Later rule changes cannot validate earlier pension increases, rules court

The judgment clarifies when and how pensions trustees can grant themselves a new power by amendment, in order to validate a previous invalid exercise of a power.

The court was ruling in a case concerning the pension scheme for stationery company BIC UK. The company and the scheme trustees had tried to introduce inflation-linked annual increases to the pensions of members of the scheme earned before 6 April 1997.

The trustees first attempted to introduce the increases in 1991, but did not comply with the necessary formal requirements in the rules which governed the scheme at the time. Nobody spotted the error, and the increases were added and taken into account when calculating accruals of future pensions entitlements as well as the scheme’s funding.

In 2011 the company challenged the validity of the increases. The trustees sought to rely on changes to the scheme’s rules made in 1993, saying these could be used to validate the steps taken to introduce the increases in 1991.

Last year the High Court ruled in favour of the trustees, saying that while relying on the 1993 changes “involves an element of re-writing history” this was permissible.

In a unanimous decision the Court of Appeal overturned the High Court judgment, saying that the trustees could not rely on the retrospective powers of the 1993 rules to validate the mistakes made in 1991.

“The law should lean in favour of validating transactions undertaken by trustees in good faith if it properly can, but it must also recognise that formal requirements have a purpose, and if they are not complied with, the normal consequence is that the intended transaction is of no effect,” the Court of Appeal said in its judgment.

The Court said there was no evidence that the trustees and the company had tried to validate any previously invalid amendments when it made the changes to the scheme’s deed and rules in 1993. It said that while the 1993 deed and rules were backdated to 1990, this was for “reasons wholly unconnected” with the increases.

It decided that the High Court had gone “a step too far” in deciding that the 1993 rules could retrospectively validate the invalid steps taken two years earlier, and ruled in favour of the company.

Pensions law expert Hayley Goldstone of Pinsent Masons, the law firm behind Out-Law.com, said: “We’ve seen the Scottish courts take a pragmatic approach to situations where there has been non-compliance with formal requirements but the English courts take a strict approach and the Court of Appeal have followed that approach in this case. 

“We’re seeing an increasing number of cases where it has been discovered that formal requirements may not have been complied with and it’s causing a real headache for trustees and employers alike,” Goldstone said.