Pensions cases 2005

United Kingdom

Trustees of the Saffil Pension Scheme v Curzon (High Court), 2 March 2005

This was an appeal by the trustees to the High Court against a decision by the Pensions Ombudsman to grant an incapacity pension to a member which they had declined.

The test under the rules for an incapacity pension was whether the member had left employment by reason of permanent incapacity arising from physical injury or ill health. The member had a back injury. The only way he could resume his normal job was if he had an operation. However, due to the member being “seriously obese” the operation would be unsafe.

Although there was medical evidence which made several references to the member’s obesity, it did not do so in the context of saying that he could cure it himself and thereby take a critical step towards ending his incapacity. The Ombudsman was therefore right to conclude that the trustees had come to a perverse decision unsubstantiated by the evidence. The Ombudsman had acted within his powers in deciding to grant the pension rather than remitting the matter back to the trustees. The Ombudsman had the statutory power under the Pension Schemes Act 1993 to direct any person responsible for the management of the scheme to take such steps as he might specify in his determination. While neither the Ombudsman nor the court should substitute their own judgment for that of the trustees, there was an exception where the trustee’s decision was perverse (as here).

Furthermore, it was unsatisfactory for the trustees not to give reasons for their decision where the decision was one of fact.

Cornwall and Others v Newhaven Port & Properties Ltd (High Court), 14 April 2005

This was a claim for summary judgment by the trustees. The defendant (“D”) was an employer in a multi-employer pension scheme. On its withdrawal from the scheme, a scheme valuation was carried out and D was certified by the actuary as owing a debt under Section 75 Pensions Act 1995. This was assessed as 16.5% of the scheme’s overall deficit. D challenged the certificate and apportionment and the trustees sought summary judgment.

The court held that, in principle, the parties were bound by the certificate and opinion of the actuary in calculating the amount of debt. In respect of the deficiency calculation, given that the legislation entrusted the calculation to the scheme actuary and the methodology was prescribed, it was reasonable to infer that Parliament had intended the parties to be bound. The apportionment calculation was said to be more vulnerable to attack (presumably where there was, say, manifest error). However, in this case, there was no evidence to suggest that the wrong methodology had been used. D had no real prospect of success, and the trustees were entitled to judgment.

Re Phoenix Venture Holdings Ltd (Company No 2692 of 2005) (High Court), 20 May 2005

The principal employer of the MG Rover Group pension scheme went into administration and the scheme was put into winding-up by the sole trustee. When the scheme had entered winding-up, a debt of approximately £200,000 was attributable to Phoenix, one of the participating employers, pursuant to Section 75 Pensions Act 1995. On the same day as the scheme was placed into winding-up the trustee executed a deed of amendment which purported to give the trustee the power to apportion the deficit amongst all employers in such shares as the trustee in its absolute discretion decided. Under this new power, on 28 April 2005 the trustee informed Phoenix that it must pay £15m towards the deficit and that all employers would be jointly and severally liable for the whole deficit. On 12 May 2005 the trustee resolved to apportion £25m of the deficit to Phoenix. It also reserved the right to apportion a further part of the deficit to Phoenix in the future, thereby increasing its potential liability for the deficit.

Phoenix disputed the trustee’s ability to apportion the debt in this way, arguing that the imposition of joint and several liability for the whole debt did not constitute apportionment at all. They said that the trustee’s action in executing the deed was not authorised and, furthermore, that the passing of the resolutions had not been a valid exercise of the trustee’s powers. They submitted that the trustee was bound to have regard to its interests (as a residual beneficiary) in exercising the power. Furthermore, it was submitted that the first resolution (which conferred the power “if a debt arises…when the scheme commences winding-up”) was ineffective, as no debt had arisen. The second resolution was therefore also void on this basis.

Phoenix was granted an injunction to prevent the trustee from either presenting a petition to wind it up or from obtaining an administration order in respect of it for so long as adequate security for its debt to the scheme was satisfied. The deed of amendment was authorised under the scheme rules. However, the first resolution was not a valid exercise of the trustee’s power of apportionment, since no debt had arisen under section 75 Pensions Act 1995 (it could only arise after winding-up had commenced and the amount of the debt had been ascertained by the actuary). In addition, the court held that “even if the power had arisen and there was subject matter on which it could operate, the creation of a joint and several liability for the whole was not an “apportionment” in “shares” amongst a class of six employers”. Accordingly, the second resolution was also invalid.

Drake Insurance Plc v MacDonald (High Court), 9 June 2005

The rectification of an amendment to the rules of a pension scheme will be ordered where the amendment failed to reflect the intention of the parties. In this case, the original rules required trustee and employer consent for early retirement, subject to an actuarial reduction. The rule was amended to remove the requirement for consent and the provision for actuarial reduction. The employer argued that it had not been its intention to bring about a right to an early retirement pension without actuarial reduction and sought rectification of the amendment by re-inserting the original words that provided for the actuarial reduction. The court granted the rectification. The documentation revealed that the employer’s intention had been to effect the removal of the requirement for consent by the employer and the trustees but only on the basis that a cost neutral actuarial reduction would continue to apply. The deletion of the provision for actuarial reduction resulted in a failure to reflect the intention of the parties. The evidence of parties’ intentions could come from subsequent and prior conduct showing the parties’ understanding of what the words meant.

Sieff v Fox (High Court), 23 June 2005

The Duke of Bedford made a settlement in 1971 creating separate trusts of several different funds. The trustees of the settlement made an appointment of assets in favour of Lord Howland relying on certain incorrect tax advice. The trustees claimed they would not have made the appointment if they knew the actual tax consequences and applied to have their actions set aside under the rule in Hastings Bass or because their decision was made under a fundamental misapprehension. If the claim succeeded the trustees hoped to avoid the liability to meet the substantial tax liabilities which had then arisen. It was claimed that, first, the trustees had failed to take into account tax charges, secondly, they were under a duty to consider these because of the impact on beneficiaries, thirdly, if they had been aware of the impact, they would not have made the appointment and finally, if this was the case, the trustees’ advisers were at fault in not making the trustees aware of these consequences of the proposed course of action.

The judge allowed the decision to be set aside under the principle in Re Hastings-Bass: “Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account”.

The judge set aside this appointment of assets as the trustees had a duty to take into account tax consequences, but failed to do so because of incorrect advice. The effect of their decision was not what they intended and they would not have acted as they did had they known the correct situation. The judge stated that the courts could limit the application of the rule in Hastings Bass by taking a reasonable view of what trustees ought to take into account, and adopting a critical approach to contentions that the trustees would have acted differently had they known the true facts.

Pinsent Curtis v Capital Cranfield Trustees Limited (Court of Appeal), 13 July 2005

A defined benefit scheme’s rules allowed the trustees to claim “appropriate” contributions from the employer until the end of the notice period leading to winding-up. The question was whether the contribution rule permitted the trustees to demand a buy-out debt from the employer before the expiry of that notice period. The Court of Appeal agreed with the first instance judge that the clear meaning of the rule was for the trustees to have the power to decide that the company should make a contribution to the Scheme to enable the benefits of the members to be funded on a winding-up. The liability of the company to make an appropriate contribution did not terminate until the end of the period of notice it had given.

This article first appeared in our Pensions update January 2006. To view this publication please click here to download it as a pdf in a new window.

For further information please contact:

Mark Kowalik, Solicitor at [email protected]