Of interest to all schemes is the decision on 30 December 2015, of the Inner House of the Court of Session in Scotland (equivalent to the Court of Appeal in England and Wales), which has dismissed an appeal by the partners of a firm of solicitors relating to a claim by the trustees for arrears of pension contributions allegedly due to the Scottish Solicitors Staff Pension Fund. The firm argued that the trustees were not entitled to bring their claim for arrears on the basis that amendments made to the Fund's governing deed on several occasions since 1980 were invalid.
This case was an appeal by the partners of a firm of solicitors in ongoing litigation relating to a claim for arrears of pension contributions allegedly due from the firm to the Scottish Solicitors Staff Pension Fund (the Fund). The partners denied liability to pay the arrears and argued that the trustees were not entitled to bring their claim on the basis that amendments made to the Fund since 1980 were invalid.
Until 1991, the Fund's governing deed required that any amendments had to be approved under a “triple-lock” mechanism. This required a set of three general meetings to be held at which each constituency involved with the Fund had to approve the amendment by a two-thirds majority vote. An alternative, simpler amendment procedure had been adopted in 1991 and subsequent amendments were made using that procedure.
The partners argued the triple lock mechanism had not been followed for amendments purportedly made in 1980 and 1990 and the trustees' claim for arrears was accordingly based on documents that were ineffective. On being challenged about the validity of the amendments, the trustees had undertaken extensive searches of historical documents, but were unable to produce evidence confirming that the triple lock had been fully complied with in 1980 or 1990.
At first instance, the Outer House of the Court of Session rejected the partners' argument. The partners appealed to the Inner House.
The Inner House rejected the partners' argument. Citing the decision of the Outer House in Low & Bonar plc v Mercer Ltd , Lord Drummond Young commented that the general approach to the interpretation of pension scheme documents should in the court's view reflect the fact that pension schemes and the trusts under which they operated were designed to exist for long periods and were likely to affect a substantial number of beneficiaries.
Lord Drummond Young noted that the Latin maxim omnia praesumuntur rite esse acta (all things are presumed to have been done in due form) applied in considering transactions that took place a significant time in the past. He held that four reasons justified the application of the maxim:
- in practice, substance was more important than form. Any defects in procedure tended to be matters of form rather than substance;
- any substantial objections to a transaction would usually be raised immediately, even if only informally;
- if a lengthy period had elapsed since a transaction occurred, evidence was likely to have been lost; and
- transactions did not stand alone, but were relied on by the parties and others in their future dealings. Allowing a party to challenge the validity of a transaction long after the event would be “an intolerable situation”. Indeed, “no pension fund could seriously carry on its administration under such a threat”.
The court held that the maxim applied on the facts. Given its application, the onus was on the partners to prove the triple lock mechanism had not been followed. They could not do so and the various amendments had therefore been properly effected.
The maxim also applied in relation to amendments made in 1991 and 2009 under the revised procedure that replaced the triple lock. Although the available evidence demonstrating compliance with the revised procedure was “manifestly incomplete”, certain evidence of compliance was available and the amendment was confirmed by subsequent practice adopted by the Fund's managers. In such a situation, “the policy considerations that underlie the maxim are just as applicable in our opinion as in a case where a formal deed is available”.
The court reiterated that it was not for the trustees to establish that amendments to the Fund's governing deed had been properly effected: instead, those who challenged the regularity of past procedures were obliged to prove that proper procedures had not been followed. Without this rule “the sensible administration of pension funds, and indeed other long-term contracts and trusts, would be rendered unacceptably difficult”.
The approach adopted by the court in this case acknowledges the practical point that pension funds must be allowed to operate free from concerns that historic actions may be challenged, in some cases many years after the event. However, the decision raises questions about how the court should attempt to balance these concerns against the requirement for legal certainty implicit in the obligation to follow proper procedures.
Although the rules relating to the execution of deeds differ in Scots law from those applying in England and Wales, it will be interesting to see whether this decision is taken into account in the forthcoming appeal against the 2014 High Court decision in Briggs and others v Gleeds which could be heard on 11 or 12 July 2016.
In Gleeds on which we reported in our May 2014 update the High Court held that deeds dating back over 20 years relating to the Gleeds Retirement Benefits Scheme (the Scheme) had been invalidly executed and that the changes would not stand. Several purported amendments, including such changes as a post-Barber equalisation of benefits exercise, trustee and principal employer appointments, the adoption of a new trust deed and rules, introduction of a new defined contribution section, an increase in member contributions and a closure of the defined benefits section to future accrual were held to be ineffective.
The judgment was a blow for the Scheme’s employers, with serious consequences in terms of increased funding costs. While some employees who thought they had joined the Scheme had not actually done so, others who thought their benefits had been reduced stood to receive windfall payments. As the judge said, “Unfortunate consequences are, I am afraid, unsurprising when so many documents have not been validly executed.”