The Axminster Twist: Forfeiture, Limitation and Interest

A key case for all trustees which addressed whether claims by members for underpayments were time barred and/or forfeited under the scheme’s rules

20 August 2021

On 17 June 2021, Mr Justice Morgan handed down his judgment in Punter Southall Governance Services Ltd v Hazlett. This case concerned the Axminster Carpets Group Retirement Benefits Plan, a scheme which was in a PPF assessment period following the insolvency of both employers. 

The claim was brought by the professional trustee who, when appointed in 2013, suspected that scheme amendments regarding pension increases had not been validly made. Some of the amendments lacked the actuarial confirmation required by section 37 Pension Schemes Act 1993 (which restricts alterations to the rules of a contracted-out scheme). Despite initial expectations that the s37 issue would be the main point of interest in the case, the question of whether a failure to obtain that confirmation renders an amendment ineffective was not considered by the Court as the issue was compromised between the parties and the court was only asked to approve that compromise. That question, therefore, remains unanswered for now.

The trustee sought the Court’s view as to the validity of the past decisions made in relation to pension increases, but of more general relevance to all trustees, it addressed whether members’ claims for underpayment of benefits were time barred and/or forfeited under the particular rules of the Axminster scheme. In addition, the case provides useful guidance to trustees when exercising their discretion whether to forfeit benefits and also considered what interest should be paid on any arrears due.

Who should read this update?

How to rectify past underpayments for members is a common issue for all pension trustees and their advisers, particularly in the context of ongoing exercises in relation to GMP rectification and GMP equalisation. The principles set out in this case will, therefore, be of relevance to all those involved in managing and administering occupational pension schemes. In the remainder of this article, we examine the court’s analysis and what it means for trustees.

Forfeiture

The court analysed two forfeiture clauses - one in the scheme’s 1992 Trust Deed and Rules and one in the scheme’s 2001 Trust Deed and Rules.

The 1992 provision enabled the trustee, at its discretion, to apply monies payable but not claimed within six years in various ways. The court held that this clause was not a forfeiture clause as it did not contain wording that expressly referred to forfeiture of arrears of pension. Similarly, the clause did not contain any wording which operated as a time-bar on claims for payment of arrears. Instead, the court held that the drafting looked to address orphaned money for missing beneficiaries.

The 2001 provision, however, did operate as a forfeiture clause because it contained express wording dealing with forfeiture of unclaimed benefits by providing for benefits to be ‘forfeited’ where a member 'fails to claim a benefit within six years of its becoming due.' The court conducted a detailed analysis of the drafting, which demonstrates that each clause should be examined carefully based on the precise wording used. For example, the court concluded that the word 'benefit' referred to the sum which is payable on a certain date, whether it is a lump sum or instalment of pension. The reference to 'a benefit' is not a reference to the wider right to a pension from retirement. The result is that to classify as a claim, a beneficiary must distinctly request payment of their pension arrears - to request payment of their pension (as they understand it) is not enough.

The court also considered whether the introduction of the 2001 forfeiture clause was invalid because it offended a restriction in the scheme’s amendment power. The amendment power prevented the trustees from making an amendment 'which would diminish the benefits already accrued'. The court held that the amendment to introduce the forfeiture rule did not did not 'diminish' accrued benefits as the rule only applied where the beneficiary failed to claim their benefits within six years of them becoming due. It was not possible to say that this would happen at the time the rule was introduced. There remains a question as to whether the court would have reached a different conclusion if the restriction prevented making an amendment 'which would or might diminish benefits already accrued'. The analysis highlights the importance of seeking advice on the interpretation of individual scheme provisions.

Discretion

As is common in forfeiture rules, the 2001 provision gave the trustees discretion to apply any benefits forfeited in various ways as they saw fit, including a discretion to make the payment to the member. The court gave trustees some helpful guidance when deciding how such a discretion should be exercised. It held that where members have not specifically claimed the arrears (perhaps because they are unaware that they have been underpaid), the starting point should be for trustees to make good the underpayment without further delay unless there are other considerations which override that approach.

The judge approved all of the following as relevant factors that the trustees should take into account:

  • how the situation had arisen and the consequences of the discretion being exercised or not (in this case, the consequence would be members losing something of real value to them)
  • absence of fault on the part of the beneficiaries or the presence of fault on the part of the trustees
  • whether the scheme is in a PPF assessment period
  • that a rational and proportionate response is required in relation to administrative difficulties in attempts to pay the arrears
  • the trustee could exercise its discretion in relation to a part of the benefit, even if not in relation to all.

Limitation

The court was asked to address whether a beneficiary’s claim to pension arrears was time-barred. Upholding the decision reached in Lloyds Banking Group Pension Trustees Ltd v Lloyds Bank plc, Mr Justice Morgan held that no limitation period under the Limitation Act 1980 (the 'LA1980') applies to beneficiaries who are claiming pension arrears.

However, in what we consider to be the Axminster twist, Mr Justice Morgan considered that the position may differ depending on the type of claim brought by the member. A claim for arrears can either be expressed as a claim to an account together with an order for payment of all sums due on the taking of the account and/or as a claim for compensation for breach of trust, the breach of trust being the trustees’ failure to pay the correct pension when it fell due. The court held that if expressed as a claim to an account, all arrears could be claimed and there was no need to prove fault on the part of the current trustee.

However, claims expressed as compensation for breach of trust (which have the added benefit of attracting interest or compensation for the member – see below) can only be made against the current trustee as they are in possession of the trust property within the meaning of section 21 of the LA1980. If the current trustee has underpaid even one instalment of pension, all arrears can be claimed as the trustee will have committed a breach of trust by underpaying benefits. However, if the current trustee did not commit a breach of trust (as it was the former trustee who underpaid benefits), members will not be able to claim against the current trustee. Furthermore, claims for breach of trust against the former trustees will be statute barred as they will longer be in possession of trust property and they will also be covered by a scheme’s exoneration provisions. This brings into question, therefore, whether employers will appoint a new trustee just before proceedings are commenced in an attempt to avoid successful claims for breach of trust.

Rate of interest on arrears

Unexpectedly, this turned out to be the most controversial aspect of the case. The parties involved had argued that either, as per Lloyds, interest at 1 per cent over the Bank of England base rate was payable on arrears or alternatively, no interest was payable. Case law is clear that interest should be paid on European causes of action such as GMP and Barber equalisation. However, whilst some of the Axminster arrears related to European causes of action, those relating to pension increases did not.

Prior to Axminster, as a general principle under English law, interest was not payable on account of arrears of an annuity unless there was evidence of misconduct or a scheme’s trust deed and rules expressly provides for interest on arrears. Both of these scenarios do not commonly arise in practice. Mr Justice Morgan cited the Court’s power to award interest in two contexts, being where an award is made for equitable compensation for breach of trust and where arrears remain unpaid when proceedings are commenced. There is an unresolved question as to what constitutes 'proceedings' in this context.

With regard to interest on claims for breach of trust, whilst the case confirmed that a court has power to award interest in these circumstances, it is unclear as to which arrears should attract interest. There are further unanswered questions as to whether the trustee must have committed a breach of trust and what that means – is a failure on the part of the trustee to pay the correct pension sufficient? Having considered the amounts of arrears due to members of the Axminster scheme both collectively and individually, the judge observed that the individual top ups due were, for the most part, small. As such, he concluded that it was appropriate to provide for interest at 1 per cent above base rate for all beneficiaries.

Whilst the above does not provide trustees with much needed clarity, we suspect that the pragmatic way forward will be for trustees to pay interest at 1 per cent above base for all arrears, irrespective of whether the arrears relate to an European or English cause of action, whether proceedings have been commenced and whether the trustees have committed a breach of trust. Such an approach is consistent with the approach taken by the Pensions Ombudsman who has statutory power to award interest on arrears and should help avoid litigating legal points that ultimately will not result in significant additional benefits for members.

Takeaways for trustee and their advisers

  • The judgment confirms that beneficiaries are not subject to a limitation period when claiming pension arrears from the current trustees. There are, however, difficulties in recovering arrears from former trustees.
  • When exercising a trustee discretion under a forfeiture rule, as with the exercise of all trustee discretions, an audit trail of the decision-making process should be kept and legal advice obtained where appropriate. This is particularly important when correcting underpayments following a GMP reconciliation and equalisation exercise or where there have been invalid scheme amendments affecting a number of members.
  • With regard to interest on arrears, a pragmatic and simple way forward would be for trustees to pay one per cent above base rate or, if higher, any rate provided for in a scheme’s trust deed and rules.

If you have any questions in relation to the issues raised in this article, please contact Richard Knight or a member of our pensions team.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions
  • Pensions Services
  • Pensions Legal Advice

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