Court grants the rectification of mistakes in pension scheme documentation

In a recent case, rectification was granted where the intention of the parties was clearly evidenced and the amending documentation of the Scheme was incorrect.

The High Court has given its judgment in the case of Hogg Robinson plc v Harvey and others [2016] EWHCC 129 (Ch). The company and the pension trustees resolved to amend the rules of the Hogg Robinson (1987) Pension Scheme (the Scheme) in 1998 to reduce the rate at which annual increases were made to pensions in payment and in deferment. By mistake, the administrators of the Scheme drafted the deed of amendment so that it only amended the pensions in payment. The Court granted rectification concluding that there was compelling evidence, leading up to and post-dating the deed, to establish that a mistake had been made in drafting the amending deed which did not reflect the intention of the Company and the trustees.

Referring to IBM United Kingdom Pensions Trust Ltd v IBM United Kingdom Holdings Ltd [2012] EWHC 2766 (Ch), the Judge said the Court would rectify a document where there was convincing evidence of the intentions of the employer and trustees (where the power of amendment required the consent of both). The parties' collective intentions must be established objectively at the time of the execution of the deed of amendment. Evidence post-dating the execution of the deed of amendment was also admissible. The judge was satisfied every potential defence to rectification had been "investigated, weighed, and finally correctly rejected as a realistic basis on which to defend the claim".

This decision is another example of the court’s recent approach to correct deeds in a pragmatic and reasonable way on summary judgment.

Detailed analysis

Rectification is a process through which a court can amend a document retrospectively in a way which reflects the original intention of the parties. The aim is to place the parties in the position that they would have been in had the mistake not been made. Rectification will only be granted if the document does not express the true intentions of the parties as a result of the mistake, and there would be no other reasonable way to correct the error.

The governing provisions of the Scheme in this case provided that pensions in payment should be increased and benefits in deferment be revalued by an annual compounded figure of 5%. In 1998, the secretary to the Company, the scheme actuary and a trustee discussed an amendment to the rules of the Scheme so that for future service, pensions in payment and deferred pensions would increase at the rate of the annual RPI increase subject to a maximum of 5% (LPI), rather than at a fixed 5%. The reason for the proposed change was that by 1998, the rate of inflation was significantly below 5% and expected to remain there.

The Minimum Funding Requirements introduced by the Pensions Act 1995 meant that the Scheme was underfunded. Consequently, funding a fixed 5% increase in benefits to meet the statutory funding requirements going forward was very expensive. The company projected that if the Scheme rules remained un-amended, employer contributions would rise from 8.7% of salaries to 17.5%. With the proposed reduction in the rate of increase of benefits, employer contributions at 11.7% of salaries would be sufficient.

In October 1998, the Scheme actuary presented to the trustees explaining the proposed changes to both benefits in payment and deferred pensions, by reference to a draft valuation of the Scheme as at 6 April 1998. The draft valuation stated that the benefit structure would be changed so that both benefits in payment and in deferment would be increased on an LPI basis for pensions accrued from April 1999. At a subsequent trustee meeting it was noted the Company had resolved to amend the Scheme. The minutes of a trustees' meeting on 19 May 1999 recorded the  agreement to the change and the trustees noted that the members’ booklet should be amended to reflect it. The Company issued an announcement to members in July 1999, stating that LPI increases would apply to both pensions in payment and deferred pensions in relation to pensionable service completed from 1 August 1999.

The power of amendment contained in the Scheme's governing trust deed allowed the company to amend its provisions with the consent of the trustees, provided no amendment prejudiced any pensions already in payment or benefits already accrued at the date of an amendment. A deed of amendment was prepared by the Scheme administrators and executed by the company on 27 July 1999 and by the trustees on 8 September 1999. The amending deed only amended the Scheme rule relating to pensions in payment (purportedly with effect from 1 August 1999). The Scheme rule concerning the rate of revaluation of deferred pensions remained unchanged.

In the period following the execution of the deed of amendment, several Scheme documents made reference to the change from fixed 5% increases to the LPI basis. These included the trustees' annual report for the 1998/99 financial year, which noted that the scheme rules had been amended on the basis that pensions in payment and deferred pensions would be increased for future service from 1 August 1999 on the 5% LPI basis.

The court granted rectification of the deed of amendment to reflect the drafting mistake.

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.

Tim Green

Partner - Head of Pensions

I am a Partner in the Pensions team with a broad advisory, transactional and dispute resolution practice.