had the employer followed the rules, asked the rights questions, weighed up the evidence etc?) - he would only interfere if the employer had misdirected itself or come to a conclusion no reasonable employer, acting on that evidence, could reach. It appears from the judgment that Mrs Chittoo had suggested that the correct approach would have been for the Ombudsman to substitute his own decision for that of the employers - and that the only permissible conclusion was that she was entitled to the pension. This argument was rejected by the court. Laila Chittoo v British Telecommunications PLC [2007] EWHC 3069 (Ch)

6 DEFINITION OF EMPLOYING AUTHORITY IN THE LGPS SOUTH TYNESIDE The essential question in this case was whether a body which had no active members in the LGPS came under the definition of employing authority and thus could be required to contribute to the deficit in the Tyne and Wear Pension Fund. The scheme had a deficit of 1,300m and the actuary certified that the Northumbria Magistrates Court Committee (NMCC) should pay the sum of 214,000. The NMCC had never been an active employer in the LGPS but was formed by the amalgamation of former employers. From the date of the amalgamation it had participated in a different pension scheme. NMCC argued that it was not an "employing authority" for the purposes of the LGPS Regulations and so could not be required to contribute to the scheme. The court looked at various arguments on statutory interpretation. It found that the consequences of an interpretation resulting in only active employers being required to contribute would lead to an injustice. The correct interpretation was that employers will always be required to contribute to the pensions of persons they have employed, even if the employer is no longer an employer of active members. As NMCC had taken over responsibility for the liabilities of the former employers of deferred and pensioner members of the LGPS it could be required to contribute. Employers taking on former LGPS employees should ensure that they are aware of, and if possible are indemnified against, any liability for deficit obligations in relation to those employees. R on the application of South Tyneside Metropolitan Borough Council [2007] EWHC 2984 (Admin)

7 CONTACT Kate Richards, Partner T +44 (0) k.richards@nabarro.com Susan Jones, Knowledge Lawyer T +44 (0) s.jones@nabarro.com About the pensions team We have one of the largest and most established pensions teams in the UK. Everyone in our team is a pensions specialist and together we can provide expert advice on every aspect of pensions. We focus our diverse experience and in-depth knowledge and understanding of key pension issues on delivering effective, tailored solutions. We handle a very wide range of pensions issues, from drafting complex pensions documentation, dealing with complex pensions reorganisations to successfully defending Pensions Ombudsman complaints. London Lacon House, 84 Theobald's Road, London WC1X 8RW T +44 (0) F +44 (0) Sheffield 1 South Quay, Victoria Quays, Sheffield S2 5SY T +44 (0) F +44 (0) Brussels 209A Avenue Louise, 1050 Brussels, Belgium T F Disclaimer Detailed specialist advice should be obtained before taking or refraining from any action as a result of the comments made in this publication, which are only intended as a brief introduction to the particular subject. This information is correct on the date of publication. We cannot be responsible for links to external websites that may become broken in the future. Nabarro 2008