28 September 2022

The High Court handed has handed down a judgment in the case of CMG Pension Trustees Limited v CGI IT UK Limited, which adds to the line of cases on the operation of forfeiture provisions in scheme rules and whether they can be relied upon to limit the correction of past underpayments.

In his judgment, Leech J decided that not only must trustees carefully analyse the forfeiture rule in the current scheme rules but it may also be appropriate to look at previous versions of the rule and any admissible background. Where scheme rules contain a mandatory forfeiture clause and the employer and trustee are in dispute as to whether members’ benefits are forfeit, it opens up the prospect of future litigation as to how the rules should be applied. The case further highlights the need to obtain legal advice as to whether individual scheme rules permit forfeiture and, if so, whether the provision should be relied upon.

This case also re-opened the question of whether a determination of the Pensions Ombudsman is sufficient to recoup a disputed overpayment under section 91 (6) of the Pensions Act 1995 or whether a Court order is required. The Ombudsman is considering the judgment so further developments on this no doubt lie ahead.

Who should read this update?

How to rectify mistakes, correct past underpayments and recover member overpayments is a common issue for all pension trustees and their advisers. The principles set out in this case will, therefore, be of relevance to all those involved in sponsoring, managing and administering occupational pension schemes. In the remainder of this article, we take an in-depth look at the court’s analysis in the CMG case and what it means for trustees and sponsoring employers.

Underpayments and the forfeiture point

The recent line of forfeiture cases started with the 2018 GMP equalisation case of Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc or the Lloyds 1 case, in which Morgan J decided that the rules of the Lloyds Bank schemes permitted the forfeiture of unpaid arrears going back more than 6 years even though not all the rules contained the word “forfeiture”, one scheme rule provided for forfeiture at the trustees’ discretion, members could not possibly have known that they had been underpaid and the trustees had committed a breach of trust by failing to pay members the benefits to which they were legally entitled. However, when considering the same rules in the context of whether benefits transferred out of the scheme more than 6 years ago were also forfeit in the 2020 Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc or the Lloyds 3 case, Morgan J decided that top-ups to transfer payments were not ‘benefits’ and were, therefore, not forfeit under the rules.

The question came again before Morgan J in the High Court again in the 2021 case of Punter Southall Governance Services Ltd v Hazlett, or the Axminster Carpets case. In that case, the Court decided that one of the forfeiture clauses considered in the 2001 Trust Deed and Rules did operate as a forfeiture clause whereas the other, in the 1992 Trust Deed and Rules, did not. These cases highlight that careful analysis of a forfeiture rule is required to rely on it.

The CMG case stemmed from historic defective amendments intended to equalise the scheme’s normal retirement date and reduce the scheme’s accrual rate. Having concluded that the amendments had not taken effect from the intended date of the change, the trustees proceeded to rectify the underpayments made to members in full. The employer then brought a claim arguing that in doing so the trustees had failed to take account of Rule 5.11 which provided for the mandatory forfeiture of unclaimed benefits. The employer argued that the trustees should recoup the overpayments made from future payments of pension.

Rule 5.11 provided as follows:

“5.11 Benefit forfeiture

Notwithstanding Schedule II if a benefit or instalment of benefits is not claimed by or on behalf of the person entitled to the benefit or instalment in accordance with these Rules within 6 years of its date of payment it shall be retained by the Trustees for the purposes of the Scheme”.

The Trustee argued that Rule 5.11 was drafted in similar terms to Clause 25 of the 1992 Trust Deed and Rules in the Axminster case, which the court decided was not a forfeiture clause as it did not contain wording that expressly referred to forfeiture of arrears of pension. Further, the clause did not contain any wording which operated as a time-bar on claims for payment of arrears. Instead, the court in Axminster decided that the drafting looked to address orphaned money for missing beneficiaries. Clause 25 provided as follows:

"25 Power to apply unclaimed monies

Any monies payable out of the Plan and not claimed within six years from the date on which they were due to be paid may (at the Trustees' discretion) be applied:

  • in augmenting the benefits of those Members still in Service,
  • in reducing the Employer's contributions to the Plan, or
  • in payment of the expenses of the management and administration of the Plan."

However, in CMG, Leech J disagreed with the Trustee and decided that Rule 5.11 was a forfeiture clause despite the fact that, like Clause 25, the body of the rule did not expressly refer to forfeiture of arrears of pension, finding that the words “shall be retained by the Trustee for the purposes of the Scheme” have the same effect. In reaching this conclusion, he considered in particular the inclusion of the words “Notwithstanding Schedule II” at the start of the rule. Schedule II related to contracting out, paragraph 6 of which provided that if a Member or his spouse has a GMP, and such pension is to be forfeited in accordance with the Rules, any GMP could only be forfeited in the circumstances prescribed by regulations. Paragraph 6 only made sense if Rule 5.11 was intended to be a forfeiture clause – otherwise why include it?

Notwithstanding Leech J’s interpretation of Rule 5.11, he was also satisfied that this was a case where it was appropriate to consider previous versions of the rule, citing the 1997 case of National Grid Co Plc v Laws where it was accepted that provisions of a pension scheme are admissible as an aid to interpretation and are not excluded in the same way as drafts or negotiations of the parties, albeit that any such exercise must be done with caution. The CMG’s scheme’s first Definitive Deed and Rules contained a forfeiture rule which was headed as such and which contained the word “forfeiture” in the body of the clause. In the 1988 Rules, the drafting was changed to include the wording which eventually became Rule 5.11 of the Definitive Deed and Rules dated 29 November 2000. Every set of rules between 1988 and 2000 included the same substantive drafting, with the only reference to “forfeiture” being made in the rule heading. Leech J decided that the “archaeology” of the rule supported the conclusion that Rule 5.11 was intended to be a forfeiture rule.

With regard to the earlier cases of Lloyds 1, Lloyds 3 and Axminster, Leech J pointed out that the Court’s interpretation of one document is not binding authority in relation to the interpretation of another but that it may provide real assistance when faced with similar drafting. In CMG, the Court took “considerable comfort” from the Court’s interpretation of Rule 3 in Lloyds 1 in particular, which provided that “if any pension or benefit or any instalment remains unpaid to and unclaimed by the person to whom it is payable for a period of six years from the date it became payable, then the entitlement to it shall be extinguished and it shall be retained by the Trustees in the Fund”, noting the close analogy between the underlined words and Rule 5.11.

All in all, the Court’s approach in CMG highlights the need for trustees to seek specialist legal advice as to whether current and previous scheme rules permit forfeiture and, if so, whether the provision should be relied upon.

Overpayments and the recoupment point

Having concluded that underpayments of benefits made more than 6 years ago were forfeit, Leech J went on to consider the mechanics of recouping the overpayments made to members by the trustees. By way of reminder, where trustees wish to recover an overpayment, there are two ways to retrieve the money:

  • Bring a restitution claim for unjust enrichment: this involves asking the beneficiary to repay the overpayment, either as a lump sum or in instalments, and is the only available option for “not on admin” cases where the individual has transferred out or commuted their benefits under the scheme. If the member refuses to repay voluntarily, a claim can be made for unjust enrichment but the Limitation Act 1980 can prevent the recovery of an overpayment made more than 6 years before the trustees took action to recover it.
  • Bring a claim for equitable recoupment: this involves the trustees reducing future payments due to an existing member either by withholding future increases or by reducing pensions in payment. The Limitation Act 1980 does not apply to these types of claims. However, where the member disputes the amount/terms of recoupment or indeed whether any recoupment should be made at all, section 91 (6) of the Pensions Act 1995 arguably provides that no reduction of benefits should be made to a member’s benefits unless there has been an order of a competent court.

Since the High Court’s decision in the 2018 of Burgess v BIC UK Ltd there has been a question as to whether the Pensions Ombudsman is a competent court for the purposes of section 91 (6). In that case, the Court held that the Ombudsman was not a competent court and that a Court order was required. The Ombudsman disagreed, arguing that the judge’s comments on this point were obiter and in April 2019 issued a factsheet in response.

However, in CMG, Leech J agreed with Arnold J’s decision in Burgess v BIC, concluding that this part of the judgment formed part of the reason for his decision, notwithstanding that the primary point of his judgment regarding the validity of scheme amendments was overturned on appeal. In reaching his decision, Leech J noted that the Ombudsman lacks power to investigate recoupment disputes solely at the trustee’s request – a dispute has to be referred by the member. It was unlikely that Parliament would have extended the power of enforcement in s91(6) of the Pensions Act 1995 to the Pensions Ombudsman if the trustee had no right to apply for it.

Of some comfort to trustees will be Leech J’s finding that they do not need to obtain a County Court or High Court order requiring the member to repay the amount – a declaration of the court that an overpayment has been made is sufficient because the right of recoupment does not require a member to repay anything. Instead the trustee retains the overpayment from future instalments of pension.

The case creates uncertainty for trustees who wish to recover an overpayment from a member’s future benefits and means that they may now have to incur the additional costs of a court application to recover disputed payments. However, there is an argument, which was not considered in the CMG case, as to whether section 91(6) applies to recoupment at all. The section refers to the inability to exercise a charge, lien or set-off unless the obligation in question has become enforceable under an order of a competent court. It does not expressly refer to recoupment. The Ombudsman’s factsheet states that it is reviewing its content in light of the judgment in CMG so it will be interesting to see if the Ombudsman uses this or any other argument to uphold its previously held position that trustees can recover disputed overpayments on obtaining an Ombudsman determination.

Takeaways for trustees and sponsoring employers

  • Trustees undertaking a benefit correction exercise should seek specialist legal advice as to whether their scheme rules permit forfeiture. Trustees should obtain advice not only on the drafting of the current rules but also on the drafting of any previous rules and any relevant background. Where a forfeiture rule exists, consideration should be given as to whether forfeiture is mandatory or discretionary and its application when correcting past underpayments.
  • Where trustees have a discretion to forfeit benefits under scheme rules, Morgan J said in the Axminster case that where members have not specifically claimed arrears (perhaps because they didn’t know they had been underpaid) their first reaction should be to make good underpayments without further delay. Subject to other considerations, many trustees (and employers) are uncomfortable about relying on forfeiture for current members where it is the trustees’ breach of trust that has led to the underpayment being made and members had no way of knowing that an underpayment had been made – it doesn’t feel a very fiduciary thing to do.
  • Even where scheme rules contain a mandatory forfeiture clause, in cases involving a breach of trust trustees may wish to consider seeking the employer’s agreement to augment the members’ benefits so that underpayments are corrected in full. Where employers and trustees agree an augmentation, they should seek legal advice as to how to validly implement that decision under the scheme rules.
  • Pending the Pensions Ombudsman’s response to the CMG case, trustees who are in dispute with a member regarding the recoupment of an overpayment should seek legal advice as to whether they should apply to the County Court or High Court for a declaration that an overpayment has been made before adjusting future benefits.

If you have any questions in relation to the issues raised in this article, would like advice on the forfeiture rule in your scheme rules or are looking to recover an overpayment from an existing member, please contact our Pensions team.

Key contact

Alice Honeywill

Alice Honeywill Partner

  • Pensions Services
  • Public Sector Pension Schemes
  • Life and Pensions

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