The High Court has ruled that defined benefit schemes are not subject to a time limit on their ability to recoup pension overpayments. Such a recovery must be carried out equitably by altering future payments, however.
Annual pension payment increases have come under the court’s scrutiny in recent months. In January, it blocked BT’s attempt to change the index by which increases for its Section C scheme are calculated.
The court handed down its ruling in Burgess and others v BIC UK on April 17, in a case that concerned whether trustees had legitimately granted annual payment increases at a 1991 meeting. It also considered whether these payments could be recovered.
We’ve effectively got two High Court judgments that are conflicting, and from a legal perspective there’s no correct answer
Peter Murphy, Sackers
Legislation introduced in 1987 limited the level of surplus schemes are allowed to hold to 105 per cent of their liabilities. In 1991, the BIC scheme was in a surplus position of £2.33m, exceeding the permitted level.
The trustees decided to increase future benefits for pensioners and scheme members by the lower of 5 per cent or the retail price index between April 6 1992 and April 6 1997.
The court ruled that the trustees had not validly granted the increases in accordance with its scheme rules at the time, but that the decision fell within the window of subsequent backdated rules, rendering it valid.
Regardless of the validity of the increases, the court also gave clarification on how a board might recoup an invalid increase.
It considered, and rejected, the Pensions Ombudsman as an appropriate body for approving trustee efforts to seek equitable recoupment, pointing instead to county courts.
Scheme rules allow for rewriting of history
Scheme rules introduced in 1991 and 1992 would not have permitted the increases. But the 1993 rules were written to apply from August 6 1990.
Martin McFall, partner at law firm Trowers & Hamlins, which represented BIC, said, “If the 1993 scheme rules [had not been] retrospective… these increases wouldn’t have been validly made,” he said.
“The judge said actually, ‘This is rewriting history, but it’s not an impermissible way of rewriting history,’” he added.
The current trustees, who were the claimants in the case, argued that exercising the equitable right of recoupment is subject to a six year limitation period, as set out in the Limitation Act 1980.
They cited a handful of cases including the Webber v Department of Education High Court case. In July 2016, the Justice Nugee ruled that a scheme could not claim back overpayments made more than six years before a recognised cut-off date.
Yet in this month’s ruling, Justice Arnold accepted the defendant’s argument that recoupment was in this case “not a restitutionary claim for unjust enrichment” but “an equitable self-help remedy which did not involve any claim for payment back of the monies”.
Because the trustees would have recouped the value by adjusting future payments, rather than claiming repayment, their action would not have been covered by the Limitation Act.
The Ombudsman cannot enforce recoupment
The judge ruled that the Pensions Ombudsman is not a sufficiently competent authority to deliver an order under section 91 of the Pensions Act 1995 in favour of allowing trustees to undertake equitable recoupment.
The High Court ruled that trustees could instead obtain the necessary resolution from the county court.
Key principal conclusions
The pre-97 increases were not validly granted by virtue of either rule 32 or rule 36 of the fourth edition of the Rules
The pre-97 increases were validly granted due to the 1993 Rules since those provisions can take effect from August 6 1990 without impermissibly re-writing history
Equitable recoupment is not subject to a six-year limitation period under the Limitation Act 1980
If the trustees were to recoup overpayments, then determination by the Pensions Ombudsman on a reference by a member would not amount to an order of a competent court under the Pensions Act 1995
McFall described this as “a slightly tortuous route”, but said that the outcome provided “a bit more clarity for trustees as to how they could recoup overpayments in the future”.
Naeem Noor, senior associate at law firm Stephenson Harwood, which represented the claimants, said that use of the Ombudsman is not a trustee-instigated procedure and is therefore not an appropriate starting point for trustees looking to recover overpayments.
“The Pensions Ombudsman is a forum for members to make complaints,” he said. “It’s not a forum whereby trustees can use the Pensions Ombudsman in order to enforce a claim against a member”.
We have two verdicts at conflict
Peter Murphy, head of pensions and investment litigation at law firm Sackers, said that friction between this month’s ruling and the verdict of the Webber case will fuel uncertainty on trustee boards.
BT scheme to keep RPI amid bigger changes
The High Court has ruled in favour of the BT pension scheme trustees and denied BT the right to change the measure by which increases for its Section C scheme are calculated, but BT has said it is considering an appeal.
“We’ve effectively got two High Court judgments that are conflicting, and from a legal perspective there’s no correct answer,” he said.
This will make the process of reviewing benefits even more difficult, he said, and arouse opposition from cynical members who fear that they are being penalised for the mistakes of others.
“Trustees will have to recognise that setting a policy will need greater flexibility, and it might have to recognise that while six years might be a pragmatic solution, it can’t be simply adopted as a starting point,” Murphy said.
