Historic claims for pension underpayments following Axminster Carpets: improved guidance for pension schemes
Details
In a judgment that is likely to be of considerable interest to those administering and funding pensions schemes, the High Court has in Axminster Carpets Group Retirement Benefits Plan, Re [2021] EWHC 1652 (Ch) (Axminster Carpets) provided significant clarity on the approach to forfeiture and limitation in historic claims for underpayments, in addition to providing guidance on trustees’ exercise of discretion in such matters.
Background
Issues of forfeiture and limitation in pensions claims have been the subject of significant legal debate in recent years, previously culminating in the well-publicised judgment of Morgan J in Lloyds Banking Group Pensions Trustees Ltd -v- Lloyds Bank Plc [2018] EWHC 2839 (Ch) (Lloyds 1).
Section 92(1) of the Pensions Act 1995 (PA 1995) provides that a member’s entitlement or accrued right to a pension under a pension scheme cannot be forfeited. However, section 92(5) PA 1995 outlines an important exception, confirming that benefits can be forfeited where a claim is not made within six years of the date on which the pension becomes due.
These provisions often have to be considered alongside express forfeiture clauses in scheme documentation providing for limits on the scope of recovery.
These statutory provisions were considered by Morgan J at some length in Lloyds 1. Morgan J held that a claim by a beneficiary to receive late payment of arrears to be paid by the trustee out of the trust property would not fall within the scope of section 92 PA 1995, on the basis that these circumstances would instead form a claim to ‘recover trust property’ within the meaning of section 21(1)(b) of the Limitation Act 1980. In circumstances falling within section 21(1)(b), no limitation period will apply.
The claim
The Axminster Carpets case concerned a defined benefit occupational pension scheme in which the current trustee had been appointed in 2013. It had become apparent that a series of historic amendments regarding pension increases had not been validly made, the result being that sums previously paid did not satisfy members’ full entitlements and members were owed arrears.
The case considered the extent to which those members’ claims for underpayment were time barred and/or forfeited. Morgan J decided to consider and explore these issues afresh in the Axminster Carpets judgment (despite handing down the Lloyds 1 judgment only three years earlier). The key points arising from the judgment are explored below.
The judgment
Limitation
Morgan J reiterated the reasoning in Lloyds 1, ruling that no limitation period would apply to claims by a pension scheme beneficiary brought against a current scheme trustee seeking payment of arrears, as this would be an action to recover trust property within the meaning of section 21(1)(b) of the Limitation Act.
However, this could not be the case for claims against the predecessor trustee (ie prior to 2013), as the predecessor trustee would not be in possession of the trust property at the time the claim was brought.
Forfeiture
The court analysed two forfeiture clauses in the pension scheme documentation and held that only one of the two would operate as a valid forfeiture clause on the basis that the forfeiture clause would be required to directly deal with forfeiture of an entitlement to benefits.
It is now, therefore, clear from the judgment that the question of whether or not a scheme’s provisions permit forfeiture of unclaimed benefits will be decided on a case by case basis, in accordance with the specific drafting of the relevant provision.
Exercise of discretion
As is commonly the case, the forfeiture rules in this instance provided that the trustees could exercise their discretion in applying the sums in question. The court provided helpful clarification on how pension scheme trustees should exercise any discretion they may have in relation to scheme forfeiture rules, expanding in some detail on the commentary provided in Lloyds 1.
It was confirmed that the ‘first reaction’ of a trustee where members are not at fault/had no reason to know they were being underpaid should be to pay arrears to members without delay. However, this is ultimately a question for the discretion of the trustees, and not for the court.
Interest
The judgment also touched upon the question of whether interest will be payable in claims for arrears by beneficiaries.
The court held that if a beneficiary claimed the arrears as part of a claim for equitable compensation for breach of trust, the Court would be permitted to award interest on that compensation. The appropriate rate was held to be 1% above base rate.
Comment
Axminster Carpets has now become the leading judgment dealing with matters of forfeiture and limitation in relation to claims for pensions arrears.
Although the judgment affirms a number of the conclusions already reached in Lloyds 1, it also provides crucial guidance on the operation of forfeiture clauses and the scope of trustees’ discretion in dealing with such clauses.
Any trustees faced with the question as to the payment of pensions arrears will be required to carefully consider the guidance provided in Axminster Carpets, particularly in the face of any perceived forfeiture clauses in the scheme documentation.
