Scheme goes to court to avoid £10m rules drafting mistake

Blatchford – the sponsor of the Chas A Blatchford & Sons Limited Group Pension Scheme – saw the High Court approve a rectification to the plan’s 1996 rules, which dictated that members of the scheme’s category D would receive increases of the greater of 5 per cent and the annual hike in the retail price index.

However, the original announcement in 1992, when the rises were introduced, dictated that these members were entitled to increases to their pensions in payment of the lesser of 5 per cent and the RPI.

The difference a word makes

The goal was that in periods of high inflation, rises would be no greater than 5 per cent; and in periods of low inflation, rises would be no greater than increases in the RPI.

The increases were documented in the deed executed in 1996, but due to the mistake in wording, instead of a cap on pension increases, the rule operated as a collar.

The rectification route may sometimes be the best way to fix this sort of mistake, albeit with the trouble and expense of litigation

David Everett, LCP

Currently, category D of Blatchford’s pension scheme has 107 deferred members and 131 members with pensions in payment.

According to Capita Employee Benefits, the scheme’s current administrator, not rectifying the current rules would have an additional cost of between £9m and £10m.

When the sponsor came to fix the mistake, they made an application for rectification in 2008, but this was ineffective, Chief Master Marsh said in the judgment.

Some 11 years later the matter was taken to the High Court, with the judge finding there was no evidence that when the deed came to be written there was any intention to change the increases promised in the earlier announcement. 

The trustees could not recall the discussion of the amending deed and the solicitor who drafted the 1996 rules admitted she made a mistake at the time, with the judge concluding that an order to fix the rules should be issued.

Rectification was the only route

According to David Everett, partner at consultancy firm LCP, rectification proceedings can fix mistakes where it is very clear that documentation does not reflect the intentions of the parties.

However, it is not always possible to demonstrate this after the passage of time. “It was in this case, which shows that the rectification route may sometimes be the best way to fix this sort of mistake, albeit with the trouble and expense of litigation,” Mr Everett said.

Stephen Scholefield, partner at Pinsent Masons, stressed that lawyers are human and errors in documents do arise. Fortunately, the process for correcting errors is now “well established and where it can be demonstrated that an error occurred, it can often be corrected”, he noted.

“It is not always straightforward though, as the passage of time can occasionally make it difficult to tell what the parties were trying to achieve,” Mr Scholefield said.

“And even where it is clear that an error occurred, pulling together the evidence can be a time-consuming process.”

For Mr Scholefield, the real lesson from cases like this is that drafting pension scheme rules, and benefit specifications used for buy-ins and buyouts, is “a skilled job and something to approach with care”.

He added: “While schemes may not always see the value in paying for this type of work, the risk of having to correct errors later means getting it right is money well spent.”

The rules always prevail

Rosalind Connor, a partner at Arc Pensions Law, noted that the rectification is being used more frequently by pension schemes.

She said: “They highlight a fundamental problem that if you find that the pension scheme documents don’t fit with what people, or at least some of the people, think should be the rules, it is not easy to fix. 

“Most schemes have some problems of this nature, so it is a very common issue.”

The problem is that if the rules say something and the trustees, employer, administrators and even the members think it should say something else, the rules in general still prevail, Ms Connor stressed.

“They can’t be ignored just because everyone thinks they are wrong,” she said.

“The problem is that unless you can amend the rules, you have to follow them, even if they don’t say what anyone thinks they should. There aren’t many ways of amending the rules, particularly as you can’t change accrued benefits, so quite often rectification is the best way to make a change.”

Ms Connor added: “It is a long and expensive process. It would be very helpful if there was another way to deal with this issue, but sometimes, there really isn’t.”