Pensions Litigation: A UK-wide Overview

Pension litigation continues to be a very busy area of practice and is likely to remain so for the foreseeable future, driven in part by government policy and the effect of the macroeconomic environment on employers and pension schemes.  

As has been the case since the September 2022 “mini-budget” pushed up gilt yields, many schemes have moved to being fully or nearly fully funded, which has significantly shortened their journey to buy-out. Errors that may have lain undisturbed for, perhaps, decades are now being unearthed in due diligence exercises.

Many of the errors cannot be dealt with through a higher risk premium or quietly reinterred. Their financial impact might be too significant, so insurers may exclude coverage, trustees may refuse to proceed to buy-out without resolving the uncertainty, or employers may refuse to provide the indemnities that trustees want. This has led to novel and often significant issues (both legally and financially) coming to light, and employers and trustees are increasingly turning to the Court’s wide jurisdiction to find remedies to these problems.

Pension practitioners continue to deal with some “hardy perennials”, including (even now, years after Barber) the equalisation of normal retirement ages, the meaning and effect of fetters on amendment powers and failures to execute pension documentation correctly.  Whether forfeiture comes into play when correction projects are required or members cannot be traced is also a common theme.

In addition, new issues are coming to the fore, for example limitation arguments based on the effect of the Equality Act 2010, and whether a pension in payment to be increased for the first time should receive a full or proportionate increase – one of the many issues the Court considered in Verity Trustees v Wood. 

In resolving these issues, the courts have been asked to grant familiar remedies, such as rectification and orders as to the correct meaning of words used in pension rules. A number of cases have been resolved quickly, sometimes on an uncontested basis, with the courts being asked to apply their proverbial “red pen” by applying the well-known remedy of “corrective construction”, such as in Renishaw Plc v Callanan.

We will continue to see the courts use those familiar remedies to resolve issues involving pension schemes. In addition, a number of cases are emerging in which the courts will be asked to rescind or set aside allegedly erroneous pension scheme rules on the basis of fundamental mistake, sometimes as the primary remedy sought.  

At 32 days, Verity Trustees v Wood was the longest pensions hearing that did not involve witnesses. As with many “big ticket” pension cases, the judgment of the Court on the many issues the judge had to consider is likely to have implications for defined benefit schemes across the country.

The fallout from the Virgin Media litigation continues and “Section 37” issues are likely to remain live for many schemes notwithstanding the government’s publication of draft amendments to the Pension Schemes Bill which, as currently worded, would allow scheme actuaries to give retrospective confirmations validating otherwise void rule alterations. For now, it remains uncertain how the intended flexibilities will operate in practice, precisely what rule alterations will be caught by the new regime and how actuaries will approach giving retrospective confirmation. Moreover, the new dispensation contains a number of exceptions to the relief that will be granted. Those exceptions might give rise to further uncertainties, which employers, trustees and their professional advisers will need to get to grips with.  

Whilst many schemes remain on the road to buy-out, a number of employers have decided, at least for now, to run-on so as to extract surplus from their schemes. Releasing surplus is not always straight-forward and whether a scheme’s rules allow surplus to be accessed is not always clear. Sometimes the rules of the scheme need to be amended, often in quite innovative ways, which sometimes involves seeking the approval of the court (as in Arcadia Group Pension Trust Ltd v Smith) or regulatory intervention, as happened in the application to the Pensions Regulator by the trustees of the Littlewoods Pension Scheme. We can expect further cases in which the Court will be asked to approve proposals to allow the innovative use of surplus (.g, to fund ongoing contributions to Defined Contribution schemes).

As part of the Pension Scheme Bill, trustees will be allowed to modify the rules of their pension schemes so as to facilitate the release of surplus. With a new tool to release surplus, if trustees and employers do not see eye-to-eye on the use of surplus, this increased flexibility might give rise to new uncertainties and potentially lead to cases coming to court.

Professional negligence claims concerning pension schemes continue to be litigated, albeit experience suggests they are resolved by a commercial settlement more quickly than, say, ten years ago. Litigating parties appear to get a handle on the merits of their respective positions more quickly and the quantum of claims is often limited to the costs of prosecuting proceedings (often called “remedial litigation”) that resolved problems with pension scheme rules.

Following the September 2022 mini-budget, there was speculation that trustees or employers of schemes which had become highly exposed to gilts might bring Liability-Driven Investment claims. In practice, although such claims were made and continue to be pursued, the anticipated torrent of cases did not materialise, with most cases appearing to have been resolved in the early stages behind closed doors.  

So, there is plenty to keep pensions litigators busy for the foreseeable future, trying to address issues that arise, whether they involve “known knowns” (such as Section 37 and fetters on amendment powers), “known unknowns” (such as the effect of the provisions in the Pensions Schemes Bill) or “unknown unknowns” (being novel and unexpected issues emerging as more schemes head towards buy-out, the government progresses its agenda or the effects of new global crises and economic shocks).