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Pensions Update

A Cheaper way to resolve drafting errors?

Sadly it is not uncommon to discover drafting mistakes and errors in pension scheme trust deeds and rules or deeds of amendment. Correcting those mistakes however can often become a sizeable headache for trustees who have a duty to administer their scheme in accordance with the terms of the governing scheme documents.

Where drafting errors are discovered trustees may be able to enter into some form of clarification documentation with the sponsoring employer setting out a stated position with regard to the error, although this provides little protection should pension scheme members seek to challenge that position. To achieve legal certainty many trustees therefore apply to court to rectify the error. If the court grants the rectification, it will amend the pension scheme documentation retrospectively so that it reflects the terms that the parties intended. The aim is to place the parties in the position in which they would have been had the mistake not been made. This is often a time consuming and expensive process.

Last month saw a flurry of headlines in the pensions press declaring a “ground breaking case” in which the High Court backed trustees in ignoring drafting errors.

The case in question was Re BCA Pension Plan. [2015]. In this case a consolidated trust deed and rules was prepared and adopted in 2011. However when drawing up the consolidated document a crucial paragraph (which appeared in the parallel provision in the previous trust deed and rules) was omitted from the pension increases rule with the result that the rule made no sense. Rather than pursuing formal rectification proceedings the trustees made an application to the court, under section 48 of the Administration of Justice Act 1985, to grant an order so that they could administer the scheme on the basis that the pension increase rule could be interpreted as if certain words had not been mistakenly deleted during the consolidation exercise.

The Judge, Mr Justice Snowden, concluded that in this case it was self-evident that there had been a mistake in the drafting of the pension increases rule with the result that the rule was unworkable. He therefore granted the trustees’ application. In doing so however he commented that the inclusion of the relevant paragraph to make sense of the provision did not change the meaning of the document or create a new contractual provision but rather gave practical effect to the rule’s existing meaning.

So are section 48 applications the ground breaking resolution to drafting errors which trustees have been looking for, and will they replace the need for rectification orders?

Remedying errors under section 48 is a relatively straight forward and cheap procedure. The option has in fact been available to trustees for the last 30 years. It does not require the detailed statements of case, the appointment of representative beneficiaries and witness statements required when seeking a rectification remedy. Instead it provides that where it is questionable how the scheme rules should be construed, and a counsel of at least 10 years’ experience has provided a written opinion about the provision in question, then the court may make an order allowing the trustees to rely upon that counsel’s opinion.

There are many circumstances where it is appropriate to use section 48, for example where it is clear that a word or wording has been unintentionally omitted from the trust deed and rules (as was the case in relation to the BCA Pension Plan) or where duplicate wording has been included within a provision.

Most section 48 judgements are not published. So the fact that the Chancery Division of the High Court published this ruling in December 2015 looks like the High Court encouraging trustees to take advantage of this simpler and less time consuming (both for the trustees and the courts) procedure to resolve mistakes in their governing scheme documents.

The Irwin Mitchell view

We expect the number of section 48 pension applications to increase considerably after this judgment and for its use to evolve so it could be used for example in the Gleeds type situation where execution of a deed is in question. The time is ripe for the judiciary to accept, with better grace, that in the real world mistakes do occur in documents and when they do, a workable solution is needed.

Fortunately the Supreme Court seem to be supporting this stance and we think it would be a brave member who challenged trustees and employers who administer a scheme relying on such an order. Such a member would be potentially at risk from having to pay all parties’ costs of such a challenge – not a comfortable position to be in.

However we also think it’s likely trustees will have to be more upfront with their members about such applications before section 48 orders are granted, than occurred in this particular case. Here the trustees mentioned the order in passing in a general trustees’ newsletter issued on Christmas Eve after the order had been granted. It is important that members have an opportunity to make representations about a proposed application before the court considers it.

However they evolve, section 48 applications are certainly far more attractive than the most comparable alternative - a summary judgement application for rectification. The latest pensions summary judgment was issued on 28 January 2016. It had eight parties represented by three City law firms, one Queen’s Counsel, two senior junior barristers, and one junior barrister. I know which route I’d want to follow if I had some pension litigation to resolve!

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