Was this a ground breaking case, or an isolated decision?
The Wembley case, which was decided in the High Court in October 2011, has caused some interest among pensions lawyers. It concerned the difficult question, and common problem, of scheme changes which are attempted without following properly the procedure set out in the scheme’s governing documents. Can the Court “cure the defect”, by applying one of its equitable principles: “Equity looks on as done, that which ought to be done”?
Equitable maxims have developed over many centuries in specific Courts of Equity in England and Wales. They were the principles which those Courts of Equity applied when deciding cases before them. When all the Courts of England and Wales were consolidated in the 19th century, the Courts of Equity disappeared, but their maxims prevail today. There are a dozen or more major equitable maxims, including the maxim applied in the Wembley case, which is probably the most well known.
Wembley plc, the sponsoring employer of the Wembley 1989 Pension Scheme (the Wembley Scheme), went into voluntary liquidation in 2005. The Wembley Scheme was set up in 1989, following the consolidation of two previous schemes. At the time of the amendment in question, the trustees were five individuals.
In 1999, the Wembley Scheme provided that both the revaluation of deferred pensions before retirement, and increases to pensions in payment (together, the Increases), were fixed at 5 per cent each year. The issue before the Court concerned an amendment which the trustees and Wembley plc thought they had made in 1999/2000, which was to change the rate of Increases to that of the Retail Price Index (RPI) capped at 5 per cent each year, for future accrual.
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The amendment power
The Wembley Scheme was established using Legal and General standard documents, with a standard Legal and General amendment power.
The power of amendment had four requirements:
- The Principal Employer must provide written authorisation to the trustees to make the amendment.
- The Trustees must declare the amendment in writing.
- The Trustees must notify all affected members in writing of the amendment.
- The amendment must not breach various restrictions. There were a number of restrictions, one of which was that no amendment could be made which would diminish any rights accrued to a beneficiary under the scheme before the date on which the amendment took effect.
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What happened in 1999/2000
There were a number of meetings held by the trustees and Wembley plc during 1999/2000. Unlike some other cases where an amendment has not been properly documented, there was good evidence of all the parties’ intentions, together with a detailed “paper trail” of documentation. Courts do find it easier to come to a conclusion where there is such good evidence.
The chronology of events is summarised below:
- November 1999 - the trustees met, and four of the five individuals were present. They agreed that the amended rate for the Increases would be RPI capped at 5 per cent, for accrual from 6 April 2000.
- December 1999 - the Board of Wembley plc discussed a recommendation to change the rate of Increases to the lower of 5 per cent or inflation.
- January 2000 - all five trustees met and agreed unanimously to amend the rules so that, in respect of benefits accrued from 6 April 2000, the rate of Increases would be RPI, capped at 5 per cent.
- July 2000 - four of the five trustees met and signed a declaration. Subsequently, an announcement was made to members.
Shortly before Wembley plc went into liquidation in 2005, the individual trustees were replaced by a corporate trustee, HR Trustees Ltd. HR Trustees Ltd asked for directions from the Court as to the validity of the 1999/2000 amendment to the rate of the Increases.
The Judge, Vos J, reviewed the events, and the principles of construction of pension scheme documents as set out in previous cases. He held that:
- a scheme’s operation should not be encumbered by unnecessary technicalities, although if the amendment procedure contains important safeguards for members or trustees, that is a good reason to require the employer to adopt it;
- benefits which members receive are deferred pay, and this puts the members in a different position to mere beneficiaries under a trust;
- the scheme rules should be construed so as to give a reasonable and practical effect to their provisions, bearing in mind any changing commercial background. It is necessary to test competing constructions of the rules against the consequences they produce in practice; and
- it is important to avoid unduly fettering the power of amendment.
Vos J also spent some time reviewing the case of BESTrustees Plc v Stuart , in which the Court considered a contested amendment, made under an identical power of amendment. The problem in BESTrustees was that, while the authorisation requirement had been complied with, and an announcement had been made, there had been no declaration of the amendment. Because of that failure, the amendment was not effective.
After reviewing all the authorities in the light of the Wembley case, Vos J was quite clear that the requirement for a declaration by the trustees “in writing under their hands” required signature by all the individual trustees, as “the words are clear and must be respected”. The declaration had not been effectively made, but here Vos J went further than the Court had in BESTrustees. He decided that the decision of the trustees to make the amendment was essentially composed of two parts:
- first, they exercised their discretion to make the amendment, which was shown by the clear written records of their meetings in November 1999 and January 2000; and
- second, they made the declaration, although ineffectively.
He concluded that the omission to make the declaration was entirely formal, and the evidence showed it to be simply an administrative error.
Vos J then considered the crux of the case:
could the Court “cure the defect” by applying the equitable maxim that “Equity looks on as done, that which ought to be done”.
The Court considered previous authorities and concluded that this was a classic case where the equitable maxim could and should be applied. Vos J said that “The law and equity would be made to look ridiculous if [they] were powerless to correct what has been an obvious administrative error like the one made in this case.” He was also influenced by the fact that no member had any reason to feel aggrieved, since they had received the announcement of the change. They had not expected to continue to accrue rights on the previous basis, so if they did so now, any such benefits would be an unjustified “windfall”.
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In this case, the Court was able to follow the previous line of cases such as BESTrustees, which requires strict compliance with the amendment power. In addition, the equitable maxim was also applied, in what Vos J considered a sensible and pragmatic manner intended for just such cases, where strict application of the law may otherwise produce a ridiculous result.
While this was the right result in this case, some lawyers have expressed doubts as to how far the Wembley judgement represents a move away from the strict compliance requirements, and whether this case may be followed in future. There are many instances where claims arise in relation to errors occurring in a scheme’s amendment procedure. While the Wembley claim succeeded because the meetings and decisions were carefully recorded, in many cases there is simply not enough evidence to support such an application.
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