UK: Court Rejects Back-Door Rectification - Smithson & Ors V Hamilton (2007)

Last Updated: 14 February 2008
Article by Mark Howard

The High Court has rejected an application from the trustees and participating employers of the Siemens Fire Safety and Security (PFP) Pension Scheme ("the Scheme") for relief under the Rule in Hastings-Bass to set aside a scheme rule which afforded certain deferred scheme members unintentionally over-generous benefits.

The Scheme was established on 1 April 1990 by an Interim Deed which governed the Scheme on an interim basis until the execution of the Definitive Deed. The Definitive Deed was executed in 1992. In between the Interim Deed and the Definitive Deed was the European Court decision of Barber v Guardian Royal Exchange (1990) requiring pension schemes to provide equal benefits for men and women.

In the Definitive Deed, the rules dealt with Barber by allowing active members to retire between the ages of 60 and 65 without the consent of the employer. The pension would be subject to actuarial reduction taking account of the effect of the Barber decision. However, the rules allowed a deferred member to draw his or her pension at age 60 without any actuarial reduction. As drafted, the Definitive Deed allowed active members to bypass the standard early retirement rule and take advantage of the deferred member's early retirement rule, which failed to incorporate a reduction. The problem with the rules was discovered around 1999, and an amendment was executed in 2001 to change the position but only for future pensionable service. The extra cost as a result of deferred pensions potentially being payable early without reduction was put in excess of Ł1.5 million.

The primary way to correct a document that does not accurately record the intentions of the parties is by application to the court for rectification. If successful, the court will alter the wording of the instrument so that it reflects what was intended. However, the trustees and employer did not seek an order for rectification and no reasons were given to the Court for why rectification was not sought.

Instead, the trustees and employer applied for relief under the Rule in Hastings-Bass. This applies where a trustee has acted under a discretion conferred by a trust deed and rules, but the effect of that act is different from what was intended. The court will set aside the trustees' action if it is clear that the trustees would not have acted in that way, had they considered factors that ought to have been taken into account, or had they taken into account considerations which ought not to have been taken into account. In this case, it was argued that the trustees had failed to appreciate the difference in treatment of active and deferred members (and the consequent cost implications) and that this brought the Rule in Hastings-Bass into play.

The Court rejected the trustees and employers arguments on a number of grounds:

  • The Court viewed the application to be "rectification by the back door". The Rule in Hastings-Bass, if applicable, would require the rule to be set aside altogether. In this case the rule needed to be amended as otherwise the deferred members would have no right to early retirement at all (which in turn would cause problems with complying with preservation legislation).
  • The responsibility for arranging the drafting and execution of the Definitive Deed was with the employer. However, the Rule in Hastings-Bass applies to the acts of trustees, not to acts of the employer. The trustees did have fiduciary duties in relation to the execution of the Definitive Deed, but were limited to being satisfied that the Definitive Deed would provide an acceptable scheme providing the kinds of benefits that members expected. Their fiduciary duties did not extend to identifying the problem with the early payment of deferred pensions.

The trustees and employers also argued that the principle of equitable mistake should apply to allow the problematic rule to be set aside. However, after a thorough review of the authorities, this argument was also rejected. The judge held the doctrine should only apply to voluntary settlements, not pension schemes where benefits have been earned. Also, following the Court of Appeal decision in Great Peace Shipping v Tsavliris Salvage (2002) the mistake had to affect the essential quality of the document for it to be set aside. In this case, the Definitive Deed still constituted a pension scheme, albeit one which was more generous to members than anticipated.

The Rule in Hastings-Bass has been applied in many pension cases over the last few years and often in tandem with an application for rectification. However, this case perhaps represents the start of the courts beginning to restrict the use of the Rule. The discussion as to the balance of responsibility between the employer and trustees regarding the execution of the Definitive Deed is also interesting. The conclusion on this part is a pragmatic approach, reflecting that the scheme is part of the employer's remuneration policy and, therefore, it should be for the employer to decide what benefits to give. However, the same approach may not apply to the execution of further deeds intended to consolidate the rules of a scheme. In that context, the trustees might have a role to ensure that the benefits are not being changed in any way.

This decision is to be appealed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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