In Lloyds Mr Justice Morgan concluded that the pension scheme rules he had to consider permitted or required trustees to forfeit arrears that would otherwise be due to scheme beneficiaries.
Mr Justice Morgan has now handed down another ground-breaking judgment (Punter Southall Governance Services Limited v Jonathan Hazlett (as a representative defendant)  EWHC 1652 (Ch)) in this area of pensions law, addressing issues which went beyond those he considered in Lloyds and which are likely to be of considerable interest to those involved in the administration and funding of pension schemes.
This case concerned the Axminster Carpets Group Retirement Benefits Plan (the "Plan"), in which members of our Pensions Disputes team (with barristers Henry Legge KC and Tom Robinson) acted for the Trustee, Punter Southall Governance Services Limited.
The facts in brief
The Trustee was appointed in 2013. After its appointment, it identified legal uncertainties with various instruments historically executed in relation to the Plan. The Trustee sought directions from the Court to resolve those uncertainties. The interests of members were represented by a representative defendant ("RD").
The Trustee and the RD reached a compromise on most issues, the effect of which was that members were, at first sight, owed arrears because (amongst other things) the pension increases they had historically received did not reflect the increases to which they were legally entitled. However, an issue arose as to whether those arrears could or should be forfeit under the Plan's rules and whether, in any event, claims for arrears were time-barred under the Limitation Act 1980.
Having been the judge in Lloyds, Mr Justice Morgan was in familiar territory in having to decide whether the Plan allowed arrears to be forfeit, albeit he had to consider issues beyond those he had decided in Lloyds. Further, although in Lloyds he had decided that claims for arrears were not statute-barred, Mr Justice Morgan decided he should hear extensive argument on limitation in Axminster Carpets, as a consequence of which his judgment is now the leading authority on this area of law.
The Plan's provisions
The relevant deeds were executed in 1992 (the "1992 Deed") and 2001 (the "2001 Deed").
The 1992 Deed contained Clause 25, as follows:
"POWER TO APPLY UNCLAIMED MONIES
ANY monies payable out of the Plan and not claimed within six years from the date on which they were due to be paid may (at the Trustees' discretion) be applied:
(i) in augmenting the benefits of those Members still in Service,
(ii) in reducing the Employer's contributions to the Plan, or
(iii) in payment of the expenses of the management and administration of the Plan."
The 2001 Deed (which applied to active members as at 16 March 2001) contained Rule 36, as follows:
If a Beneficiary fails to claim a benefit within six years of its becoming due, it shall be forfeited but the Trustees may at their discretion … apply all or any part of such benefit:
(a) to the Beneficiary notwithstanding the forfeiture;
(b) in augmenting the benefits of Members still in Service;
(c) in reducing the Employer's contributions to the Scheme under Rule 10; or
(d) in payment of the expenses of the management and administration of the Scheme ..."
Whereas Clause 25 enabled, but did not compel, the Trustee to apply unclaimed monies for various purposes, Rule 36 provided for mandatory forfeiture in accordance with its terms, whilst giving the Trustee a discretion to apply forfeit benefits for stated purposes, including paying the beneficiary to whom arrears were owed.
Were Clause 25 and Rule 36 forfeiture provisions?
Mr Justice Morgan concluded that Clause 25 does not operate as a forfeiture clause as, he found, it does not contain wording that directly deals with the forfeiture of an entitlement to arrears. He thought it likely Clause 25 was intended to deal with orphaned money that ought to have been, but which could not be, paid to a missing beneficiary. In that situation, the Judge concluded, the Trustee would have surplus funds it might wish to apply for a useful purpose rather than retain them indefinitely.
In contrast, the Judge concluded that Rule 36 operates to forfeit underpaid pensions. Mirroring the approach he had taken in Lloyds, Mr Justice Morgan concluded that the words "a benefit" in Rule 36 do not refer to the right to a pension from retirement. Rather, if an instalment was due on a date and part of the instalment was paid but part not, the relevant "benefit" for Rule 36 is the part that was not paid.
The fact that (most) members could not be expected to know they had been unpaid was irrelevant to how Rule 36 should be interpreted, albeit it could be relevant to the exercise of the Trustee's discretion. In reaching this conclusion, the Judge concluded that the word "fails" in Rule 36 described a situation in which no claim had been made; it did not limit forfeiture to a situation in which a member had been at fault in not making a claim.
Further, Rule 36 was permitted by section 92 of the Pensions Act 1995. Section 92(5) stated that the prohibition in section 92(1) does not prevent forfeiture by reference to a failure to make a claim for any benefit where, amongst other things, a claim is not made within six years of the date on which any benefit became due. The Judge concluded that, where no claim had been made within the relevant period, it is not necessary to ask whether the absence of a claim was the result of a "failure" by the member.
When were "claims" made?
Forfeiture provisions are often engaged when members did not "claim" arrears to which they were entitled within six years from when that entitlement arose. Can it be said that members "claimed" those arrears when they requested their pensions to be put into payment, such that there will be no period during which they were entitled to arrears but failed to "claim" them?
In Axminster Carpets, Mr Justice Morgan affirmed his conclusion in Lloyds. It was not enough that, before their pension came into payment, a member had asked for their pension to be paid. It was necessary for members specifically to make a claim for the arrears to which they were entitled, such claim having been made at the latest, the parties agreed, when the Trustee issued the proceedings before the Court.
Did the introduction of Rule 36 infringe the Plan's amendment power?
The Plan's amendment power prevented any amendment that would "diminish … benefits … already accrued under the Plan… The Judge had to consider whether, as Clause 25 was not a forfeiture provision, Rule 36, which enabled forfeiture for the first time in the Plan, had been validly introduced.
Rule 36 did not apply to arrears due before 16 March 2001. However, it did apply to payments that fell due after 16 March 2001 in respect of all the pensionable service of members who were active on 16 March 2001.
The Judge concluded that the change brought about by Rule 36 was not an alteration that would diminish benefits already accrued because the amount of the benefits to which the member was entitled was not diminished and Rule 36 only results in forfeiture where the beneficiary fails to make the claim, so it could not be said it "would" happen.
In appropriate cases, it will also be necessary to consider whether the introduction of a forfeiture provision satisfied the requirements of section 37 of the Pension Schemes Act 1993 and section 67 of the Pensions Act 1995, neither of which the Court had to consider in Axminster.
Rule 36 gave the Trustee a power to apply unclaimed arrears for various purposes, including paying the members whose benefit might otherwise be forfeit. The Trustee asked the Court for guidance on the factors it should take into account in considering how it should exercise its discretion.
The Judge was asked to rule whether, as a matter of law, a factor was a relevant or irrelevant consideration. He would not direct the Trustee to act in a particular way or suggest the weight to be given to relevant factors he identified.
It was clear that the Judge thought it particularly relevant that, for most members, the fact they had been underpaid was not their fault and they could not reasonably have been expected to claim arrears any earlier. He noted that, in such a case, "the first reaction of the Trustee should be to make good the … underpayments without further delay". That was a clear judicial indication of a kind not found in Lloyds. However, Mr Justice Morgan acknowledged that Rule 36 does not require this and there might be other considerations that would go against that "first reaction".
For example, although the Judge thought that the Trustee should proceed on the basis that members were always entitled to the rights established by the compromise, fault on the part of past trustees, who formed a distinct class of the membership that was owed arrears, was capable of being a relevant factor in how discretion should be exercised in relation to them.
Further, Mr Justice Morgan decided that administrative difficulties in paying arrears were potentially relevant. A rational and proportionate response was required and he was not able to say that a member-by-member examination of the difficulties that might be involved was always appropriate.
The Plan is in a PPF assessment period and the Judge ruled that there was no reason for the Trustee to exclude that fact in deciding how to exercise its discretion.
The Judge also confirmed that it was possible for a trustee to exercise its discretion to save from forfeiture some, but not all, arrears that would otherwise be forfeit.
Having noted that the fact members had not claimed arrears because they had no reason to believe they were entitled to them provided a "powerful" reason to avoid forfeiture, he acknowledged that it would be necessary to consider any administrative difficulties in exercising the power under Rule 36.
Accordingly, the Judge was not able to say that, as a matter of law, any decision that did not involve an exercise of the power under Rule 36 for every beneficiary for every year during which there had been underpayments would be perverse and a decision no reasonable trustee could make.
The main issue on limitation was whether a claim for arrears was "an action by a beneficiary under a trust … to recover from the trustee trust property … in the possession of the trustee" within section 21(1)(b) of the Act, to which no limitation period applied.
The Judge had considered this issue in Lloyds but, given its importance, he had concluded he should decide the issue having heard full argument in Axminster, which he said he had not received in Lloyds.
Members' rights under a scheme are not proprietary rights and claims for arrears are not proprietary claims. However, the Judge decided the words "trust property" in section 21(1)(b) mean property held on trust and it is not necessary for a beneficiary to have a proprietary interest in the trust property. Further, the word "recover" did not import a requirement that the claimant must have a proprietary interest in the thing to be recovered.
Accordingly, the phrase "to recover trust property" did not require the member to have a proprietary interest in the arrears. That being the case, a member claim for arrears against the current Trustee was not time-barred.
However, the Judge made some interesting comments on how a claim for arrears might be put, which might have wider implications.
A member might claim an account and order for the payment of arrears from a current trustee, which claim would not depend on showing that a breach of trust had occurred. As the trustee will possess trust property, no limitation period will apply.
Alternatively, a member might claim compensation for breach of trust, which, unlike a claim for an account, might carry interest. A claim against a current trustee for compensation could not rely on breaches of trust committed before they became a trustee. For such breaches of trust, it would be necessary to sue former trustees. However, a claim against former trustees would be subject to the six year limit as the member would not be able to rely on section 21(1)(b) because the former trustee would not be in possession of trust property.
The Judge made a number of interesting comments and findings in relation to interest.
The Judge accepted that a claim for an account against a current trustee would not, of itself, include a claim for interest, albeit the Court had the power to award interest under section 35A of the Senior Courts Act 1981 on any sum ordered to be paid further to a claim for an account.
On the other hand, the Judge held that a claim for compensation for breach of trust could include a claim for interest. Such a claim would be based on breaches of trust by a scheme's current trustees. In order to go back further, it would be necessary for the member to bring breach of trust claims against former trustees. However, such claims would be subject to the six-year limitation period because former trustees are no longer in possession of trust property, so no compensation might be recoverable from them, with or without interest.
In Axminster Carpets, the Court was not asked to decide whether, in its discretion, it would award interest and, if so, over what period. However, Mr Justice Morgan stated that he was "not convinced" that members would be entitled to interest on the full amount of arrears for the full period since arrears had fallen due.
Axminster Carpets is now the leading judgment on this area of practice.
Short of a decision of the Court of Appeal, the issue of whether claims for arrears fall within section 21(1)(b) of the Limitation Act, to which no limitation period applies, has been definitively resolved.
The judgment of Mr Justice Morgan affirms many of the conclusions he had reached in Lloyds as to the operation of forfeiture clauses. In addition, the judgment addresses issues not considered or resolved in Lloyds, for example, whether the introduction of a forfeiture clause might contravene the fetter in a scheme's amendment power.
However, the conclusion he reached on Clause 25 illustrates that, as with "RPI v CPI" pension increase cases, the devil will be in the detail and close attention needs to be paid to the precise wording of scheme rules to determine whether they permit or require forfeiture.
The judgment in Axminster Carpets confirms that the usual scenario of a member not being responsible for having been underpaid, and not being to blame in not claiming arrears earlier, is likely to be irrelevant in deciding whether a clause is a forfeiture provision. However, Mr Justice Morgan indicated that it would be significant when it comes to whether a discretionary power to forfeit should be exercised.
Interesting questions remain as to the interest to be paid in "arrears cases" which were not resolved by the judgment.
If you have any questions about this insight, or about pensions more generally, please contact Ian Gordon.
Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc  EWHC 2839 (Ch).