52: Forfeiture and limitation of underpaid pension benefits
The recent High Court judgment in Punter Southall Governance Services Limited v Jonathan Hazlett  EWHC 1652 (Ch) concerns limitation, forfeiture and the payment of interest in pension claims and will be of interest to any trustee board dealing with underpayments of benefits, including those associated with GMP equalisation.
The trustee of the Axminster Pension Scheme (the Scheme) asked the court questions concerning the validity and effect of a number of scheme documents making changes in relation to pension increases. As a result of the uncertainty over those changes, Scheme members argued they had been underpaid and were entitled to the unpaid arrears and interest on those arrears.
The trustee accepted that there had been underpayments, but argued that any claims for arrears were subject to a six-year limitation period and that interest was not payable on arrears of pension. The trustee also argued that amounts of unpaid pension relating to periods more than six years before the start of the claim were forfeit in accordance with the forfeiture provisions under the Scheme rules.
Upholding the decision on limitation reached in Lloyds in the context of GMP equalisation, Morgan J confirmed that a claim by a beneficiary against a trustee for payment of arrears of pension when the trustee was ‘in possession of trust property’ (ie a current trustee of a scheme) is ‘an action to recover from the trustee trust property’ within the meaning of section 21(1)(b) of the Limitation Act 1980. There is no limitation period on claims where Section 21(1)(b) applies which meant that the Scheme members could claim arrears against the current trustee from the date their pension first came into payment. It is however likely that the Limitation Act 1980 would impose a limit on the time over which a member could bring a claim for arrears against a former trustee who is no longer in possession of trust property.
Morgan J accepted that settled law provides that arrears on annuities do not attract interest (as argued by the trustee in this case) but held that a claim by a member for compensation for breach of trust (ie the failure to pay the correct pension) could include a claim for interest as the court would have a discretion as to whether to exercise its equitable and statutory powers to order the payment of interest on underpaid pension in those circumstances.
As such, interest could be payable on arrears of underpaid pension although in this case, Morgan J was not asked to decide whether interest would be awarded and over what period. Notably Morgan J did say that he was not convinced members would be entitled to receive interest on arrears for the whole period of any underpayment (this may to be determined in part by how long the current trustees have been in office).
In this case, two sets of rules applied to govern benefits for Scheme members: the 1992 Rules for pre 2001 leavers and the 2001 Rules for post 2001 leavers. They both contained different provisions permitting the trustee to take action in relation to ‘unclaimed’ benefits. The 2001 Rules expressly gave the trustee a discretion to forfeit all or part of any benefits unclaimed for more than six year, whereas the 1992 Rules did not use the word forfeit and instead gave the trustee the discretion to apply such unclaimed monies for other purposes of the scheme. Morgan J held that a rule permitting forfeiture must contain clear language to that effect and accordingly forfeiture was permitted under the 2001 Rules but not under the 1992 Rules.
In the context of forfeiture of unclaimed benefits under the 2001 Rules, it was only necessary that a member had not claimed the benefits and it was not relevant whether the member knew about the underpayment and so would ever have been in a position to make such a claim.
Notably, Morgan J also held that the later introduction of the forfeiture rule in the 2001 Rules did not contravene the restrictions in the Scheme’s power of amendment which prohibited changes that would diminish accrued benefits. This was on the basis that the amount of benefit was not diminished and there was no certainty a member would fail to claim benefits.
Trustee approach to the exercise of a forfeiture rule
In this case, the 2001 Rules provided the trustee with a discretion about whether to forfeit unclaimed benefits and Morgan J stated in those circumstances ‘the first reaction of the Trustee’ should be to exercise its discretion ‘to make good the earlier underpayments without delay’ especially in circumstances where the member had no reason to know that they were being underpaid.
The case gives helpful clarification and confirmation for trustees dealing with underpayments of pension benefits: limitation does not apply against current trustees although underpayments may be subject to forfeiture. There remains some uncertainty about the extent of the obligation to pay interest, but in our view it is likely to be the starting point of most trustees that interest should be paid on all arrears unless there is a compelling reason not to pay such interest.
The terms and applicability of forfeiture of arrears of underpaid pension will depend on the specific wording of a scheme’s rules and trustees should seek legal advice on those terms. They should also bear in mind the comments of the court on how they should exercise a discretionary forfeiture power. Even where a forfeiture rule is not discretionary ie it takes effect automatically without a decision, trustees may well see their starting position as seeking to agree an augmentation of benefits with the sponsoring employer in order to permit the payment of underpaid pension for periods in excess of six years, especially where members were never in a position to claim the underpaid position.
Many of the principles in the case will also have wider application for pension schemes trustees.