OPDU Report 4 Article 2

While 1998 has not so far been a year for ground-breaking legal decisions in the occupational pensions field, there have been a number of interesting decisions concerning day-to-day administration of occupational pension schemes and scheme rules. The time is also ripe for some in-depth judicial analysis of the more difficult aspects of the Pensions Act 1995, particularly section 67.

South West Trains v Wightman
1997 finished on a high in terms of court activity with the South West Trains v Wightman case. The case concerned a pay restructuring agreement between the railway companies and the unions under which the various elements of employees' remuneration (some but not all of which were pensionable) were consolidated into a single 'basic pay' package. Unfortunately, the definition of pensionable pay in the Rules of the Railways Pension Scheme stated that all 'basic pay' was pensionable, which would have resulted in a crippling and unintended windfall to some members.

The Court held that the Trustees could retrospectively amend the Rules to correct the situation without contravening Section 67, since the relevant events took place before that section came into force on 6 April 1997. Amendment would simply confirm the terms of a legally binding pensions agreement which had, in effect, overridden the Rules. In theory this could be extended to cover other changes to scheme rules which are communicated to and agreed by members before a formal rule amendment is made, at least where the events occurred before 6 April 1997. However, it would be most unwise to rely on such an assumption today without very careful analysis of the legal issues.

MMI v Harrop
The 1998 season kicked off in January with Municipal Mutual Insurance Ltd v Harrop. This case concerned an attempt by the employers to correct, retrospectively, an earlier rule amendment which had been incorrectly drafted in a way which favoured the members. This attempt was held to be invalid. The case turned principally on the construction of the particular rules, which contained no power of retrospective amendment. However, the refusal of the court to approve the exercise of the power of amendment in a way which conflicted with its precise terms is also a reminder that decisions will be invalid unless the trustees and employers have followed the correct procedures - a point which is consistently emphasised by the Pensions Ombudsman in his rulings on maladministration.

The Barnardos Case
A contrasting case involving Barnardos Pension Scheme trustees, Libby v Kennedy, was decided in October. Two out of a body of six trustees took a decision to pay death benefits to a member's second wife, following his expressed wishes. The other trustees informally indicated their consent and the pensions manager accordingly made the payment to the second wife. The trustees later ratified the decision at a trustees' meeting. However, the Ombudsman decided that the decision had not been delegated or taken properly in accordance with the scheme rules, and the payment was invalid. The Court allowed an appeal from his decision. It found that the decision had been validly delegated, and that the pensions manager was entitled to regard the informal notification as signifying the trustees' agreement. It did not matter precisely how they indicated that agreement, provided that a reasonable pensions manager would have interpreted it as such. Even if there had not been a proper exercise of a delegated power, ratification was acceptable as an alternative approach. Thus, while following set procedures is clearly important both to the courts and the Ombudsman, there is room for the exercise of common sense where appropriate.

Preston v Wolverhampton Healthcare NHS Trust
February saw the latest instalment in the part-timers saga, with the House of Lords referring three questions to the European Court of Justice in Preston v Wolverhampton Healthcare NHS Trust. Part-time workers complained that their exclusion from the pension scheme, where eligibility for membership depended upon a minimum number of hours worked per week, constituted sex discrimination. They claimed access to membership and recovery of employer contributions, relying on Vroege and Fissher (1997) ECR 1. However, their claims were time-barred under the Equal Pay Act 1970. The House of Lords is seeking a ruling from the ECJ as to whether the relatively short time limits under the Act breach European law by impeding the exercise of rights to equal treatment under Article 119 of the Treaty of Rome. The time limits in question are that a claim must be brought within six months after leaving employment and that no more than two years retrospective entitlement will be granted. These limits have come under scrutiny, particularly as a result of the decision of the ECJ in the Magorrian case last December. The decision is still some months away.

Re Trusts of the Scientific Investment Pension Plan, Kemble v Hicks
This case considered the effectiveness of a provision in a trust deed which served to forfeit a member's benefits in the event of bankruptcy, the Trustees having a discretion to apply the benefits to his dependents instead. One member's trustee in bankruptcy argued that the clause was repugnant for avoiding the bankruptcy laws and that the pension rights ought to vest in him. Mr Justice Rattee found that, while a clause which purported to forfeit an absolute interest in possession in the event of alienation would be void, there was nothing wrong with a clause which forfeited future or determinable interests on the happening of certain events. This confirms that until Section 91(3) of the Pensions Act 1995 comes into force, a properly-drafted forfeiture clause will prevent the bankrupt member's accrued rights under an occupational pension scheme from becoming payable to the trustee in bankruptcy. However, once the pension comes into payment it is another matter, as each instalment of pension can be taken away by the trustee in bankruptcy just like any other income.

Kilvert v Flackett
In this case which was decided in July, a bankrupt member reached his normal retirement age and opted to take a large lump sum. The Court of Appeal promptly granted his trustee in bankruptcy an income payments order for the entire sum. The moral is obvious: the member should not commute his pension in these circumstances.

Clark (Inspector of Taxes) v Trustees of the BT Pension Scheme and Others
In this case, which was an appeal by the Inland Revenue, the trustees of three exempt approved pension schemes had regularly engaged in the sub-underwriting of share issues in return for payment of commissions. The Court found that this activity constituted trading, and the profits were therefore chargeable to income tax under Case 1 of Schedule D of the Income and Corporation Taxes Act 1988 (ICTA) and not exempt under either Case I or IV of Schedule D. The trustees incurred a further liability to additional rate tax as the income deriving from their activity did not fall within Section 682(2)(c) of ICTA by which trustees of discret-ionary trusts pay tax at a reduced rate (currently 23%). At the heart of the judgment was Lightman J's view that the trustees' sub-underwriting consisted of operations of a commercial character carried on over a period of years which was frequent and organised, as well as extensive, business-like and for profit. It was irrelevant that the trustees regarded the activity as deriving profits from investments rather than as trading.

This decision does not change the law on taxation of profits from trading, but it indicates the Inland Revenue's vigilance in the area and the attitude of at least one judge as to the test for trading.

University of Nottingham v Eyett
This case decided in November, provides some welcome guidance on the scope of employers' duties. A pensioner complained to the Ombudsman that his employers had failed to tell him that if he delayed his retirement for one month, he would receive higher benefits. The Ombudsman considered that the employers had breached the implied duty of mutual trust and confidence in the employment relationship (Malik v BCCI [1997] 3 All ER 1; Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597). Hart J, however, disagreed. He considered that the employers had not deliberately failed to inform the member of his rights, which he could have worked out for himself from the scheme booklet. They merely followed a policy of not volunteering advice to their employees. As to the implied duty of trust and confidence, Hart J noted that the decided cases had consistently been in negative terms of prohibiting conduct likely to harm the employment relationship, rather than positively requiring conduct in order to avoid harm. It was not impossible that the implied duty could have a positive content in appropriate circumstances, but caution had to be exercised as this would involve a considerable extension of the law, with far-reaching consequences.

This decision puts a sensible limit on the implied duty of trust and confidence in the pensions field. The alternative would have placed a new and onerous burden on employers, requiring them to proffer unasked-for advice in individual circumstances in order to avoid the risk of complaints to the Ombudsman. In the present heavily-regulated climate, with some employers asking themselves whether their final salary schemes are still worth the effort, such a development would be unlikely to help employees in the long run.

The National Grid Case
Finally, the Court of Appeal's decision in the National Grid case is awaited, following the conclusion of the hearing in October. Pensioners in the Electricity Supply Pension Scheme complained that surplus had been unlawfully misapplied by National Grid for its own benefit. The Pensions Ombudsman agreed; Robert Walker J did not. With the score still one-all, Pensions Litigation 1998 is not over yet.

I S S U E 4 NOVEMBER 1998
Pensions Litigation 1998 The story so far by Karen Lush, specialist pensions litigator, Baker & McKenzie
While 1998 has not so far been a year for ground-breaking legal decisions in the occupational pensions field, there have been a number of interesting decisions concerning day-to-day administration of occupational pension schemes and scheme rules. The time is also ripe for some in-depth judicial analysis of the more difficult aspects of the Pensions Act 1995, particularly section 67. South West Trains v Wightman 1997 finished on a high in terms of court activity with the South West Trains v Wightman case. The case concerned a pay restructuring agreement between the railway companies and the unions under which the various elements of employees' remuneration (some but not all of which were pensionable) were consolidated into a single 'basic pay' package. Unfortunately, the definition of pensionable pay in the Rules of the Railways Pension Scheme stated that all 'basic pay' was pensionable, which would have resulted in a crippling and unintended windfall to some members. The Court held that the Trustees could retrospectively amend the Rules to correct the situation without contravening Section 67, since the relevant events took place before that section came into force on 6 April 1997. Amendment would simply confirm the terms of a legally binding pensions agreement which had, in effect, overridden the Rules. In theory this could be extended to cover other changes to scheme rules which are communicated to and agreed by members before a formal rule amendment is made, at least where the events occurred before 6 April 1997. However, it would be most unwise to rely on such an assumption today without very careful analysis of the legal issues. MMI v Harrop The 1998 season kicked off in January with Municipal Mutual Insurance Ltd v Harrop. This case concerned an attempt by the employers to correct, retrospectively, an earlier rule amendment which had been incorrectly drafted in a way which favoured the members. This attempt was held to be invalid. The case turned principally on the construction of the particular rules, which contained no power of retrospective amendment. However, the refusal of the court to approve the exercise of the power of amendment in a way which conflicted with its precise terms is also a reminder that decisions will be invalid unless the trustees and employers have followed the correct procedures - a point which is consistently emphasised by the Pensions Ombudsman in his rulings on maladministration. The Barnardos Case A contrasting case involving Barnardos Pension Scheme trustees, Libby v Kennedy, was decided in October. Two out of a body of six trustees took a decision to pay death benefits to a member's second wife, following his expressed wishes. The other trustees informally indicated their consent and the pensions manager accordingly made the payment to the second wife. The trustees later ratified the decision at a trustees' meeting. However, the Ombudsman decided that the decision had not been delegated or taken properly in accordance with the scheme rules, and the payment was invalid. The Court allowed an appeal from his decision. It found that the decision had been validly delegated, and that the pensions manager was entitled to regard the informal notification as signifying the trustees' agreement. It did not matter precisely how they indicated that agreement, provided that a reasonable pensions manager would have interpreted it as such. Even if there had not been a proper exercise of a delegated power, ratification was acceptable as an alternative approach. Thus, while following set procedures is clearly important both to the courts and the Ombudsman, there is room for the exercise of common sense where appropriate. Preston v Wolverhampton Healthcare NHS Trust February saw the latest instalment in the part-timers saga, with the House of Lords referring three questions to the European Court of Justice in Preston v Wolverhampton Healthcare NHS Trust. Part-time workers complained that their exclusion from the pension scheme, where eligibility for membership depended upon a minimum number of hours worked per week, constituted sex discrimination. They claimed access to membership and recovery of employer contributions, relying on Vroege and Fissher (1997) ECR 1. However, their claims were time-barred under the Equal Pay Act 1970. The House of Lords is seeking a ruling from the ECJ as to whether the relatively short time limits under the Act breach European law by impeding the exercise of rights to equal treatment under Article 119 of the Treaty of Rome. The time limits in question are that a claim must be brought within six months after leaving employment and that no more than two years retrospective entitlement will be granted. These limits have come under scrutiny, particularly as a result of the decision of the ECJ in the Magorrian case last December. The decision is still some months away. Re Trusts of the Scientific Investment Pension Plan, Kemble v Hicks This case considered the effectiveness of a provision in a trust deed which served to forfeit a member's benefits in the event of bankruptcy, the Trustees having a discretion to apply the benefits to his dependents instead. One member's trustee in bankruptcy argued that the clause was repugnant for avoiding the bankruptcy laws and that the pension rights ought to vest in him. Mr Justice Rattee found that, while a clause which purported to forfeit an absolute interest in possession in the event of alienation would be void, there was nothing wrong with a clause which forfeited future or determinable interests on the happening of certain events. This confirms that until Section 91(3) of the Pensions Act 1995 comes into force, a properly-drafted forfeiture clause will prevent the bankrupt member's accrued rights under an occupational pension scheme from becoming payable to the trustee in bankruptcy. However, once the pension comes into payment it is another matter, as each instalment of pension can be taken away by the trustee in bankruptcy just like any other income. Kilvert v Flackett In this case which was decided in July, a bankrupt member reached his normal retirement age and opted to take a large lump sum. The Court of Appeal promptly granted his trustee in bankruptcy an income payments order for the entire sum. The moral is obvious: the member should not commute his pension in these circumstances. Clark (Inspector of Taxes) v Trustees of the BT Pension Scheme and Others In this case, which was an appeal by the Inland Revenue, the trustees of three exempt approved pension schemes had regularly engaged in the sub-underwriting of share issues in return for payment of commissions. The Court found that this activity constituted trading, and the profits were therefore chargeable to income tax under Case 1 of Schedule D of the Income and Corporation Taxes Act 1988 (ICTA) and not exempt under either Case I or IV of Schedule D. The trustees incurred a further liability to additional rate tax as the income deriving from their activity did not fall within Section 682(2)(c) of ICTA by which trustees of discret-ionary trusts pay tax at a reduced rate (currently 23%). At the heart of the judgment was Lightman J's view that the trustees' sub-underwriting consisted of operations of a commercial character carried on over a period of years which was frequent and organised, as well as extensive, business-like and for profit. It was irrelevant that the trustees regarded the activity as deriving profits from investments rather than as trading. This decision does not change the law on taxation of profits from trading, but it indicates the Inland Revenue's vigilance in the area and the attitude of at least one judge as to the test for trading. University of Nottingham v Eyett This case decided in November, provides some welcome guidance on the scope of employers' duties. A pensioner complained to the Ombudsman that his employers had failed to tell him that if he delayed his retirement for one month, he would receive higher benefits. The Ombudsman considered that the employers had breached the implied duty of mutual trust and confidence in the employment relationship (Malik v BCCI [1997] 3 All ER 1; Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597). Hart J, however, disagreed. He considered that the employers had not deliberately failed to inform the member of his rights, which he could have worked out for himself from the scheme booklet. They merely followed a policy of not volunteering advice to their employees. As to the implied duty of trust and confidence, Hart J noted that the decided cases had consistently been in negative terms of prohibiting conduct likely to harm the employment relationship, rather than positively requiring conduct in order to avoid harm. It was not impossible that the implied duty could have a positive content in appropriate circumstances, but caution had to be exercised as this would involve a considerable extension of the law, with far-reaching consequences. This decision puts a sensible limit on the implied duty of trust and confidence in the pensions field. The alternative would have placed a new and onerous burden on employers, requiring them to proffer unasked-for advice in individual circumstances in order to avoid the risk of complaints to the Ombudsman. In the present heavily-regulated climate, with some employers asking themselves whether their final salary schemes are still worth the effort, such a development would be unlikely to help employees in the long run. The National Grid Case Finally, the Court of Appeal's decision in the National Grid case is awaited, following the conclusion of the hearing in October. Pensioners in the Electricity Supply Pension Scheme complained that surplus had been unlawfully misapplied by National Grid for its own benefit. The Pensions Ombudsman agreed; Robert Walker J did not. With the score still one-all, Pensions Litigation 1998 is not over yet.

Pensions Litigation 1998 The story so far by Karen Lush, specialist pensions litigator, Baker & McKenzie

Pensions Litigation 1998

The story so far by Karen Lush, specialist pensions litigator, Baker & McKenzie