Axminster: Limitation and forfeiture revisited after Lloyds

The High Court (Morgan J.) has delivered judgment in Punter Southall Governance Services Ltd v Hazlett [2021] EWHC 1652 (Ch), concerning the Axminster Carpets Group pension plan. It is now the leading judgment on limitation in claims by pension scheme beneficiaries for arrears. It also gives key guidance on the court’s power to award interest on such claims and on the interpretation and exercise of forfeiture clauses, and makes certain findings on the scope of s.37 of the Pension Schemes Act 1993. This summary only scratches the surface of a detailed 347-paragraph judgment covering several different areas of pensions and trusts law. A more flippant title might have been: “The Axminster Carpets case: a pile of issues…”

Limitation

As in Lloyds [2019] Pens LR 5, the Court found that a claim by a pension scheme beneficiary brought against a current scheme trustee seeking payment of arrears of pension was not a claim to which a statutory limitation period applied. Such a claim would be a claim for an account and order for payment, and fall within s.21(1)(b) of the Limitation Act 1980. This is because it is an action “to recover from the trustee trust property” within the meaning of s.21(1)(b). Those words import no requirement that the beneficiary has a proprietary interest in the arrears.

Interestingly, the Court accepted that scheme members have no proprietary interest in specific assets of the scheme, but added that they could be considered to have a “proprietary interest in the broader sense of the term” due to their right to enforce the trust and the possibility of asserting that right against those holding trust assets (at [71]).

Forfeiture

Two rules of the Plan were relied on as forfeiture clauses, the first in a 1992 Deed and the second in a 2001 Deed. The first enabled the Trustee to apply monies that had not been claimed within six years of their due date to other purposes. The second provided that such unclaimed monies “shall be forfeited” but gave the Trustee a discretion to pay them to the beneficiary regardless, or use them for other purposes.

The Court held only the second of these rules operated as a forfeiture clause as the former did not contain any wording which directly dealt with the forfeiture of an entitlement to benefits (at [175]).

Fetter on amendments

The effect of the Court’s construction of these clauses was that the 2001 Deed introduced an automatic forfeiture clause where none had existed before. The Court considered whether this was prevented by the Plan’s Courage proviso to its amendment power, which read “Provided that no such amendment or addition shall be made which would diminish the benefits .. already accrued .. under the Plan to the Member without his previous written consent”.

The Court held that the change to an automatic forfeiture rule was not an alteration which “would diminish the benefits .. already accrued”. It “might” do so, but it could not be said that it “would” because (i) the alteration did not affect the amount of the benefits to which a member was entitled and (ii) the forfeiture only occurred if benefits were unclaimed for 6 years, which might or might not happen (at [221]).

Exercise of Discretion

The Court expanded significantly on its guidance in Lloyds as to how trustees should exercise any discretion given to them under a forfeiture clause. In relation to claims for arrears of pension, the Court rejected an argument that it would be perverse to forfeit the arrears. This was because e.g. there might be administrative difficulties in paying them. However it said that the “first reaction” of the trustee where members were not at fault should be to pay arrears without delay. Various potentially relevant factors for the trustee’s exercise of discretion are listed in the Judgment, including the fact that the Plan was in a PPF assessment period. Nothing in ITS v Hope [2009] Pens LR 379 required that fact to be left out of account (at [293]).

Interest

Finally the Court considered whether claims for arrears by beneficiaries should bear interest. It is settled law that claims for arrears of an annuity do not bear interest. However the Court held that if a beneficiary claimed the arrears by way of a claim for equitable compensation for breach of trust, the court had its usual jurisdiction to award interest on equitable compensation (at [324]). The court also had jurisdiction to award interest under s.35A Senior Courts Act 1981. The appropriate rate in relation to arrears of pension increases was held to be 1% above base.

Section 37 PSA 1993

The Judgment records that the parties compromised a number of issues, including as to the scope and effect of s.37 of the Pension Schemes Act 1993. The 2001 Deed mentioned above did not have an actuary’s confirmation for s.37 purposes, leading to uncertainty as to the effect of some amendments that it made. The Court approved the parties’ compromise, including making Re Benjamin orders that gave the Trustee permission to administer the Plan on a certain factual footing. This is a useful tool in compromises, and is discussed at [32] and [38]. Further, the Court made declarations that s.37 PSA 1993 did not affect lump sum death benefits or benefits to survivors other than widows or widowers. This followed a consideration of s.12B(3) & (4) PSA 1993 and may prove relevant in other cases.

The Judgment is available here.

Tom Robinson acted for the Claimant, led by Henry Legge QC and instructed by Gowling WLG.