This insight considers the High Court decision of Mr Justice Morgan on forfeiture and limitation in relation to historic claims for pension arrears under the Axminster Carpets pension scheme.
In particular, it confirms that no limitation period applies, but that “failing to claim” includes situations where the member is unaware that his or her pension is being underpaid due to an error in its calculation. The case highlights that forfeiture provisions are scheme-specific and provides important guidance on how trustees should apply such provisions where they contain an element of trustee discretion.
Mr Justice Morgan has delivered another important decision on the application of forfeiture provisions and limitation periods to historic claims for underpaid benefits, in this case arrears for underpaid pension increases.
The judgment, in the case of Punter Southall Governance Services Limited (as Trustee of the Axminster Carpets Group Retirement Benefits Plan (the Plan) v Jonathan Hazlett (as a representative defendant), confirms that no limitation period will apply, but that forfeiture provisions will be scheme-specific and provides important guidance on how trustees should apply such provisions.
This latest High Court judgment follows the 2018 Lloyds 1 case (see our insight update for further information) in which Mr Justice Morgan held that the right to arrears which had arisen as a result of a member’s benefits being wrongly calculated and underpaid could be forfeit under the scheme rules which were considered in the case if they were not claimed within a six year period after becoming due. He also held that no statutory limitation period applies when paying members arrears of their benefits.
(As a general rule, under Section 92 of the Pensions Act 1995 (Section 92), a member's entitlement or accrued right to a pension under an occupational pension scheme cannot be forfeited unless an exception applies, one such exception being a scheme's rules permitting or requiring forfeiture where a member fails to claim their benefits within six years of the date on which they became due.)
Background to the Axminster case
In Axminster, the trustee of the Plan had asked the High Court to approve a compromise of pension increase issues that arose due to concerns about the validity and effect of documents dealing with pension increases, and to determine issues as to limitation, forfeiture of unpaid pensions and interest relating to arrears owed to members as a result.
The Judge considered whether two scheme provisions were forfeiture provisions. He decided that one, Clause 25 of a 1992 Deed, did not operate as a forfeiture clause because it did not directly deal with the forfeiture of an entitlement to benefit arrears.
It allowed the Trustee to use unclaimed moneys for other purposes but did not say that the member ceased to be entitled to the benefits.
However, a replacement scheme provision (Rule 36 of a 2001 Deed) was held to operate as a forfeiture provision permitted under Section 92.
In his judgment, Mr Justice Morgan confirmed that references to "a benefit" in Rule 36 were to the sum which was unpaid on the date it fell due, rather than the right to a pension during a member's lifetime. The unpaid element of any instalment which had been underpaid on the day it fell due was the relevant "benefit" for the purposes of forfeiture.
He also confirmed that the "claim" must be made by the beneficiary within the period of six years from the due date of payment and that decisions made by members before their retirements came into payment were not sufficient to meet the requirements for a making a claim for the purposes of Rule 36.
The word "fails" meant that a claim was not made within the six-year period and did not require the trustee to demonstrate that the beneficiary was at fault in some manner. Although a beneficiary could not be expected to know that they had been underpaid, that did not change the meaning of "fails" in this context.
Was Rule 36 validly introduced?
The Judge looked at whether the amendment of the Plan rules to introduce Rule 36 which allowed forfeiture for the first time in the Plan was valid. The Plan's amendment provisions prevented any amendment or addition which "would diminish the benefits…already accrued…under the Plan…". He decided that the introduction of Rule 36 was not a change which would "diminish the benefits…already accrued"; the entitlement to a benefit amount was not diminished and, as Rule 36 only resulted in forfeiture where a beneficiary failed to make a claim, although this might happen it could not be said that it "would" happen.
Relevant factors for the exercise of discretion
Mr Justice Morgan considered what factors were relevant when the trustee considered how it should exercise its discretion to apply unclaimed arrears under Rule 36 (which included paying them to the beneficiary whose benefits might otherwise be forfeited). The Judge considered that how the position had arisen, and the effects of the discretion being applied or not applied were relevant.
Lack of knowledge and first reaction
Mr Justice Morgan noted that the beneficiary’s lack of knowledge would be a relevant factor for a trustee to take into account when deciding whether to pay otherwise forfeited benefits. Although in this case Rule 36 provided for automatic forfeiture of the unclaimed arrears, the High Court found that "the first reaction" of the trustee should be to exercise its discretion to pay the arrears where the beneficiaries were unaware that they had been underpaid and were consequently "not in any sense to be criticised". (Nevertheless, Rule 36 did not require such a reaction and there could be other considerations that would counter this.)
Breach of trust
In relation to this case, the beginning point was that the position arose because the trustee did not do what it should have done, and the trustee should proceed on the basis that the beneficiaries were always entitled to the rights determined by the compromise – in essence the trustee not providing payments in accordance with those rights was a breach of trust.
Other relevant factors – administrative difficulties and PPF assessment period
Overall, the combination of these factors (entitlement to the benefits in arrears, lack of knowledge and breach of trust) was a "powerful reason" for the exercise of the Rule 36 discretion but that, balanced against this, were matters such as administrative difficulties in exercising the power. The Judge could not conclude that any decision which did not mean that the Rule 36 discretion was exercised for each beneficiary for each year of underpayment would be perverse and a decision that no reasonable trustee could reach.
Other potentially relevant factors could include the fact that the Plan was in an assessment period for transfer to the Pension Protection Fund.
Mr Justice Morgan reaffirmed his judgment from the Lloyds 1 case that limitation periods do not apply to claims for arrears of pension benefits because no limitation period applies to an action by a beneficiary under a trust to recover trust property which is in the possession of the trustee (Section 21(1)(b), Limitation Act 1980). However, he did confirm that claims could not be brought against predecessor trustees as the predecessor trustee would no longer be in possession of the trust property at the time the claim was brought.
It was noted that interest could be awarded in respect of a claim on account against the current trustee (one of the ways in which a claim for arrears could be framed) but not if the debt or damages had been paid before the action was brought.
Another way in which a claim could be brought would be a claim against the trustee for equitable compensation for breach of trust. The Court could award interest on such compensation (although a claim against a former trustee for breach of trust was subject to a six-year time limit – an exception to the 'no limitation period' point discussed above).
The appropriate interest rate was 1% above base rate.