The High Court has further clarified the procedure for paying arrears when a member has not claimed a back payment within the usual six-year period, confirming that scheme rules will determine whether trustees have discretion as to whether those benefits have been forfeited.
The judgment in the case of Axminster Carpets, issued by Mr Justice Morgan, builds on that handed down in the earlier Lloyds judgment in confirming that no limitation generally applies to beneficiaries seeking to recover arrears.
While legislation allows benefits that have been unclaimed for six years to be forfeited, Morgan stated that scheme rules will take precedence in any dispute, with trustees having discretion as to whether to forfeit said benefits.
Ultimately, it seems likely that there will be a ‘rules lottery’ on these issues rather than a single industry practice, unless trustees can exercise their discretionary powers
John Cormell, Barnett Waddingham
Where trustees do have discretion, a number of factors must be borne in mind when deciding not to forfeit benefits. These include a lack of awareness by the member of the benefits to which they are entitled, and the absence of fault on the part of the beneficiary.
Question of limitations has been ‘definitively resolved’
Ian Gordon, head of pensions disputes at Gowling WLG, said that the Axminster Carpets case “is now the leading judgment on this area of practice”.
Though there is still a possibility that the Court of Appeal will be called to issue its own judgment, he said that “the issue of whether claims for arrears fall within section 21(1)(b) of the Limitation Act, to which no limitation period applies, appears to have been definitively resolved”.
Though the earlier Lloyds judgment covered much of this area, the judge in this case addressed several additional points, not least whether the introduction of a forfeiture clause “might contravene the fetter in a scheme’s amendment power”, Gordon continued.
“Usefully, [the judge] also considered what factors a trustee might take into account in considering how to exercise any discretion given to it under a scheme’s forfeiture rules.”
As with pension increase cases arising where a scheme attempts to change from the retail price index to the consumer price index, Gordon said that “the devil will be in the detail and care needs to be taken in construing the precise wording of scheme rules to determine whether they permit or require forfeiture”.
Importantly, the judgment in the Axminster Carpets case “confirms that the usual scenario of a member not being responsible for having been underpaid, and not being to blame in not claiming arrears earlier, is likely to be irrelevant in deciding whether a clause is a forfeiture provision”, he added.
However, the judge “indicated that it would be significant when it comes to whether a discretionary power to forfeit should be exercised, an indication he did not give in Lloyds”.
Judgment gives rise to a ‘rules lottery’
John Cormell, principal and head of guaranteed minimum pension equalisation at Barnett Waddingham, said: “The Axminster judgment was eagerly awaited by GMP equalisation practitioners, who were hoping that some of the points of detail not covered in the Lloyds case would now be addressed.”
GMP ruling implementation will be ‘Herculean’ task for schemes
A ruling on guaranteed minimum pension equalisation will see trustees having to revisit 30 years of pension transfers, which will be a “Herculean” task for administration teams amid missing data and poorly kept records.
He noted that the “judgment will be a boon to the lawyers, focusing on the need to consider specific scheme rules on whether forfeiture and limitation provisions will prevent members claiming their back payments from the scheme trustees”.
Cormell continued: “Ultimately, it seems likely that there will be a ‘rules lottery’ on these issues rather than a single industry practice, unless trustees can exercise their discretionary powers.
“The judgment will be useful for schemes in wind-up, which are desperate for clarity on what will happen if they cannot find data to equalise past transfers out.”
