The judge also considered other matters in this case, including the correct rate of interest to apply to arrears payments (he applied 1% above base rate, as had been previously applied in other cases), and the operation of the "recoupment" remedy in relation to over payments made from the pension scheme (where the over payment is deducted from future pension payments). In particular, the judge agreed with the conclusion reached in the earlier Burgess v BIC2 High Court case that the Pensions Ombudsman is not a "competent court" for the purposes of Section 91(6) of the Pensions Act 1995, such that it cannot provide an "enforceable order" with regard to an over payment obligation which would permit trustees to deduct over payments from future pension installments following a dispute. This is contrary to the Pensions Ombudsman's previously expressed view that it is, in fact, a "competent court" for the purposes of the relevant legislation.
The facts of the case
It was established that underpayments had been made from the CMG UK Pension Scheme ("Scheme"), following a defective process to equalize Normal Retirement Dates within the Scheme and to amend the accrual rate. Arrears payments were made to members but questions then arose as to whether the forfeiture rule in the Scheme (Rule 5.11) should operate automatically to limit those arrears payments to only those made in the preceding six-year period.
Rule 5.11 read:
“Notwithstanding Schedule II if a benefit or installment of benefits is not claimed by or on behalf of the person entitled to the benefit or installment in accordance with these Rules within 6 years of its date of payment it shall be retained by the Trustees for the purposes of the Scheme”.
Unusually, Rule 5.11 did not contain, as is often the case in pension scheme governing rules, a discretion for the trustee not to apply forfeiture. Considerations for trustees as to whether to forfeit benefits (where there is a discretion) were looked at by the High Court in the 2020 Axminster Carpets3 case.
Over payments were also relevant in the case because, following the Court's confirmation that arrears payments due over six years ago were to be extinguished, the Trustee and the employer then had to address the arrears payments that had already been made to members in respect of the period prior to 2013, as these had effectively then become overpayments from the Scheme.
The judge decided that, notwithstanding the fact that Rule 5.11 did not contain the words "forfeit" or "forfeiture", applying legal principles of interpretation, it should still be construed as a forfeiture rule and should operate to limit arrears payments to those due after 1 October 2013 (which was six years before the 2019 date that the parties agreed should be treated as the date on which affected members were deemed to have made a claim for the unpaid benefits). He also found that the rule should still operate in circumstances, like those relevant in the case, where the benefits were unclaimed because the beneficiary was unaware of the entitlement (whether as a result of the mistake by the Trustee or otherwise). This seemed very much to turn on the wording of the rule and the fact that the drafter had specified that a member had to make a claim for benefits to "stop the clock" and there was no express qualification to this requirement by reference to the knowledge or understanding of the member.
The CMG case, therefore, dealt with a mandatory forfeiture rule where there was no trustee discretion to disapply forfeiture. As such, where underpayments are made as a result of an error (of which the member was unaware) in cases where a trustee has a discretion as to whether to forfeit benefits, as was the case in Axminster Carpets, the findings in the CMG case alone would not, in our view, prevent the Trustee from deciding not to forfeit the payments and the comments in Axminster Carpets on the exercise of such a discretion continue to apply.
The judge also commented on what would constitute a "claim" for the purposes of Rule 5.11. He found that the wording required an express assertion by a member of a right or entitlement. The judge also noted that, although awareness of the right or entitlement was not necessary for a claim to be validly made, it would be much easier to interpret a communication as making a claim if the member is aware that the benefit or entitlement is unpaid.
Interest on arrears payments
The judge in the Lloyds GMP equalisation litigation and the Axminster Carpets case found that a rate of 1% above base rate should be applied on arrears payments. The judge in the CMG case applied the same rate, and did not find it relevant that the amounts at stake in the case were higher than in the earlier cases, nor did he consider it relevant that the underpayments in the CMG case were effectively "windfall" benefits, owing as a result of defective rule amendments. Interestingly, the judge also referred directly to the question of whether a higher rate should be awarded as a result of the current high inflationary environment. He concluded that this was not necessary because interest and inflation rates were lower during the relevant period from 2013 (even if they are currently at a higher level).
That said, the judge did carefully consider the arguments made by the Trustee's counsel that a higher rate should be applied and seemed to agree that the relevant interest rate might depend on the circumstances, meaning that 1% above base rate shouldn't always be considered as a "one size fits all" solution and that thought should be given to the appropriate rate to apply on a case-by-case basis.
Recoupment of overpayments
The judge was asked various questions about the equitable remedy of recoupment, which was considered in detail in the Burgess v Bic High Court case. As a reminder, this remedy is available to trustees to use as a "self-help remedy" where an over payment has been made and it can be recovered by way of a deduction from future pension installment payments.
The questions focused on the interaction of recoupment and the provisions of Section 91(6) of the Pensions Act 1995 ("Inalienability of occupational pension"), which sets out certain restrictions where a trustee is applying a "set off" and there is a dispute with the member in relation to it. There remains some debate about whether recoupment is a "set-off" for the purposes of Section 91 but the case proceeded on the basis that it was. Section 91(6) provides that, where there is a dispute as to the amount of the obligation owing from the member, a set-off cannot be applied unless the disputed obligation in question has become enforceable under an order of a "competent court". There has been some debate about whether the Pensions Ombudsman would qualify as a "competent court" following the Bic v Burgess case. In that case the judge commented, in a way that was considered by the Pensions Ombudsman not to be central to the case (known as an "obiter" comment), that he did not think that the Ombudsman would meet the requirements to be a "competent court". The Ombudsman disagreed with this and publicly stated that it considered that it would qualify as such.
The judge in the CMG case was clear on this point and said that he thought the comments made in relation to the Ombudsman not being a "competent court" for the purposes of Section 91(6) in Bic v Burgess were, in fact, part of the decided case and he agreed that the Ombudsman was not a "competent court". In relation to recoupment exercises, where there is a dispute, the practicalities of this will need careful thought.
The judge also concluded that a "dispute" between the trustee and a member in relation to an overpayment for the purposes of Section 91(6) would include not only a dispute as to the absolute amount of an overpayment, but also the rate of recoupment (i.e., the amount of deduction from each instalment of pension). However, there remain several open questions as to what other circumstances may constitute a "dispute" and trustees may need to consider these issues carefully in any future overpayment cases where recoupment is the chosen method of recovery. For instance, would a member raising a "change of position" defence to the recovery of the overpayment be a qualifying dispute for the purposes of Section 91(6)? Similarly, would a member's mere refusal to pay meet the threshold or do they have to set out some grounds?
This case will be of interest to trustees and employers dealing with the underpayment and overpayment issues that often arise on benefit rectification exercises, including GMP reconciliation and GMP equalisation projects. Following several High Court cases, the scope and potential impact of forfeiture rules in this area is becoming clearer, with trustees now having a better idea of how arrears payments can potentially be limited as a result of the operation of a scheme's forfeiture rule.
Similarly in the context of overpayments, where there is a recoupment exercise, which is treated as being within the scope of Section 91 of the Pensions Act 1995, the decision that the Ombudsman is not a "competent court" for the purposes of any dispute could have important practical implications. Various questions remain, however, in terms of what constitutes a "dispute" that could halt an otherwise straightforward recoupment exercise.
Please speak to your usual contact at Baker McKenzie if you would like to discuss this area further.
A copy of the case can be found here.
1. CMG Pension Trustees Ltd v CGI IT UK Ltd  EWHC 2130 (Ch)
2. Burgess & Ors v BIC UK Limited  EWHC 785 (Ch)
3. Punther Southall Governance Services Ltd (as trustees of the Axminster Carpets Group Retirement Benefits Plan) v Jonathan Hazlett  EWHC 1652 (Ch)