Axminster Carpets – repeating patterns?

Last month saw a new Judgment on the subjects of forfeiture and interest.  These are subjects that come with the territory in any benefit rectification exercise which increases members’ benefits – including the dreaded GMP Equalisation (GMPE) exercise.  So, does this Judgment tell us anything we didn’t already know?

Yes and no. 

• First of all, it was the same Judge who decided the Lloyds GMPE cases (now three of them).
• He’d already considered both of these topics in Lloyds and he did not disagree with himself.
• But the Judgment does have something new to say, particularly about how trustees can consider fairness and fault in grappling with the discretion they are sometimes given in the forfeiture rule. Happily for members, the default appears to be to pay full arrears. 
• It also serves as a warning to trustees to be careful in assuming that rules mentioning six years always provide for forfeiture.
• The Judgment includes some odd sections about interest and the relevance of the PPF – which might be better glossed over.

Recap

In Lloyds, Justice Morgan ruled that there was no overriding rule of limitation that could be relied upon to limit arrears payments.  However, a forfeiture provision in scheme rules applies to failure to claim underpayments just as it applies to failure to claim any benefits.  This latter ruling was perhaps a surprise to trustees who might have thought the forfeiture rule was there for members who were no shows, rather than those who’d claimed their benefits, but hadn’t realised they’d been underpaid (what with them not being pensions professionals…). 

Lloyds gave rise to another rules lottery (much like the RPI/CPI one) as it meant that:

• where a scheme did contain a valid forfeiture rule, trustees could (and sometimes had to) limit arrears of underpaid pension – most rules provide for a six year limitation; but
• where there was no valid forfeiture rule, trustees had to pay full arrears.

In Axminster, the same Judge agreed to revisit these rulings and also cover some related matters.

Read the standing orders – read them and understand them!

The first question around forfeiture in Axminster concerned the drafting of the rule that applied to certain members who left before a certain date.  The rule in question said this:

“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: (i) in augmenting the benefits of those Members still in Service, (ii) in reducing the Employer’s contributions to the Plan, or (iii) in payment of the expenses of the management and administration of the Plan.”

Whilst this was drafted in a similar fashion to a forfeiture clause (the six years being a key element), it did not actually say unclaimed benefits would be forfeit.  As Jackie Weaver was famously reminded, it is important to read the precise words of a clause.  The Judge thought it likely that Clause 25 was intended to deal with orphaned money that ought to have been, but which could not be, paid to a missing beneficiary. However, it did not operate to deprive members of unclaimed benefits if they claimed them after the six years.

Forfeiture and fairness – relevant factors

In terms of the provisions that do clearly provide for forfeiture however, the Judge stuck to his Lloyds guns.  He confirmed that a forfeiture provision does apply to a failure to claim part of a pension instalment (which was underpaid owing to a trustee error) as well as the failure to claim all of a pension instalment. This is the case notwithstanding that there had been no failure on the part of the member who cannot have been expected to have realised he was being underpaid.

That said, the Judge did (helpfully) rule that both of those factors were particularly relevant where a trustee has discretion over forfeiture.  As he put it, in those circumstances “the first reaction of the Trustee should be to make good the … underpayments without further delay”, albeit he acknowledged that the rule in Axminster did not require this and there might be other considerations that would go against that “first reaction”.  One example might be administrative difficulties.

He also (very briefly) considered the relevance of the PPF.  The Judge ruled that there was no reason for the trustee to exclude the fact that the Axminster scheme is in a PPF assessment period in deciding how to exercise its discretion.  However, he did not elaborate on how that might influence the trustee and seemed to simply confirm that, if the exercise of the discretion was a valid one, the fact that the scheme would transfer to the PPF would not render it invalid.  This didn’t really grapple with the question at issue and the reference the Judge makes to the decision in ITS v Hope [2009] is somewhat misplaced because, what I think the trustee was really asking was, ‘can I/should I take into account the fact that the PPF will be better off if I impose forfeiture?’  

My personal view is that, save in circumstances where the PPF is obviously a relevant factor (e.g. Shall I take a step that makes my scheme ineligible?  Shall I pay the levy?), a trustee would generally do well to exercise discretions without reference to the PPF – whether they would otherwise propose to favour it or ‘game’ it. I cannot see that it is any part of a trustee’s duty to seek to benefit other PPF levy payers; and it is difficult to see how improving the PPF’s finances (especially in such a marginal way) is going to make a difference to the security of other members of the scheme.  Equally, the PPF should not have its liabilities increased by trustees taking decisions that they would not take if it wasn’t there to pick up the pieces.

Interesting interest

The Judge’s ruling on interest made interesting reading but it’s difficult to glean anything concrete out of it in practice.  The facts of Axminster were complicated by the relatively recent replacement of the trustee and the different stances taken by the new and old trustees.  Therefore:

• the distinction the Judge drew between interest payable on different types of claim; and
• the rather Delphic comment about not necessarily being convinced that interest would be payable for the whole period from retirement

are difficult to generate clear principles from (and who knows how matters might be decided where individual trustees are replaced over time on a rolling basis). 

Ultimately, I suspect it’s likely still to be a decent rule of thumb to assume simple interest at 1% above base rate, but it’s worth bearing in mind that this could be different where the trustee has changed over time (and it was the old trustee who committed the breach) or where the arrears are particularly large (which might justify a higher rate).