Failure to comply with the strict requirements for deeds can be costly for pension schemes, says expert

Out-Law News | 16 Apr 2014 | 4:51 pm | 3 min. read

A recent judgment by the High Court reinforces the "supreme importance" of ensuring that documents making changes to a pension scheme are correctly executed, an expert has said.

The case involved around 30 deeds relating to a pension scheme that was established in 1974 for employees of partnerships and companies within the Gleeds group. The judge ruled that none of those documents had been validly executed as a deed. The fault lay in failing to get the partners' signatures on the deeds witnessed in accordance with the 1989 Law of Property (Miscellaneous Provisions) Act. The defective deeds purported to make various changes, such as introducing a money purchase section, reducing accrual rates, introducing member contributions, and closing the scheme to future accrual. The first defective deed was dated 6 March 1991.

"Trustees and employers must follow their lawyers' instructions when they are asked to execute a deed, and check the requirements with them if there is any doubt – failure to do so can be very costly," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind "Pension scheme members' benefits can usually only be reduced going forward – you can't go back and reduce them retrospectively. So if a mistake has been made in the past, it can only be corrected for the future."

"Where an individual signs a deed, the deed will be valid only if a witness attests the individual's signature. This requirement also applies when a partner signs on behalf of a partnership, as in this case. The judge refused to drop this requirement, even though he was 'very conscious that the judgment has serious implications for the scheme and Gleeds'. The witnessing of a deed served a purpose: it limited the risk of disputes about whether and how a document had been signed, and also emphasised the importance of the deed to those involved. Where it was clear from looking at a deed that it had not been correctly executed, the deed could not be treated as valid simply because the parties had not realised their mistake," he said.

The trustees brought a claim asking the court to rule on the effectiveness of the deeds, and whether pension scheme members were 'estopped' from denying the validity of the deeds. Estoppel prevents a party from going back on a position (in this case, belief in the validity of the deeds) if it has made a 'clear and unequivocal representation' about that position to another party.

The judge said that the doctrine of estoppel could not be invoked "where a document does not even appear to comply with the 1989 Act on its face". The statutory requirement that a deed be attested by a witness had an "evidential purpose" which would be "undermined, potentially to a serious extent, if estoppel could be invoked in circumstances such as those in the present case", he said.

"If estoppel were available in circumstances such as those in the present case, a party to a 'deed' who had not himself executed the document in accordance with section 1 of the 1989 Act could choose whether or not the document should be treated as valid. If it turned out to be in his interests to disavow the document, he could do so. If, on the other hand, the document proved to be advantageous to him, he could invoke estoppel ... Section 1 of the 1989 Act was in part designed to achieve certainty. It could, however, have the opposite consequence if estoppel were available in circumstances such as those in the present case," he said.

Gleeds also tried to rely on a trust principle that allows a court to deem certain things done if they should have done. However, pensions expert Simon Tyler said that the judge rejected the application of this principle to this case because it could not be used to worsen the position for scheme members.

"Some members – 103 out of 106 active members – had contractually agreed to switch from money purchase to final salary benefits in return for a one-off salary increase," Tyler said. "This contractual agreement was valid and overrode the terms of the scheme rules. That was the one saving grace for Gleeds.  All other changes that purported to reduce members' benefits were held to be invalid."

The judge did uphold an amendment to increase pensions in payment by 4% in an otherwise invalid deed.  This was an improvement to members' benefits and could be considered an augmentation under the scheme rules.

"I am very conscious that this judgment has serious implications for the scheme and Gleeds," he said. "Unfortunate consequences are, I am afraid, unsurprising when so many documents have not been validly executed."