68: High Court allows rectification of pensions increase powers in Mitchells & Butlers Pension Plan

Rectification is an equitable remedy which may be granted to enable retrospective amendments to a document where there is convincing proof that it does not reflect the shared intention of the parties to that document. The High Court has recently ordered rectification of a pensions increase provision in the Mitchells & Butlers Pension Plan (the Plan) stemming from mistakes in the drafting of its 1996 deed and rules which were then repeated in later versions of the Plan rules.

Prior to 1996, Plan pensions in excess of GMP increased in line with RPI ‘or any other index selected by the trustees’ up to a maximum amount. As such, the Plan’s trustees had the power to choose an alternative index for pension increases. In 1996 a new deed and rules were executed which moved this power to the principal employer (at that time, Bass Plc) and changed its nature: increases would be in line with RPI, up to a maximum amount ‘or any other rate decided by the principal employer’.

This change was perpetuated in two further deeds in 2002 and 2006. When Mitchells & Butlers sought to unilaterally reduce the rate of annual increases, the trustees brought a rectification claim on behalf of over 20,000 members, arguing that the current rules did not reflect the true intentions of the parties.

The High Court has now ruled in favour of the trustees and rectified all three deeds to reinstate the pre-1996 pension increase position. There are some interesting points to note as follow.

There was compelling evidence that the change had mistakenly crept into the 1996 deed, largely through use of a standard form template during updating. In respect of the 1996 deed and successive deeds, witnesses expressed a universal belief that they were not aware of any proposal to substantively change pension increase provisions and the court was able to infer that the change was not identified or discussed and so there could be no intention to make the change. This confirms the willingness of the courts to rectify successive documents where the parties had not expressly considered the effect of specific wording.

Mitchells & Butlers argued that it should be able to avoid the trustees’ claim for rectification as a bona fide purchaser for value without notice – it did not know about the mistake at the point it became the Plan’s principal employer in 2003. This argument was rejected by the Court, based on the terms of the Plan’s power to substitute the principal employer which involved it taking over all of the previous principal employer’s duties and powers under the Plan in all respects – it was concerned with substitution or succession, not a transfer of rights. It will be interesting to see if this argument could run with a different substitution power or following a corporate acquisition.

The High Court held that the change to the pension increase provisions in the 1996 and subsequent deeds was also invalid because the power of amendment required the parties to consult with the actuary prior to any modification of the rules. In these instances, insufficient steps had been taken to consult: the actuary needed to be provided with sufficient information to be able to advise on the effect of the change from an actuarial perspective. This may provide useful insight into the scope of a requirement to properly consult with the relevant party where schemes have analogous wording in their rules.

This case is unusual because it was brought by the trustees (it is commonly brought by the principal employer) and involved determining which party held the power rather than the contents or effect of the power eg mistakenly introducing higher increase rates as a right.

BDB Pitmans has extensive experience of advising on rectification to correct historic errors in scheme documentation, as well as on how to ensure that trustees and employers follow proper processes when making any changes so as to avoid the risk of future litigation.