The High Court has recently reached a decision in relation to confusion about historic amendments to the rules of a pension scheme, in particular deeds which purported to substitute the scheme’s principal employer. The High Court held that there was no need to imply “a degree of formality” to the rule containing the power to substitute the principal employer which did not contain any specific formalities as to how the substitution should be carried out. Other rules containing powers under the scheme included certain formal requirements, and it was unlikely that a formality had been unintentionally missed out.
The Wandel & Goltermann Retirement Benefits Scheme (Scheme) was a defined benefit pension scheme. Due to some confusion about the validity of certain historic deeds of amendment, it was unclear who the Scheme’s principal employer had been during the period 1997 to 2003, when the Scheme closed to future accrual. It was accepted that since 2003 Viavi Solutions UK Limited (Viavi) had been the principal employer of the Scheme.
Principally, the Court examined the validity of the following deeds:
- The 1995 Deed and Rules, which substituted new scheme rules for the previous ones and was executed by Viavi and the then trustees. The issue in relation to this deed was that it was unclear whether at the date of execution, Wandel & Goltermann Management Limited (Management) had become the principal employer of the Scheme, rather than Viavi.
- The 1999 Deed of Amendment (1999 Deed), which amended the rules and which was executed by Management and the then trustees, but not by Viavi. There was uncertainty about whether Management was the principal employer at the time the deed was executed.
- The 2001 Deed of Rectification which was intended to rectify a drafting error in the 1999 Deed. It was signed by the then trustees and Management and was dated 31 December 2001.
- The 2002 Deed of Novation, executed on 13 March 2002, which was designed to make Management the Scheme's principal employer with retrospective effect from 30 September 1994 and to ratify all actions and decisions of Management, acting as the principal employer, between 1994 and the date of the Deed of Novation. The Court considered whether this substitution had been validly made and if so, whether it was effective from 1994 or the date of this deed.
In relation to the 1995 Deed and Rules:
The Court held that Viavi, rather than Management, was the principal employer at the time of the execution of the 1995 Deed and therefore the 1995 Deed had been validly executed by Viavi with effect from 7 November 1995. Part of the Court’s reasoning for this decision was that there were documents which demonstrated that Management had not been appointed as principal employer in place of Viavi at this date, and it had not become a participating employer until 1996.
In relation to the 1999 Deed:
The 1999 Deed had been executed by Management and the then trustees, and Viavi was not a party to this deed. The 1999 Deed stated in its recitals that Management had been substituted for Viavi as principal employer on 30 September 1994, but it was accepted by the parties that this was incorrect.
The 1995 Rules required the consent of the trustees, Management and Viavi for the substitution of the principal employer. The issue before the Court was whether this rule required written consent. The judge held that simply because a rule did not contain any specific formalities, there was no need to imply “a degree of formality”. Other rules containing powers under the scheme included certain formal requirements, but there were no formalities in the substitution rule. The judge held that the wording of the substitution rule could not be interpreted as requiring written consent for the exercise of this power. The judge held that the 1995 Deed was “a carefully drawn professional document” and this seemed “to point firmly away from any conclusion that the draftsman simply overlooked an obvious term”.
The judge referred to the decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  UKSC 72, and its application to the present case was summarised as “does the 1995 Deed lack business coherence without the implied term”? The judge considered that although it would have been advisable to keep a written record of the consent to the substitution, he did not consider that the 1995 Deed could not function without this requirement: “The notion that the 1995 Deed could not properly work without there being a written agreement on a change is not one that, in my view, stands up to scrutiny. Best practice is one thing; necessity another. Terms are not lightly to be implied into complex and carefully drawn agreements.”
The judge held that at the time the 1999 Deed was executed, it was the understanding of all the parties that Management was not already the principal employer but would become the principal employer with retrospective effect to 1994. There was no evidence which satisfactorily demonstrated that before the execution of the 1999 Deed, the trustees, Viavi and Management had agreed to the substitution of principal employer.
The judge decided that the power to substitute the principal employer in the 1995 Deed did not allow this power to be exercised retrospectively. The judge acknowledged that it might be possible to appoint a principal employer retrospectively where this related to a short period of time and was designed to fill a gap where a previous principal employer had, for example, been dissolved. However, the judge could see “no good reason” why the trustees and the company which had been acting as principal employer should be allowed to agree that the company had not been subject to the obligations and requirements of principal employer at a certain time in the past. He also noted that in this case the retrospective substitution could invalidate acts by the principal employer which were valid at the time they were done, and could validate acts of the new principal employer which were invalid at the time they were done.
The judge considered whether the 1999 Deed could be deemed to be the “...necessary agreement of the trustees, Management and Viavi to Management becoming the principal employer going forward (though not with retrospective effect)...”. As Viavi was a wholly-owned subsidiary of Management, based on the “Duomatic principle” from Re Duomatic Ltd  2 Ch 365, the judge noted that decisions could be taken on Viavi’s behalf informally by Management, without a resolution being passed by Viavi. The judge concluded that the 1999 Deed was effective in substituting Management as the principal employer.
As an alternative argument, the judge decided that if his interpretation that the 1999 Deed appointed Management as principal employer instead of Viavi was incorrect, following the principle in Davis v Richards and Wallington Industries Limited  2 All ER 563 that there was no requirement to refer explicitly to the amendment power in order to exercise that power, it could be inferred that the trustees and Management exercised the substitution power at the same time as they made the amendments under the 1999 Deed.
Deed of Rectification
The Deed of Rectification, which was executed on 31 December 2001, was intended to rectify retrospectively an error in the 1999 Deed in relation to post-6 April 1997 pension increases (with effect from 15 September 1999). However, section 67 of the Pensions Act 1995 would not allow this amendment to have retrospective effect, as it would affect members’ accrued rights.
The Court also considered whether the Deed of Rectification had effectively made another amendment to the pension increase provisions. The Deed of Rectification contained a recital which referred to an attempt to amend the pension increase provision by initialling the relevant page of the 1999 Deed at the trustees’ meeting in November 2000, but the Deed of Rectification did not refer to the amendment power in relation to this change. The parties accepted that the amendment-by-initialling was not an effective amendment, as the amendment power required that any amendment needed to be made by a deed executed by the principal employer.
The judge decided that although the recital did not refer expressly to the amendment power, following the principle in Davis v Richards and Wallington, if there was sufficient evidence that Management intended to exercise its power to amend the pension increase rule, the previous amendment-by-initialling could be made with effect from the effective date of the Deed of Rectification. This evidence was provided by the reference in the Deed of Rectification to the earlier amendment-by-initialling (“in error the mistake...was not corrected at the same time”) although the amendment could not have retrospective effect.
Deed of Novation
As the judge had held that the 1999 Deed validly appointed Management as principal employer, the issue in relation to the Deed of Novation was whether it had effectively backdated that appointment. The judge held it did not backdate the appointment, as at the date the Deed of Novation was executed, Management was already the principal employer of the Scheme and so there was no need to ratify its actions.
This case emphasises the importance of keeping a clear written record of all decisions in relation to pension schemes, as even the most (apparently) obvious facts (such as the identity of the principal employer) can be called into question. The judge’s decision in relation to the substitution of the principal employer turns on the specific wording of the substitution rule, which did not require written consent to the substitution. However, in practice it is always advisable for trustees and employers to document in writing these types of decisions, even if this is not strictly required by the scheme rules.
The judgment refers to possible future court proceedings relating to estoppel, so there may be further consideration of some of the key points in this case.