What to do if there is a mistake in your scheme rules
Issue in brief: correcting unintended errors in scheme rules
Univar v Smith and SPS Technologies Ltd v Moitt have provided helpful guidance on what is needed to make a successful application to Court to correct a mistake in scheme rules. The cases went through very different court processes; the former involved a full trial whereas the latter followed a paper-based process and was resolved at an initial hearing. In both cases the decision to correct the scheme rules was made on the basis that the correct test for rectification is a subjective one rather than an objective test which has to be backed up by evidence demonstrating what the parties’ intentions were.
How do these mistakes occur, when do they tend to be discovered and what can Trustees do to correct these mistakes? Kate Payne explores the key considerations in these instances.
As the Courts have acknowledged, pension scheme deeds and rules are long and complicated, reflecting not only the benefits promised to members but also the regulatory and tax environment in which pension schemes operate. In addition, the long history of pension schemes means that different people (and advisers) are invariably involved in the preparation of documents and may introduce their own style of drafting, further compounding the difficulties of interpretation.
Mistakes often arise where documents are updated following a significant event, such as a scheme merger (where the benefits need to be consolidated), or following general legal updates affecting all schemes. The mistake may be in relation to the words used or the effect of those words, so even provisions which appear valid may conceal a hidden problem.
Univar involved an accidental hard coding of the Retail Prices Index as the measure for determining not only annual increases to pensions in payment but also a scheme specific annual revaluation of benefits in deferment.
In SPS Technologies certain deferred members were given the ability to retire at 60 without any actuarial reduction of their pension in error, whereas the equivalent active members who retired early did have actuarial reduction applied in the same situation, leading to more generous benefits for members who had left the company’s employment.
In each case the court found that the documents did not reflect the true intention and should be rectified.
How are mistakes discovered?
Mistakes can go uncovered for many years and usually only come to light following a specific review of the relevant provisions (when considering a member query for example), or as part of a benefit review on a change of adviser or in preparation for securing benefits with a third party (including on winding up). A review of the rules alone may not identify a problem unless there is a reason to suppose the provision is wrong, for example where a mismatch is identified with the administration practice.
In Univar the mistake was introduced in 2008 and identified following a review of the relevant provisions in 2011 against statutory changes made at that time. In SPS Technologies the error was made in 1998 but not discovered until 2009.
Correcting the mistakes
Very minor mistakes can often be corrected by interpretation. However, where the words on the page do not reflect the true intention of the party or parties who implemented the change (usually the sponsoring employer, the trustees or both depending on the Scheme’s power of amendment), it will be necessary to align the administration practice with the documents, by amending one or the other. Where benefits have been understated the documents can usually be amended to provide the higher (intended) benefits. However, it is not normally possible to amend documents to reduce benefits, and in those cases the parties can apply to court to rectify the documents.
Rectification is an equitable remedy granted by the court at its discretion. The above cases (and others) demonstrate the court’s willingness to rectify pension scheme documents where it can be shown, on the balance of probabilities, that the relevant party or parties intended the document to have a particular effect and, by mistake, the document does not reflect that. Intent is to be determined subjectively by looking at the evidence in relation to those who approved the terms (assessed collectively in the case of a group, such as trustees), considering both what was and was not discussed and weighing the balance where more than one party was involved.
Schemes who are minded to pursue this option are encouraged to explore all reasonable avenues to look for evidence. This can involve painstaking work but the outcome may be worth millions of pounds.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.