Rectification successfully served

In Mitchells & Butlers Pension Ltd v Mitchells & Butlers plc,[1] the England and Wales High Court (the Court) granted a rectification claim brought by the scheme trustee on behalf of the scheme's 200,000 members against Mitchells & Butlers, in its capacity as the sponsoring employer of the defined benefit pension scheme.

Important background to English and Welsh pensions law

The trust deed and rules of a final salary scheme prescribe the level of benefits and certain aspects of how the scheme must be managed. Inevitably, the provisions in these governing documents need to be amended over the years to reflect changes in legislation and employer policy. Consolidation of a scheme's rules has been encouraged by The Pensions Regulator. The goal of such an exercise is to encapsulate all of the amendments that have been effected up until the date of the consolidation, resulting in one updated set of rules. Sometimes a consolidation will itself give effect to rule amendments, other times it will merely be an exercise to ensure all past amendments are included in one document.

It is imperative that any changes are made carefully, minded to all relevant factors including requirements and restrictions prescribed within the scheme's amendment power, as well as any overriding statutory restrictions.

Many of the high-profile pension cases that have reached the courts of England and Wales have centred around changes that have been made to the governing documents of a pension scheme; and critically, whether those changes were made effectively and properly encapsulated the intentions of the parties.

Where an unambiguous error has been made in the scheme's documentation, the only way to reverse that error is to have rectification granted by the court. Rectification is often seen as an unattractive option for several reasons, not least the cost of court action and the low rate of success of such claims. Paragraph 17 of the Court judgment states:

‘The remedy of rectification is available, not only in cases where particular words have been misused, but also in cases where particular words were used intentionally, but it was mistakenly considered that the words had a different meaning from that which they in fact have as a matter of their true construction.’[2]

What was the amendment?

The topic of this case was the historic amendment to the pension increase rule. The rule prescribes how members' pensions increase annually to keep pace with inflation and, specifically, identifies who (i.e., the trustee or the sponsoring employer) had the power to alter the default rate of annual increase payable to the scheme's pensioners. 

The original pension increase provisions were contained in the rules adopted in 1988, which:

• contained a pension increase rule that provided that increases to pensions in payment in excess of guaranteed minimum pension (GMP) should be paid in line with the UK Retail Price Index (RPI) or, if less, 4 per cent per annum; and
• provided that RPI was defined as ‘the index of retail prices published by the Department of Employment or any other index selected by the Trustees…’.

In 1996, a consolidation exercise was undertaken to update the governing rules. The 1996 consolidated rules:

• provided that the rate of annual increase should be the percentage increase in the RPI  during the year ending the previous 31 May, but subject to a maximum increase of five per cent per year compound or any other rate decided by the principal employer; and
• contained no definition of RPI, unlike the 1988 rules.

The position in the 1996 rues was repeated in further consolidations in 2002 and 2006.

It is clear to see the differences between the provisions contained in the 1988 rules and the 1996 rules. The key difference, which was the subject of the court application, was the departure from the relevant power vesting in the trustee to it vesting in the principal employer. This change represented a significant shift in the balance of powers. Many of the pension cases in recent years have focused on sponsoring employers seeking to make financial cuts by altering the pension increase rate to a lower level; with this in mind, it is easy to see why the change caused concern to the scheme's members and the trustee. The question was whether that shift had been intentional and, if not, whether it could be rectified to alter the wording of the relevant rule to reverse the change.

What did the Court order?

Having considered the evidence in detail, the Court agreed with the trustee that there was no evidence that the shift in power had been intentional. As such, the court ordered rectification.

Why is this of interest?

Rectification cases are notoriously difficult to succeed in, as the burden of proof is high and difficult to satisfy. However, this case acts as a reminder that genuine rectification cases, supported by relevant evidence, will succeed.

Aside from this, the case raised and clarified a number of other important points:

• Serial rectification is possible. The Court also ordered rectification of the subsequent 2002 and 2006 consolidation documents. These subsequent amendments had not sought to amend the rules or the balance of power, they had merely sought to replicate the position as it had stood.
• ‘The sponsoring employer was a bona fide purchaser’ was not a successful defence to the rectification case. Here, the sponsoring employer claimed that because it had become the scheme's principal employer after the amendments in question, rectification could not be ordered against it as it had no knowledge of the defects. This defence failed on the grounds that the scheme's power of substitution did not effect a transfer of property to which the doctrine of a bona fide purchaser could apply.
• The power of amendment must be fully complied with. In this case, the power of amendment required the scheme actuary to be consulted on any changes. It was held that the consultations requirements had not been properly complied with. Although the scheme actuary had been sent a copy of the draft consolidation, the change in question had not been specifically brought to the actuary's attention. As such, the actuary could not be said to have been properly consulted on it or have been expected to detect it or advise on the change. The Court held that even if rectification had not been granted, the amendment would have fallen foul of this requirement in the scheme's amendment power.
• Statutory requirements must be fully complied with when amending governing provisions. The statutory requirements under s.67 of the UK Pensions Act 1995 (in force at the time of the amendment in question) had not been properly complied with, rendering the actuary's s.67 certificate void and thus rendering the amendment void.

Who needs to be aware of this?

Pension trustees and sponsoring employers need to ensure:

• • they instruct experienced legal advisers who are accomplished at drafting documents accurately and minded to the risk of unintended amendments;
  • they fully review and understand documents they are signing. This will be achieved by ensuring there is a high level of dialogue with the advisers who have prepared the documentation; and
  • they fully comply with any consultation requirements in their scheme's amendment powers and underlying legislation to avoid intended amendments being rendered void.

Anyone acquiring an entity that has a final salary scheme needs to be aware that claiming that they were a bona fide purchaser may not be a viable defence to an otherwise successful rectification claim: thorough due diligence is essential.

It is imperative that scheme lawyers ensure they are not unintentionally implementing a rule change when drafting a consolidation. Any changes made should be brought to the attention of the relevant parties (i.e., the parties who have the power to amend the rules) and anyone else who needs to be consulted in accordance with the scheme's amendment power, such as the actuary in this case.

Conclusion

For the reasons above, this judgment is particularly important and useful. Any trustees who are concerned about past amendments are encouraged to seek advice – a problem ignored is one that is likely to lead to far greater problems down the line.