In this article Justin Briggs, who advised the members of the Univar Scheme, looks at how Univar applied the Court of Appeal’s new subjective test for rectification in a pensions context and at what proving rectification under an subjective test will involve going forwards.
The Facts
The problem the Univar Scheme faced is a relatively familiar one: an unintended error was said to have been made in a re-write of the Scheme Rules. Prior to 2008 the Rules provided for deferred pensions to be revalued in line with statutory requirements and for pension increases to be purely discretionary. The net effect was that both revaluation and pension increases were provided in accordance with the statutory position. The new edition of the Rules in 2008 provided increases on pension in excess of GMP and revaluation of RPI capped at 5 per cent. In other words, the 2008 Rules hardcoded the use of RPI as the index for increases and revaluation into the Scheme Rules.
Subsequently, in 2010, the Scheme was closed to DB accrual and the final salary link severed. It was not possible to sever the final salary link without member consent, therefore documentation was prepared to obtain this consent. The closure documentation stated that after DB accrual had ceased deferred pensions would be revalued in line with RPI. The reference to RPI was potentially made as a result of the way RPI had been hardcoded into the 2008 Rules. One alleged error had potentially bred another.
Around the same time as the closure the statutory basis of indexation was changed from RPI to CPI and, shortly afterwards, it was first noticed that an inadvertent change might have been made in the 2008 rules.
The FSHC issue: is the intention of those who execute documents determined objectively or subjectively and what is the difference between the two?
There has been discussion in recent cases as to whether proving the intention of those who executed documents sought to be rectified is an objective matter based largely on documents, or a subjective matter based not just on documents but also witness evidence in which the relevant trustee or company representatives explain their intention. The latter is widely regarded as a harder test which is more expensive to prove. Moreover, it is potentially fraught with considerable uncertainty given that it appears to place considerable emphasis on the recollections of those who executed the document in question.
Unlike commercial matters involving rectification of contracts where errors are usually spotted within a relatively short timescale (as was the case in FSHC), unintended changes in pensions documentation can often go unnoticed for many years. Even after they are spotted it can take considerable time to prepare an application to court and for that application to be heard. Pensions rectification cases are therefore often heard many years after the document sought to be rectified was executed. Where that happens, issues will inevitably arise as to whether witnesses are able to recall their intention from so many years ago and, if they appear able to do so, just how reliable that evidence really is?
More significantly there might be the possibility of an application that ought to succeed on an objective test not succeeding under a subjective test if witnesses are unable to recall their intention, differ in their intention or generally perform poorly under cross examination. All of these issues came to the fore in Univar in the context of how the decision in FSHC should apply in a pensions context.
Trustee and Company witnesses gave evidence in relation to preparation of the 2008 Deed which process began in 2002, some 18 years before the trial earlier this year. The evidence they gave was, in some cases, supportive of the claim for rectification but in other instances was not. What then was the judge to make of this given FSHC’s subjective test and the emphasis this places on witness evidence?
The judge followed the FSHC decision and applied the subjective test, thereby confirming that pensions matters are not in some way distinguishable from commercial cases. But, he did so in such a way that it is difficult to discern how a subjective test is any harder than the previous objective test. He did so by following earlier case law to the effect that the evidential question of how the intentions of a body, such as a group of trustees or committee of a board, are established will normally be by (or at least with the support of) documentary means with the recollection of witnesses being of relatively little probative value.
Whilst not suggesting that the intention can be objectively tested, he approached the matter in such a way that the documentary evidence became the determining factor. Above all else, he held that a Schedule of Changes intended to be made by the 2008 Rules was the most reliable guide to what was and was not intended to be achieved by those Rules. Where the witness evidence was consistent with the Schedule of Changes the judge accepted that evidence and where it was not he held that the witness evidence was unreliable leaving the schedule as the best evidence on the point.
The net effect of the judgment is an application of the subjective test for determining intention but in such a way that its potential to produce what some might see as harsh consequences appears to have been carefully excised. This will be most welcome news to those seeking rectification of pension scheme documentation as well as those responsible for drafting the documentation in the first place.
There had been fears that this decision might raise the bar on what must be overcome to prove rectification resulting in a sharp increase in the number of unsuccessful rectification applications but the decision has not done that. That said, rectification applications will require increasingly careful preparation to ensure that those witnesses who give evidence on intention appreciate the significance of their evidence and express it appropriately. Notwithstanding the pre-eminence of documentary evidence, it remains possible that poorly drafted statements could still create a banana skin on which applications could slip up. In particular, it is more important than ever to steer well clear of generic statements, notwithstanding the practical difficulties of avoiding this where multiple parties are giving evidence on the same point.
The Closure issue: did the closure documentation create a bar to rectification for those members affected by the closure?
No less than five arguments were raised on behalf of members in relation to whether the legal effect of the closure documentation amounted to a bar to rectification generally or at least in relation to those members who were in active service at the time of the closure and who received the closure documentation. The arguments were varied and technical but a common thread was that the reference to RPI in the closure documentation was a substantive representation upon which members were intended to and did rely in deciding whether or not to agree to closure of the Scheme.
The judge cut through all of these arguments by deciding that the reference to RPI in the closure documentation was not a representation of sufficient substance such that it was intended to be relied upon by members. Accordingly, whilst the judge decided that the closure documentation created a contract between the employer and the members, he held that the only terms of the contract were that members were giving up salary linkage and the right for BD accrual in return for the ability to transfer to a DC scheme on enhanced terms. The reference to RPI was purely descriptive and too vague and so was not a contractual term that the members could rely on. Further, there was no evidence of a commitment to apply RPI to revaluation independently of the Rules. The representation, if there was one, was to do what the Rules provided for and therefore there was no intention to contract on different terms to the Rules on this specific point. Based on the same reasoning the judge went on to find that all of the legal arguments about the legal effect of the use of RPI in the closure documentation failed.
Employers may take some comfort from this result but must take note about the level of scrutiny given to the closure documentation in Univar. The decision shows only too clearly how potentially any substantive scheme activity subsequent to a drafting error might have the potential to undermine an application to correct that error.
While it is of course impossible for communications with members to be drafted with rectification applications in mind, given that such applications arise from unknown errors, the Univar decision underlines the importance of taking particular care when communicating with members as errors can be compounded inadvertently.
Often such communications have to strike a difficult balance. On the one hand it is necessary to provide sufficient information for members to understand an issue but, on the other, it is usually seen as counterproductive to provide overly concise explanations where members might find themselves drowning in the detail. A half-way house of a fairly accurate explanation is often the way forward but it can be precisely this approach that creates unintended consequences.
Further, in some types of documentation it will not be possible to use disclaimer wording which provides that it is only the rules of the scheme which govern how it is operated. From time to time, an employer will want communications, such as consent forms, to be legally binding. Including disclaimer wording in such communications would negative the legal effect of obtaining member consent and defeat its intended purpose.
The solution is therefore to be as clear as possible as to what is intended to be important information upon which a member can rely without further explanation and what is meant to be a summary only of something which is more comprehensively described in a scheme’s rules.
If you would like to discuss any of the issues in this article, please contact Justin Briggs or Suzanne Padmore.