The case of Smithson v Hamilton raised a common problem. In a lengthy Definitive Deed for what subsequently became the Siemens Fire Safety and Security (PFP) Pension Scheme, neither the trustees nor the employer had spotted that the early retirement rule allowed deferred members to take their pension without consent and unreduced from age 60. This was despite the fact that the normal retirement age for the scheme was 65.
The case was chiefly concerned with early retirement provisions which were said not to have been drafted in the intended manner. The High Court decided that the only way of correcting the situation was through rectification. Solutions based on establishing simply a mistake by the trustees (the rule in Hastings-Bass) or simply a mistake by the company (the rule in Gibbons v Mitchell), were found to be unacceptable.
This strict approach was in marked contrast with other cases where judges have been more inclined to resolve problems in the drafting of scheme documentation using these two rules. Leave to appeal was granted on this issue but in the short term, unless the other, more liberal decisions are preferred in subsequent cases, it will be harder to correct drafting errors.
There was potentially more bad news for employers in the suggestion that, where members would not be disadvantaged, it was no part of the trustees’ responsibility to check that the drafting reflected the employers’ wishes.
More encouraging from employers’ perspective were strong statements to the effect that decisions on scheme design were matters for them and not for the trustees. Also helpful, if followed in rectification cases, was a very pragmatic view of the degree of scrutiny trustees might give to complex scheme documentation when it has been reviewed by their advisers and other – perhaps more experienced – trustees.
Where scheme rules do not say what they were intended to say, one solution is to apply to the court for an order rectifying the scheme, but clear evidence to support such a claim is needed. The deed in question dated back to 1992. Not all of the individuals from that time were available to give evidence to support that approach. Rectification was not, therefore, the obvious remedy for this case.
In recent years, the courts have found other ways to resolve these sorts of mistake. Where satisfied that trustees have failed to take into account all relevant considerations, or have taken account of irrelevant considerations, thereby giving a benefit that was not intended, the courts have decided that they can set aside the resulting decision (the rule in Hastings-Bass). Where the employer confers an unintended benefit, the courts have provided a similar solution for the company’s mistake (the rule in Gibbons v Mitchell). The company and the trustees sought to use these remedies to solve the problem.
For the members of the scheme it was argued that the mistake lay not with the early retirement rule for deferred members but with the definition of the normal retirement age. The intention, it was said, was that the normal retirement age for the scheme should have been 60 for everyone.
Both the counter-claim and the claims made by the trustees and the employer were dismissed.
The counter-claim failed on the facts. The judge decided that the documentation had been properly considered by the trustees and that there was no possibility of the company adopting any normal retirement age other than 65.
The judge’s decision on the claim was more interesting. He held:
- Where what was needed to solve a problem arising from a drafting error was not the annulment of a particular provision but its alteration, the only proper remedy was rectification.
- Issues of scheme design were matters for the employer, not the trustee. There was therefore no decision for the trustees to make. If the trustees did have a role, where members would not be disadvantaged, it was no part of the trustees’ responsibility to consider whether the drafting reflected the employers’ wishes. Under either analysis there was, therefore, no trustee decision on which the rule in Hastings-Bass could ‘bite’.
- The company could not rely on its mistake because the establishment of the pension scheme was more akin to a contract agreed between two parties. Such contracts could only be set aside where the effect of the mistake was to make the contract essentially different from what it was believed to be. The characteristics of the pension scheme were not so altered as to satisfy this test. The rules were still those of a pension scheme, it was just a more expensive one from the employer’s perspective.
The judge’s unwillingness to allow the claimants to choose between alternate remedies was a significant change from the stance taken by the courts in a number of recent cases. Since the potential difficulties with claims for rectification emerged after the Lansing Linde case in 1999, the courts have been more willing to allow the rule in Hastings-Bass and the rule in Gibbons v Mitchell to be used as a means of overcoming those difficulties. This liberalisation was not without its critics but a case in 2005 suggested that the more liberal approach was going to prevail. Smithson is a strong reassertion of the older, stricter approach.
As a first instance decision, the Smithson case need not necessarily be followed in other cases and subsequent cases could see judges reasserting the more liberal view. Some of the more liberal decisions involved judges with considerable experience in pensions, including some who are now in the Court of Appeal. In addition, in other areas of the law, the choice between alternate remedies is permitted, even though claimants might make that choice because one remedy is perceived as being ‘easier’ to obtain than another. Arguments like these could justify the courts in taking a different approach from that followed in Smithson. Until that time, or until the Smithson decision is successfully appealed (leave having been granted) employers and trustees will have to be advised that it will be potentially harder to correct drafting errors where rectification is not available than it has been in recent years.
Also of interest are the judge’s views on what might be expected of trustees when reviewing complex scheme documentation. One of the difficulties with the rectification remedy stems from the very high degree of scrutiny of scheme documentation that case law in that area seems to imply.
In Smithson the judge saw nothing wrong in trustees delegating liaison between themselves and specialist advisers to one or more of their number, relying on them to confirm that the documentation, once finalised, was suitable for signature. Indeed, the judge went so far as to say that it would be unrealistic to expect a greater degree of individual scrutiny by trustees. If this approach were to be adopted in the context of a rectification claim, it could go some way to mitigating the consequences of a stricter approach to the alternate remedies trustees and companies have previously had for correcting drafting mistakes.
Finally, the judge made a number of observations about scheme design that could have implications not just for cases involving mistakes in the drafting of scheme documentation. Scheme design, he considered, was a matter for the employer and not for trustees. Trustees were obliged to ensure that an acceptable scheme was set up providing the benefits members expected. Although trustees could draw possible errors in benefit design to the company’s attention, it was not part of their job to do so. It is not clear that the trenchant terms in which the decision is expressed is wholly consistent with other cases in this area. For employers currently negotiating changes in benefit structure or mergers, these passages in the judgment will merit careful consideration. Employers are likely to be encouraged by the autonomy the judgment gives them on matters of scheme design. For trustees and their advisers, the judgment would appear to cut down some of the responsibilities they might have expected to have when considering new or revised scheme documentation.