Court dismisses trustee’s Barber window arrears claim

The case was brought by the CMG trustees against the scheme’s sponsoring employer, CGI IT UK, and hinged on how a specific part of the scheme’s rules should be applied when rectifying underpayments the trustee had identified dating back to 2009.

The question as to what should happen with arrears due more than six years prior arose in 2019, with the employer and the trustee disagreeing on the interpretation of a specific rule — rule 5.11 — and its implications.

The employer argued that the rule was, in effect, a forfeiture provision, while the trustee maintained that it was not.

The judge’s determinations on context and drafting suggest that future cases of this nature could end up being a bit of a lottery

Charlotte Clewes‑Boyne, Arc Pensions Law

The background

Underpayment issues arose in part out of the application of the Barber ruling, when the European Court of Justice decided in 1991 that the right to equal pay for men and women applied to occupational pension schemes. This meant that men and women had to be given the same retirement age.

Until then, it was normal practice in the UK to have unequal retirement ages between male and female members, typically 65 for men and 60 for women.

Following May 17 1990, pension schemes had to set a date for equalisation and, until that date came into effect, pension rights were gradually levelled up, in what was called the Barber window.

This meant that disadvantaged members were entitled to more favourable treatment, which generally meant that male members were entitled to a lower retirement age.

Although the scheme was administered on the presumption that the equalisation had taken place, the change to its deed and rules did not take place until some time after the fact. This led to the paying of incorrect benefits to some members, with the trustee informing the employer of this twice, first in 2012 and then again in 2014.

The trustee resolved to correct members’ benefits in 2016, and has since done so with respect to future benefits, while paying all arrears (without interest) accrued until 2017. In total, 116 members were affected by the equalisation issue, with the total underpayment amounting to around £1.2mn, and the largest single underpayment amounting to £54,567.

A further issue arose relating to the accrual rate, again because the scheme was administered on the presumption that a change to the rules had been made, with the actual change not being made until some years later.

This gave rise to further arrears totalling £818,306, although representations from a director of the trustee suggested the figure could have been reduced to £378,509 if the arrears had been restricted to the six-year period from October 2013 to October 2019.

Further pension corrections were made until late 2019, with the trustee director’s argument being that each figure would have been reduced by the application of the six-year restriction.

The argument

The principal question the judge was tasked with resolving was whether rule 5.11 amounted to a general forfeiture requirement, as was the employers’ contention, or whether it was intended to have a limited and targeted effect, as was the trustees’ argument.

According to Justice Leech’s account, the trustee argued that the purpose of rule 5.11 “was to deal with missing beneficiaries and to prevent funds from being ‘orphaned or trapped within the scheme’”.

Nevertheless, the rule was not created with the intent to “extinguish the benefits of members where they could be identified and paid, or to extinguish benefits where they had been unrecognised (eg, as a result of a mistake by the trustee)”.

The trustee also argued that the rule was not intended to “extinguish shortfalls”, such as where a lump sum or instalments had been “regularly underpaid”.

The employers’ submission, meanwhile, admitted that the rule did not specifically contain the word “forfeiture”, but that it was a point of “genuine uncertainty” how the rule was in fact intended to be applied.

The employers’ representative pointed to statutory history allowing for the forfeiture of benefits that had been unclaimed for more than six years, and contended that the scheme in question had contained a forfeiture clause since its 1981 rules were drafted, albeit the word only appeared in headings and not in the body of the rules.

The ruling

The judge determined that rule 5.11 was indeed a forfeiture clause, “and 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”. 

“It is also my judgment that rule 5.11 is not limited to missing beneficiaries but applies to all unclaimed benefits once the six-year period has expired,” he wrote.

He accepted that the wording of the rules did not refer to “forfeit” or “forfeiture”, but found that they did contain wording to the same effect: the phrase “shall be retained by the trustee for the purposes of the scheme”.

The judge further concluded that the rules did not distinguish between benefits unclaimed for six years because the beneficiary is missing, and those unclaimed because the beneficiary was unaware of their entitlement, arguing that “if the purpose of the rule was to draw such a distinction, one would have expected the drafter to use clear language to that effect”. 

He ruled that the trustee’s construction or interpretation of rule 5.11 was “impractical” and would “[deprive] the rule of any real effect”.

Arc Pensions Law associate Charlotte Clewes‑Boyne explained that the case places a significant weight on a literal analysis. “That said, the judge accepted that context is not irrelevant and a purposive construction may be necessary,” she said.

Clewes‑Boyne noted, however, that the case “did produce some useful principles when looking at the specifics of a scheme’s rules — for example, noting that you don’t need the word ‘forfeit’ in a rule for it to operate as a forfeiture clause”.

“In this case, the judge preferred an interpretation which did not require any extra wording to be added into the clause, focusing on the wording of the rules in front of him and what they did and, importantly, did not say,” she said.

“It was also relevant that the rule in question had remained broadly unchanged over multiple iterations of drafting, and in this case looking at the archaeology of the rules of a scheme was deemed appropriate.

“Citing the Stena case, the judge took the view that the forfeiture clause in this case had been intended to retain its historic meaning, and also placed weight on the accepted principle that in a pensions context, greater weight is placed on the specific language chosen by the drafter.”

Clewes‑Boyne continued: “Overall, the judge’s determinations on context and drafting suggest that future cases of this nature could end up being a bit of a lottery.

“The relative importance of the drafting of the scheme rules and their context remains a balancing act in the hands of the court. It will depend entirely upon an individual scheme’s circumstances, drafting and archaeology.”