Pensions analysis: Do we have further clarity on when a negligence claim against advisers to a pension scheme is time barred? Anne-Marie Winton, partner at Arc Pensions Law, comments on a recent ruling and its implications for trustees.

Equalisation, novation and limitation periods in pension schemes‚further clarity?

Original news

Capita ATL Pension Trustees Ltd and ors v Sedgwick Financial Services Ltd and ors [2016] EWHC 214 (Ch), [2016] All ER (D) 115 (Feb)

In this judgment, what particular issues were considered in the High Court action brought by the trustees of the Sea Containers 1983 Pension Scheme?

The trustees were properly concerned to ensure that the correct benefits in the correct amount were payable to members of the Sea Containers pension scheme (which had memorably previously hit the headlines in 2008 due to the issue of a financial support direction against the principal employer’s parent company by The Pensions Regulator). The scheme subsequently entered winding-up so it was vital that all assets were collected in to meet members’ benefits. In this the potential availability of damages under a professional negligence claim is an asset of the scheme.

Years ago, the trustees had sought advice from their professional advisers as to how to equalise the benefits paid to men and women (so-called ‘Barber equalisation’ (C-262/88: Barber v Guardian Royal Exchange Assurance Group [1991] 1 QB 344, [1990] 2 All ER 660)). The intention was to equalise benefits on and from 1 August 1994 (the 1994 changes). While the substantive issues of liability were not considered in this judgment, the trustees’ ultimate case is that those 1994 changes were not correctly documented, due to negligent advice, and that this caused substantial additional liabilities to the scheme which could not be met from its assets available on winding up. Barber equalisation needs to be done by an amendment carried out in compliance with the precise formalities of the scheme’s amendment power in its governing trust document. However, it took a number of years after the Barbercase (in 1990) for this to be made clear by the UK courts. Accordingly, the question of whether any claim against the trustees’ professional advisers was now time barred was the subject of this judgment.

The quantum of loss was around £8m to meet the additional cost of scheme liabilities.

What conclusions did the High Court reach on each of the issues before it?
Broadly, the court was asked to work out which advisers were in place during which period. For a claim in negligence, the limitation period is six years from the date the damage is suffered. But given that the alleged negligent actions took place in 1994, the court also considered the exception under section 14A of the Limitation Act 1980 which extends the limitation period to three years from the date when the claimant knows or ought to have known:

• material facts about the loss
• the identity of the defendant, and
• the cause of action

The current trustees were in short attempting to get a professional adviser on the hook for actions that took place in 1994, which otherwise would have been time barred from any claim.

In terms of who advised when, the court was asked to rule that defendant 1’s retainer ended by its novation and replacement with the services of defendant 2. To examine this assertion by the defendants the judge considered the precise meaning of ‘novation’ and in particular whether this needed the consent of all contracting parties, and whether that consent must be express or could be inferred from conduct. The trustees accepted that defendant 2 was appointed from 6 April 1997‚ under Pensions Act 1995 requirements‚ but contended that defendant 1 remained an adviser (and therefore potentially liable for professional negligence) up to that point. Ultimately, the judge decided that the trustees had a realistic prospect of successfully arguing at trial that the relevant adviser in respect of the 1994 changes was defendant 1 on the basis that its retainer remained in place until 6 April 1997. So the defendants failed in seeking to have a claim against defendant 1 struck out due to their novation argument.

However, the judge decided that proceedings against defendant 2 be struck out as the trustees had had actual knowledge of the existence of potentially defective equalisation amendments by receipt of a letter from the principal employer’s lawyers in July 2007. So the ‘three years from date of knowledge’ exception to the limitation periods had in fact already expired.

Did the High Court’s reasoning raise any interesting points? Do the decisions have wider implications?

As it often the way with pensions claims, they can take years to become apparent due to the long-term nature of pension liabilities (and the fact that parties to a pension scheme rarely go looking for cans of worms to open). The court had to accept that it was difficult for witnesses to recall events from 21 years ago, and therefore had to rely heavily on documentary evidence‚Äîthe earliest document being the written agreement entered into by the trustees with defendant 1 in 1990. The trustees asserted that the retainer continued until April 1997 and therefore covered the period of the 1994 changes. However the defendants claimed that the contract novated on 1 January 1994 to defendant 2 expressly or inferred by the relevant party’s conduct, and so defendant 1 could not be liable to the trustees on and from that date. Unsurprisingly the paper trial was somewhat patchy in places with some of the trustees’records having been destroyed (due to having been stored at Sea Containers House‚ the offices of the principal employer which, with its parent, filed for Chapter II bankruptcy protection in 2006). It is not that uncommon for records to be destroyed, but in pensions this can cause problems years later when historic documents may be needed to help interpret a scheme’s benefit structure. Here copies of the scheme report and accounts for the years ending December 1992, 1993, 1994 and 1995 were produced in evidence, as well as invoices from defendant 2 to the trustees for services after 1 January 1994.
Unfortunately, the use of ‘old’ office stationery of defendant 1 (compliments slips and headed fax paper etc) added confusion as to whether that company was still providing services to the trustees at the time of the 1994 changes. So it turns out that shredding old stationery is far better rather than re-using it from a risk management perspective.

What effect, if any, will the findings in this case have on how schemes may approach claims in similar circumstances in the future?

Of particular interest in this case were the issues raised due to the relationship between the trustees and three defendants‚ (1) Sedgwick Financial Services Limited; (2) Sedgwick Noble Lowndes Limited; and (3) Mercer Limited. The defendants sought to strike out parts of the claim against defendant 1 on the basis that defendant 2 had replaced it in providing professional services to the trustees, and also to strike out all of the claim against defendant 2 on limitation issues. All the defendants were part of the Mercer group of companies (and rather confusingly there had also been some name changes along the way).

Other trustees whose professional advisers have changed over time (through replacement or merger) similarly may need to bring’ loss of a chance’ claims where, through elapse of time, the actual claim is now time-barred. So it is vital that trustees have legal certainty as to the identity of their professional advisers at any particular time, and to be sure of the scope of their retainer and how this may have changed from adviser to adviser over time. It is also worth noting that the appointment terms of professional advisers may routinely state that scheme records held by them are destroyed six years after the retainer ends (ie in line with the ‘normal’ limitation period). This case shows that that period could be too short. Therefore, trustees may consider extending that period by agreement, or instead putting in place a contractual option for the records to be returned to the trustees for safekeeping at the end of the adviser’s appointment.

Interviewed by Nicola Laver.

Read the full article on Lexis Nexis PSL Pensions here.