Pension Scheme Equalisation and Norwegian Blue Ducks

Neil Copeland

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Pension Scheme Equalisation. It’s been a long and winding road from Barber to Dubery and Foster Wheeler, with the occasional cul de sac along the way. But most of us thought we had arrived at a clear understanding as to what was required to achieve equalisation of retirement ages. Many schemes revisited their approach in light of recent case law and a significant number of these were advised that they needed to take remedial action because the original attempt at equalisation had been defective.

Ducks. Back in the old days if you approached Counsel with a question as to whether a particular pension scheme amendment had been effective they would apply the Duck Test. This posited the theory that if it looked like a duck, walked like a duck and quacked like a duck then what you were dealing with was very probably a duck. Although, lawyers being lawyers, there would be a caveat to the effect that there was a small chance that what you were dealing with was actually a particularly devious chicken.

In a pension equalisation context the argument would have been along the lines of:

• Did the trustees believe the scheme was equalised?
• Did the company believe the scheme was equalised?
• Did the members believe the scheme was equalised?
• Was the scheme administered as if it was equalised?
• Was the scheme funded as if it was equalised?
• So, did everybody in the whole world who was aware of the existence of the scheme believe that the scheme was equalised and behave as if the scheme was equalised?

If you could answer all of the above in the affirmative then what you had, so the argument ran, was a duck. And you can see the appeal of the argument.

However a number of cases have emerged in recent years, most notably Dubery and Foster Wheeler, which, to finally extend the metaphor way beyond where it’s reasonable to do so, blew the ducks out of the water and suggested that devious chickens were much more common than previously thought.

I’ll stop with the duck/chicken metaphor thing now.

These more recent cases essentially established the principle that if you had a particular process and methodology to follow set out in your scheme documentation in order to exercise the power of amendment, then you had to follow that process to the letter, crossing “t”s and dotting “i”s without deviation, otherwise any purported amendment would be held to be invalid. Even where, some might argue, this literalist interpretation flies in the face of common sense. But at least we knew where we where.

Law Lords. Enter Lord Drummond Young in the cause of Low & Bonar PLC & Bonar Pension Trustees Limited (“the pursuers”) against Mercer Limited (“the defenders”).

The trustees had had legal advice, no doubt relying on cases such as those referred to above, that the steps taken in 1991 to amend the Scheme’s Normal Retirement Age (“NRA”) to 65 had been ineffective. This was because the governing documentation of the Scheme, to all intents and purposes, required amendments to be made by deed and no deed reflecting the revised NRA was properly executed until 15 August 2002. Hence, the trustees were advised, your window period for equal treatment had to be extended from an end date of 1 July 1991 to 15 August 2002. Very expensive and the trustees and company quite naturally wanted to blame someone – namely Mercer , alleging that Mercer’s advice had been negligent. So the case was already quite interesting as the first high profile case where trustees or an employer had sought redress in relation to allegedly suspect equalisation advice.

Completely unexpectedly, at least to this correspondent, Lord Drummond Young found that the pursuers claim was based on a false premise and dismissed the action. His reasoning was threefold and of potentially much wider application.

Firstly he gave some consideration to the interpretation of pension scheme documents. He declared that he was of the opinion that “the correct approach to interpretation [of pension scheme documents] is that applicable to contracts rather than the approach used for private trusts.” Whilst accepting that “if the power of amendment or alteration imposes particular conditions for its valid exercise, these must obviously be satisfied” he goes on to state that “If … a purported exercise of a power is clear and certain, looked at objectively, and it is put into written form, I do not think that there is any need for the court to be unduly technical or restrictive in considering the niceties of its manner of exercise.” As that great Celtic bard, Phil Lynott, didn’t quite say, the ducks are back in town!

But Lord Drummond Young didn’t rely on the application of common sense in dismissing the action. The major pillar of his argument in this regard was purely legal. He notes that “In argument extensive reference was made to English cases dealing with the construction of pension schemes.” You can almost hear the skirl of the pipes, smell the peaty smoke of the highland hearth and see the Wembley officials counting their goalposts, as a stand is made again against the perfidious Sassenach.“In Scots law, unlike English law, the word “deed” did not have any technical meaning” he added. In Scots law a “deed” did not have to be a specific document drawn up by lawyers and signed by both parties. Lord Drummond Young then considered what in Scots law might constitute a “deed”. In essence he concluded that the steps taken to make the change originally in 1991, taken in aggregate, and filtered through a prism of common sense amounted to a “deed” as the term applies under Scots law and that therefore the requirement of the trust deed and rules had been satisfied and that the original amendment had been effective. Great news for the pursuers and defenders; no additional liabilities for the pursuers; no messy claim for the defenders. Group hugs all round! Well perhaps not.

Mercer had also gone with a Plan B in case Plan A didn’t work. Lord Drummond Young considered Plan B even though it was only relevant if he was wrong about his conclusions on Plan A, which was jolly decent of him. Plan B relied on arguing that the terms of the Scheme’s rule dealing with augmentations, discretionary benefits and other special provisions was sufficiently widely drawn to allow amendment of the Scheme’s NRA on the basis of complying with this Rule’s requirements – basically that the principal employer notifies the trustees “that special terms are to apply” and that the trustees then notify the affected person(s). No deed, compliant with Scots Law or otherwise, required. Lord Drummond Young did point out that having a Plan B was slightly disingenuous on Mercer’s part because the trustees either exercised the power of amendment or the power in relation to special terms, but couldn’t exercise both simultaneously. You would also hope that the trustees rather than Mercer might be in a better position to know what power they were using, and it doesn’t seem to have occurred to the trustees that they were possibly using a completely different rule. Lord Drummond Young remained unfazed by the apparent accidental use of a scheme rule by the trustees suggested by Plan B and concluded that if he was wrong about the whole “deed” thing then Plan B also worked for him.

So it’s possible that many schemes governed by Scots law took advice and actions that may prove to have been unnecessary, given this latest case. Equally schemes with similar “special terms” rules elsewhere in the UK may find themselves in a similar position. Clearly the judgement turns on the specific actions taken by the trustees and company in 1991 and the equally specific terms of their deed and rules, but given the additional liabilities which can arise from having gotten equalisation “wrong” it’s certainly worth another look.

In the pensions world we have to live with the world view shifting every so often, but is it just me or is it happening more frequently? Anyway, it will be interesting to see what wider impact, if any, Lord Drummond Young’s views on the interpretation of pension scheme documents will have.

Finally, and I apologise for the corny ending in advance, its fair to say that equalisation, as an issue for trustees, is not a dead duck. It’s just pining for the fjords!

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.