Pensions legislation and case law update: the latest developments week ended 12 November
In this week’s digest we report on the latest rectification case involving the Mitchells & Butlers Pension Plan, the PPF 7800 Index funding position, the Government’s consultation response confirming the banning of flat fees on DC pension pots below £100, and the GMP Equalisation Working Group’s recently released briefing note on GMP reconciliation and changes of administrator.
Rectification judgment – Mitchells & Butlers
On 12 November 2021, the High Court handed down its judgment in the pension increase rectification case of Mitchells & Butlers Pensions Limited v Mitchells & Butlers Plc  EWHC. The decision means that, at this stage, Mitchells & Butlers Pensions Limited, the sole corporate trustee of the Mitchells & Butlers Pension Plan, has been successful in its claim for rectification of a change to the rules which altered the party who could determine the index to be selected for the increase of pensions.
The case concerned a change made in a definitive deed dated 24 July 1996 that switched a trustee power to select the index by which increases to pensions in payment should be determined to a power enabling the principal employer to decide the rate by which pensions in payment should be increased each year. This change was maintained in later deeds executed in 2002 and 2006.
Requirements of rectification
Rectification is an equitable remedy that can only be granted by the courts. It permits a claimant to retrospectively correct a mistake in a document so that it reflects what the parties at the time intended. For a successful claim the following needs to be demonstrated:
- that the parties had a common continuing intention (assessed subjectively) and that this existed at the time of execution of the instrument; but that
- by mistake, the instrument did not reflect that common intention.
The trustee's claim
The trustee's claim was that the amendment was made by mistake and, consequently, the 1996, 2002 and 2006 provisions should be rectified to reinsert the trustee power to select the index governing pension increases.
It also said that the removal of the trustee power and the inclusion of a new principal employer power was not validly made because effective actuarial consultation as required under the power of amendment had not taken place.
The 1996 alteration and beyond
The case involved evidence heard from some 16 witnesses and is unusual because it involved a claim against rather than by an employer and rectification of a provision which altered the balance of power in a scheme's rules, with the judge noting that the amendment represented a 'material shift in the balance of power'.
The judge found that it was clear that neither the trustee nor employer decision-makers intended to alter the pension increase provisions in the way they had been altered in 1996 – "There was no intention to change anything one way or the other". Instead, there was a 'common continuing intention' at that time to continue with the position as it was previously.
The judge also found that the mistake continued after 1996 – the 2002 deed decision-makers' subjective intention was that the 2002 deed did not make any changes to the position as they understood it to be, that the power was held by the trustee – and by means of the 2006 deed.
Mitchells & Butlers Plc defence – bona fide purchaser
Mitchells & Butlers Plc (M&B), which became the principal employer of the Plan in November 2003 following a reorganisation of the Six Continents group into two listed companies, mounted a rather unique defence to the trustee's claim. It argued that when it became the principal employer in 2003 it did so as a bona fide purchaser for value without notice. This is not a defence which has previously been raised in a pensions rectification case but has been applied in cases of interests in land (potentially because employers normally bring rather than defend rectification claims). This meant that it did so "free from any equitable claim for rectification in respect of the 1996 and 2002 Deeds" and, furthermore, that there was no actionable mistake as regards the 2006 deed.
The judge concluded that the power to substitute M&B as the principal employer did not relate to the sale of property or the transfer of rights. Instead it was intended to allow for a 'seamless transition from one entity' to another, including succession in respect of the 'benefits and burdens' that the position of principal employer holds. Taking on the obligations of being the principal employer, as M&B had, was designed to allow the trustee to be able to enforce its rights against the new principal employer in the same way as it had been able to do so against the old employer.
This meant that the doctrine was not applicable in the circumstances and M&B's use of the bona fide purchaser defence failed.
The position on the 2006 deed was slightly different in that M&B did not use the bona fide purchaser defence given it was already principal employer at that stage. Instead, it claimed that there was no rectifiable mistake because the intention had been to keep the pension increase provisions which contained the employer power. However, the judge agreed with the trustee that the 2006 drafting was a 'non-event' in that there was no discussion of pension increases, and a 'common continuing intention' remained that the pension increase index provision was held by the trustee.
The validity of the changes – actuarial consultation
Having noted that a consultation process "requires both consulter and consultee to appreciate the essential nature of the alteration or modification…on which consultation is required to be carried out", the judge concluded that neither the consulter nor the consultee had appreciated that there was a change at all. As such there could not have been valid consultation with the scheme actuary as required by the amendment power. Therefore, the 1996 alteration was invalid and for similar reasoning, so were the 2002 and 2006 changes.
The case also considered the 2002 and 2006 deeds from a Section 67 perspective. Section 67 of the Pensions Act 1995 prevents amendments being made which would detrimentally affect accrued rights unless certain conditions are met.
For different reasons (given the wording and requirements of Section 67 changed between the date of the 2002 and the 2006 deeds) the judge held that the requirements of Section 67 were not met.
In respect of the 2002 deed, the judge held that the Section 67 certificate provided by the scheme actuary was not binding because the actuary could not have asked himself the correct question (given the parties understood that no change had been made to the trustee held power) and if he had then the certificate would not have been granted.
The amendments made by the 2006 deed did not 'purport' to comply with the Section 67 requirements as they then were because it was understood that no detrimental modification which would trigger Section 67 considerations was being made.
This latest rectification case covers a wide range of issues and approaches matters from a couple of unusual perspectives (and in the case of the bona fide purchaser defence a unique one) with a claim being brought against rather than by an employer and rectification being used to address a mistake in a balance of power change. We will wait to see if M&B appeals the decision.
Latest PPF 7800 Index Report shows funding has decreased
The latest PPF 7800 index report setting out the estimated funding position on a section 179 basis as at the end of October 2021 of the eligible 5,318 DB schemes shows that:
- The aggregate surplus of these schemes decreased over the month to £103.2bn from a surplus of £108.8bn at the end of September 2021;
- The funding ratio decreased from 106.4% at the end of September 2021 to 105.9% at the end of October; and
- The deficit of the schemes in deficit increased to £118.2bn from £109.4bn at the end of September 2021.
Government confirms proposal to prohibit flat fees on DC pension pots below £100
In our 28 May 2021 insight we reported on the Government's plans to introduce a £100 de minimis amount below which the flat fee element of the combination charge on DC default pension pots could not be levied on members.
The DWP's 9 November 2021 response to its May 2021 consultation: permitted charges within DC pension schemes confirms that the Government will go ahead with this proposal, with regulations bringing in the changes as from 6 April 2022. The new requirements will only apply to those schemes that use a flat fee combination charge and only apply to those pots of £100 or less.
The consultation also looked at switching to a 'universal charging structure' for qualifying DC schemes used for auto-enrolment. This would replace the existing three permitted charging structures. The Government is still considering the responses received on this proposal, most of which opposed the change and will respond separately 'shortly'.
GMP Equalisation Working Group briefing note on GMP reconciliation and transitions
On 9 November 2021, the GMP Equalisation Working Group, chaired by PASA (the Pensions Administration Standards Association), published a new briefing note on the treatment of GMP reconciliation data during a transition to a new administrator. It considers how relevant records such as an appropriate audit trail, maintenance of records for the future, and a record of trustee decisions can be 'safely passed across' as part of the transition.
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