It is often the case that, when something goes wrong, the person responsible for it will seek ways to explain why, in fact, there is no problem (or failing which, why the problem is not their fault). Various court judgments over the past few years have given the "guilty party" cause to hope that they might be able to deploy these judgments as their "get out of jail free card" (or probably in reality, "get out of jail for less" card). As such, we are starting to see cases that test the limits of the earlier judgments, to see just how far they might be pushed. In this article, we identify the lessons that can be learned from those cases and highlight other important points arising.
One high profile example of a door that had been opened by a previous case from many years ago1, but which is now barely ajar is that addressed in the Supreme Court's decision in Futter v HMRC, which we covered in our July 2013 edition of Pensions Pieces. The Supreme Court's decision firmly closed the door on the ability of trustees in most cases to say that, "had we not taken something into account that we should not have done or, if only we had taken into account something that we should have done, we would have taken a different decision, therefore, our original decision should be set aside so that we can do things properly this time". That was probably the ultimate get out of jail free card and, perhaps unsurprisingly, the Supreme Court decided that there are only very limited occasions on which it can be used.
Other cases have pushed open the door in the following ways:
- by suggesting a more liberal attitude to interpreting documents, with a greater willingness to read them in accordance with what the parties apparently meant, rather than just applying the most obvious meaning of the words actually used. The classic exposition of what one must consider, when seeking to ascertain the meaning of a document comes from Investors Compensation Scheme v West Bromwich Building Society. In that case, Lord Hoffman described the process as one of ascertaining what meaning the document would convey to a reasonable person who was in possession of all the background materials that would have been available to the parties at the time they entered into the document. Subsequent cases such asChartbrook Limited v Persimmon Homes Limited and Rainy Sky S.A. v Kookmin Bank have shown that this process can even lead to a court effectively re-writing a provision where it is clear that "something must have gone wrong with the language";
- in other cases where it has not proved possible for courts to interpret a document to mean something contended for by the parties, attempts have been made to "rectify" the document – essentially, for the court to order that the document should be read in accordance with what the parties actually agreed, even though the document does not reflect that agreement. There have been various cases where such actions have been successful, including (for active members) inIBM United Kingdom Pensions Trust v IBM United Kingdom Holdings Limited (as covered in our February 2013 edition of Pensions Pieces). One of the areas that is just starting to be explored in court judgments is quite where the boundary lies between when a court will be prepared to "interpret" a document in a particular way and when it will not be prepared to do so, such that an application for rectification might have to be made (which carries a heavier evidential burden);
- use of "equitable maxims" (basically, loose principles applied to see justice done in a particular case). In HR Trustees v Wembley, the judge applied the maxim "equity regards that as done which ought to have been done" – in other words, the court will assume that, something that was not done but which should have been done, has in fact been done. As a potential get out of jail free card that rivals – and in some ways is a broader version of – that noted above which the Supreme Court closed down in Futter v HMRC; and
- there is case law from the 1990s that indicates that, where a person intends to achieve a particular objective and has the power to do so, a purported attempt to achieve that objective will work, even if they do not seemingly use the correct power.
In the rest of this article, I consider two recent court decisions and what they mean for those possible "ways out" when things have gone wrong. In short, they demonstrate that, whilst sometimes there might be a "back door" that can be used to salvage a document where something has gone wrong in recording what the parties agreed, that cannot be guaranteed and there is no substitute for spending the time and the money needed to get it right first time.
The first case is Christopher James Briggs v Gleeds (Head Office) (a firm)  EWHC 1178 (Ch), which is a decision of the High Court.
The context for the issues arising is a pension scheme operated by a partnership (Gleeds), which was established in 1974 and, as you would expect, amended significantly over time. Those amendments included the introduction of a money purchase section for new joiners, a later cessation of all future final salary accrual and purported breaking of the link to future pay rises, and changes to eligibility for membership of the scheme. Questions were raised over all of those amendments and more.
The reason for the questions is that many of the amendments were made by deed, and those deeds executed after the coming into force on 1 August 1990 of section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 did not comply with the requirements of that sub-section – specifically, the signatures of the partners in Gleeds were not witnessed when they signed the deeds, as they should have been.
In short, things did not go well for Gleeds, as their deeds were held to be ineffective and, in large part (but not completely) attempts to salvage some of their attempted changes by other means also failed. This apparently resulted in tens of millions of pounds being added to the liabilities under the pension scheme that the Gleeds partners have to fund.
The other case is Honda Motor Europe Limited v Tony Powell  EWCA CIV 437, which is a decision of the Court of Appeal.
Honda concerned a group company that intended to join Honda's UK final salary pension scheme, but with different (lesser) benefits to be provided for its employees. As part of this, the group company signed a "deed of adherence" to join the pension scheme, to which the principal employer and trustees were also party.
Clause 1 of the deed provided that the principal employer with the consent of the trustees "extends the benefits of the scheme" to the eligible employees and directors of the relevant group company. However, the deed did not also provide – or at least, not in explicit terms – that the scheme was being amended to provide for the lesser benefits that the parties intended to make available to the employees of the relevant group company.
Moreover, there was not even any reference to the announcement that had been sent to employees of the relevant company summarising the benefits that were to be provided to them, let alone was there any copy of that announcement attached to the deed.
Therefore, the key question was, which benefits had been extended to the eligible employees and directors of the relevant group company: those already available under the scheme or those that the parties had actually intended to provide?
The short answer is, it was the benefits already available under the scheme. Further, as the scheme rules were not amended to document the lower level of benefits until some 12 years later, the scheme had to provide the existing (better) benefits for service until that later date.
The judgment reports that the estimated cost of having to provide the more generous benefits for the members concerned for the 12 years between when the group company started to participate and when the rules were actually amended is around £47m on the scheme's ongoing basis and around £70m on a discontinuance basis.
There are a number of lessons that can be learned from these cases, which have a wide application – in terms of points to note for all when making changes, and the limits of the principles that can be called on to help, for the (many) others who have found that they, too, have issues with how their intentions in relation to their pension scheme have been documented.
- Honda makes clear that there are limits to how far a court will go in interpreting words used in a document to accord with what the parties' "underlying intentions" were. The ordinary meaning of extending the benefits of the scheme was clearly that the benefits the scheme provides for would be made available to the employees concerned, with those benefits being as set out in the scheme's trust deed and rules. Further, background papers recording what happened in the time leading up to the participation of the new employer gave the impression that the employer joining the scheme and the amendment of the scheme to provide for different benefits did not necessarily have to happen at the same time or by the same document. Therefore, the background materials available to the parties at the time the deed was entered into will not have lead a reasonable reader to understand that the deed of adherence was also amending the scheme rules to provide for the intended different benefits. So, the lesson is to take care to ensure that any document clearly addresses all the actions that the parties have agreed to take, as a court will not readily read into a document any action that would not be apparent to a reasonable reader of it.
- The employers in Honda indicated that if the Court did not agree that the deed of adherence should be interpreted in the manner they put forward (i.e. so as also to include an amendment providing for the intended lesser benefits) they may bring a separate action to ask the court to rectify the deed to that end. It is clear from the Court's judgment that it considered rectification to be the right remedy, if any, and of the decision to delay that action, Lewison LJ said "In retrospect that was an unfortunate decision.
" The lesson is, if you are on the back foot in trying to establish that a document does what you meant, it is often best to use all the arguments reasonably available to you to convince others that it achieved that result.
- In Gleeds, the judge made clear that the equitable maxim of "equity regards that as done which ought to have been done" is of limited application and closes the Pandora's box seemingly opened by the judgment of Vos J in HR Trustees Limited v Wembley Plc.
The argument being made in Gleeds was that, even though no "declaration" had been made – as was required by the scheme's amendment power in addition to a deed - the judge should treat declarations as having been made.
In that regard, Newey J notes the following important point in Gleeds about Vos J's judgment in Wembley:
"It is also noteworthy that Vos J's reasoning depended on the fact that the trustees had becomeobliged to make a declaration. Had they merely had a discretion to do so, Vos J would, as I understand it, have considered that there was no question of the equitable maxim applying.
" The Court of Appeal in Honda formed the same view, albeit that their decision was made on other grounds, so this aspect of their judgment is not binding.
Newey J went on to say that "my own view is that the trustee should similarly be treated as having done what it ought to have done only in favour of someone who would have been in the position to enforce the obligation. It follows, as it seems to me, that pension trustees should not be taken to have made amendments against the interests of the scheme's members merely on the (unrealistic) basis that the members could have compelled them to do so".
The lesson is simply to do everything properly, in accordance with any requirements of your scheme's governing documents, as the court will only "fill in the gaps" and treat something as having been done when it wasn't in limited circumstances.
There is a limit as to how far one can use the principles arising out of the 1990s cases of Davis v Richards & Wallington Industries Limited and LRT Pension Fund Trustee Co Limited v Hatt. In those cases, the High Court held that, where the parties had clearly intended to achieve a particular result but did not refer to an enabling power, it will effectively treat the parties as having used any available power to that end, unless it is clear that they did not intend to use that power.
In Gleeds, counsel for the members had been seeking to argue that these principles could be used to save the award of a particular level of pension increases, even though that was provided for in a definitive deed that was not validly executed (for the reasons explained above). Counsel argued that the same result in relation to pension increases as had been attempted through exercise of the scheme's amendment power, by purported execution of a new definitive deed and rules, had actually been achieved by another route. Specifically, a prior (valid) definitive deed and rules included power for higher increases to be made and did not need this to be effected by deed, so the fact that the new definitive deed and rules was not validly executed (and so was not effective generally) did not prevent the new increases provision under it from taking effect.
The judge did not accept that argument. The application of the principle in the earlier cases noted above resulted in the entirety of what the relevant decision-maker was trying to achieve being implemented. Here, counsel was seeking to invoke the principle to allow only one particular change to stand in isolation from others, and the judge did not consider that it could be used to "cherry pick" in that way and give effect to a partial result.
The lesson is to understand what powers you have to undertake each particular desired action and then use those powers properly, as the mere existence of a valid power might not always be enough to save any given action.
Other key points
There are three other important points arising out of the judgment in Gleeds that should be noted.
The first concerns the use of contracts to agree things directly with employees, on the basis that this will then override whatever contrary position is set out in the scheme's trust deed and rules. This has become an increasingly common practice.
Gleeds demonstrates that any agreement of that kind must be clearly framed as a contract between the employer and an employee to provide for something different from that set out in the scheme's governing documentation, with routine scheme membership forms or similar usually not sufficing.
There is a related point arising out of section 91 of the Pensions Act 1995. That section prevents members from surrendering their pension rights, save in certain limited respects.
It is now clear – at least at High Court level, although the point may yet be challenged in the Court of Appeal – that employees can agree with their employers that some or all of any future pay rises will not be pensionable (at least so long as doing so does not breach the employer's duty of good faith – see our article on IBM in this edition of Pension Pieces).
There may in future be cases as to whether other aspects of benefit provision under a pension scheme can equally be given up by contractual agreement.
Finally, we now have a clear court judgment on one particular aspect of a common restriction in pension scheme amendment powers.
Many pension schemes include restrictions preventing adverse changes from being made in relation to rights that have already been built up. Each scheme must be considered on its own terms. Nevertheless, it has long been clear from the case of Re Courage Group Pension Scheme and others that have followed it, that references to benefits "secured" by contributions already made will prevent adverse changes not only to matters "purely in the past", such as the rate at which the pension accrued, but also changes that have an element of future action about them, but which affect the value of benefits already earned – in particular, whether changes can be made that prevent any future rises in pensionable pay from being taken into account (hence the increasingly common use of contracts to that end noted above).
However, there has been a question as to whether, if the amendment power instead refers to benefits that have already "accrued", the answer is the same.
It is not the same under the statutory protection provided for by section 67 of the Pensions Act 1995. That is because the statutory provisions expressly state that an active member is treated as having opted out of pensionable service, so "breaking the link" to any future rises in pay. Based on Gleeds, the same effect cannot be read into the use of "accrued" under a scheme's rules as a matter of course. Instead, one has to consider the rules of any given scheme to assess if there is anything about them that could result in those particular rules being read in that way, which wasn't the case in Gleeds (so that, for the Gleeds scheme, the restrictions protecting "accrued" benefits prevented any amendment being made to "break the link" to future pay rises).