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Honda: Another valuable lesson in drafting pension scheme documentation

Honda Motor Europe Limited (HME) has lost its appeal against a High Court decision that a Deed of Adherence admitting a new employer to the Honda Group UK Pension Scheme (the “Scheme”) could not be interpreted as introducing a new benefit structure for the employees of a new employer. As a result, members were admitted to the Scheme on the basis of a more generous benefit structure available to existing members, causing a significant increase in cost for Honda.

Background

Until 1986, HME was the sole participating employer in the Scheme. By a Deed of Adherence dated 6 October 1986, Honda of the UK Manufacturing Ltd (HUM) became a participating employer and membership of the Scheme was open to HUM employees.

The intention was that HUM employees would receive less generous benefits than HME employees.

Although an announcement was issued to this effect, the less generous benefits were not formally incorporated into the Scheme until a Trust Deed and Rules in 1998. The only document put in place at the time was the Deed of Adherence which stated it “hereby extends the benefits of the Scheme to all eligible employees and directors of [HUM]…”.

Decision

There were two key issues to consider. First, what did the phrase “extends the benefits of the Scheme” in the Deed of Adherence mean? Secondly, if the reference to “benefits of the Scheme” meant the less generous benefits, was there otherwise an effective exercise of the power of amendment contained in the Trust Deed and Rules? Honda also asked the court to apply the maxim (under the law of equity) “equity regards as done that which ought to have been done”.

The Court of Appeal concluded there was nothing wrong with the terms of the Deed of Adherence and its meaning and effect were perfectly clear. It held the meaning of the Deed did not extend beyond admitting HUM and its employees to the Scheme. Further, since the Deed did not purport to confer the less generous benefits there could be no implied exercise of the power to amend the Scheme to do so. The Appeal Court also refused to permit Honda to rely on the equitable maxim as the judge held they should have raised this in the High Court.

Lessons to be learned

This error will allegedly have cost Honda between £47m and £70m in additional liabilities. This costly mistake highlights the importance of taking care when drafting pension scheme documentation. Although Honda lost the appeal, a spokesman for the company has said it will investigate “other legal avenues” to remedy the error. So all may not be lost for Honda.

If you have any questions or would like more information, please contact Katie Kerr.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Katie Kerr

Senior Associate

I am a Senior Associate based in Glasgow and have been specialising in pensions law since 2000.