The construction and application of forfeiture provisions has been in the spotlight in recent years following the decisions of the High Court in the Lloyds Banking Group cases and Axminister Carpets Group Retirement Plan case. The latest judgement in this line of cases was delivered on 11 August 2022 by Mr Justice Leech in CMG Pension Trustees Ltd v CGI IT UK Ltd concerning the CMG UK Pension Scheme (the "Scheme") where it was held that the obligation to make remedial payments to members to correct historic underpayments was subject to a six-year limitation period under the Scheme's forfeiture rule.
What was the case about?
The case centred around whether the Trustee of the Scheme was obliged to pay arrears to members which had fallen due for payment more than six years earlier as a result of defective attempts to equalise normal retirement dates and to reduce the accrual rate in the scheme or whether the forfeiture provision in the Scheme rules could be relied upon to limit the correction of these past underpayments. The Trustee and its advisers became aware in 2009 of issues relating to the way in which the benefit changes had been implemented which resulted in benefits being underpaid to members. The Trustee had subsequently taken steps to address these issues and had begun to repay the arrears owed to members.
In 2019, the Scheme's principal employer contended that Rule 5.11 of the Scheme Rules, which provided as follows, was a forfeiture provision and that its effect was to forfeit all sums which fell due for payment more than six years prior:
"… if a benefit or instalment of benefits is not claimed by or on behalf of the person entitled to the benefit or instalment in accordance with these Rules within 6 years of its date of payment it shall be retained by the Trustees for the purposes of the Scheme".
The Trustee disagreed and argued that the purpose of the provision was not to extinguish the benefits of identifiable members or shortfalls where a lump sum or instalment had been regularly underpaid. Rather, the provision was intended to deal with missing beneficiaries and to prevent funds from being "orphaned or trapped within the Scheme".
The judge concluded that Rule 5.11 was indeed a forfeiture provision. The reference to "benefit" was not a reference to a full entitlement or right of the member, but to that part of the entitlement which was not paid on the due date and remained unclaimed after six years. and the wording of the rule "should be construed on the basis that any benefit or instalment of a benefit which has not been claimed within six years of the date on which it fell due for payment is forfeited and the entitlement to that benefit or instalment is extinguished."
In reaching this decision, Leech J issued a reminder that the Court's interpretation of one document does not constitute binding authority in relation to the interpretation of another but that it "may provide real assistance when faced with a very similar exercise." In particular, Leech J took "considerable comfort" from the Court's interpretation of a "closely analogous" rule in Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & others (the "Lloyds case") which provided that "if any person of benefit or any instalment remains unpaid to and unclaimed by the person to whom it is payable for a period of six years from the date it became payable, then the entitlement to it shall be extinguished and it shall be retained by the Trustees in the Fund". For a more in depth discussion of the Lloyds case, take a look at our previous blog.
Following the Court's ruling that arrears payments not paid within six years of the due date were forfeit, the Trustee and the sponsoring employer were left to consider how they would recover the arrears payments to members which had already been paid out by the Trustee after this period. In this regard, the judgement explored the equitable remedy of recoupment which permits trustees to set-off overpayments against any future payments to members by withholding increases or reducing pensions in payment. Equitable recoupment is open to member-challenge and section 91 (6) of the Pensions Act 1995 arguably provides that a reduction in benefits which is disputed by a member cannot be actioned without an order of a "competent court".
This led to the judge being asked to consider whether the Pensions Ombudsman ("TPO") was a competent court for the purposes of recoupment under section 91(6), which has been subject to debate following the High Court decision in Burgess and others v BIC UK Ltd where it was held that TPO did not qualify as a competent court. The judge agreed with the decision in Burgess meaning that , if a member disputes the reduction in benefits, it will be necessary for the trustee to obtain a declaration from the County Court or High Court that there has been an overpayment which the trustee is entitled to recoup out of future payments.
What lessons can be learned from the judgement?
The judgement offers useful guidance as to when a rule in a pension scheme will operate so as to permit or require forfeiture of members’ benefits. This case will be of particular interest to trustees and sponsoring employers undertaking benefit rectification exercises to correct issues of underpayment and overpayment.
While the judgement offers some clarity on the legal requirements for recoupment, it also presents practical challenges for trustees wishing to recover overpayments from dissenting members. In particular, it means that trustees may now be required to incur the addition expense of a court application to recover disputed payments.
The Ombudsman is currently reviewing its factsheet on recoupment issued in April 2019, which previously confirmed the TPO's position that it is a competent court for this purpose, in light of the decision and so it will be interesting to see the stance taken by TPO in future cases involving recoupment.
If you would like more information on any of the issues contained in this blog, please get in touch with a member of the pensions team or your usual Brodies contact.