UK: Pensioned Off

Many of the pensions claims we are now seeing arise out of changes made to the pensions regime more than a decade ago.

It may or may not be coincidental that these claims are arising at a time when employers and pensions trustees are under unprecedented pressure from pension fund shortfalls, as a combination of increased longevity of the workforce, low investment returns and an ever-greater regulatory burden take their toll.Whether or not that is the cause of the trend, these claims represent a serious threat to solicitors and their insurers.

A particular source of claims against solicitors is pensions equalisation.

Since the decision in Barber v Guardian Royal Exchange Assurance Group (1991), it has been known that the principle of equal pay for men and women applies to occupational pension schemes. The implications of this decision for occupational pension schemes were profound, as many did not provide equal benefits for men and women. The most common difference was in the retirement age of men and women. Typically, schemes would have a retirement age of 65 for men and 60 for women.

Barber was decided over 15 years ago but, as is often the case with such wide-ranging changes in the law, it was the policy of many employers and pensions trustees to await clarification of the law, through subsequent court decisions, before steps were taken fully to implement the new procedures. Uncertainty about the position following Barber centred on how long employers had to implement the new rules into their pension schemes, on the issue of whether equalisation had to be backdated and whether it was the trustees or the employers who were responsible for equalising the benefits.

In practice, even following clarification of Barber in the Ten Oeuver, Coloroll and Smith Adsel decisions, many pension schemes failed to equalise benefits or attempted to equalise benefits between men and women in a different way to that which was intended by the courts or required by the rules of the scheme. Often this will have followed consultation with firms of lawyers, accountants and actuaries.

Over the last year, there have been at least four cases examining whether schemes have properly equalised their benefits under Barber. In addition, there have been press stories of trustees and employers commencing negligence actions against former advisers, claiming that their advisers failed to equalise benefits correctly, or that they were misled over the effects of Barber.

Common features of these claims are that the problems have been identified some considerable time after the benefits were supposed to have been equalised so that memories have faded, relevant documents have been lost or destroyed, and limitation issues may arise. The financial exposure is often alleged to be in the many millions of pounds, because schemes will generally have been incorrectly calculating benefits for some time. The trustees look to the employer to make good the resulting funding deficit, and the employer in turn looks to the advisers. In many cases, more than one adviser will be in the firing line, adding to the complexity of defending the claim.

The claims tend to fall into two broad categories. First, claims that the benefits have not been equalised at all: the amendment allegedly does not satisfy the requirements of Barber or, more commonly, a procedural error in amending the scheme rules has taken place, with the effect that benefits have not been properly equalised. A common scenario was for the trustees or company, on the advice of a pensions consultant, to announce that retirement ages were being equalised with effect from a specified date, but no deed of amendment was then executed to implement the announcement. Examples of this are Trustee Solutions and others v Dubery (2006), Bestrustees v Stuart (2001) and Hodgson and others v Toray Textiles Europe Limited and others (2006).

While this may give rise to claims directly against pensions consultants and lawyers (and sometimes with good cause), we are also seeing a second category of claims arising, which are not directly concerned with the process of equalising benefits in furtherance of the Barber decision. For example, the situation may arise where a professional adviser is asked to assist on a corporate transaction not directly related to pensions and is alleged to have failed, in the course of the due diligence process, either to identify or address an issue with a company’s attempts to equalise benefits, or properly to advise on the implications of benefits remaining unequalised.

In the cases we are seeing, the employers’ claim is generally that, had they been properly advised, they would have taken steps to rectify the position and thereby limit additional costs to the scheme which have now been incurred. This secondary category of indirect claim gives rise to interesting questions relating to the scope of a professional adviser’s retainer. For example, if a client instructs a lawyer to advise on a pensions issue unconnected with equalisation, to what extent should the lawyer advise on the implications of failing to equalise benefits if he becomes aware that there is an issue? What steps should he take to investigate the position?

It has been established by various authorities that the extent of the solicitor’s duty depends upon the precise terms of (and any limitations placed upon) the retainer including the extent to which, according to the client's knowledge and experience, the client appears to need advice. This test was articulated by the Court of Appeal in National Home Loans v Giffen Couch & Archer (a firm) (1998).

Moreover, the authority of Mortgage Express Limited v Bowerman & Partners (1996) provides that a client cannot expect a solicitor to undertake work he had not asked him to do and for which he would not wish to pay. However, if in the course of doing the work he was instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of significance to the client, then the client could reasonably expect the solicitor to pass it on. Applying it to the situation described above, where a lawyer is asked to advise on a pensions issue unconnected with Barber equalisation, if the lawyer has reason to believe in the course of his enquiries that there may be a significant commercial issue with equalisation of benefits, then it appears from Mortgage Express that he may be under a duty to bring his concerns to the client’s attention. Beyond that, the onus is clearly on the client to instruct his lawyer to enquire further. There have been other key decisions on scope of duty, such as Credit Lyonnais SA v Russell Jones &Walker (2003) and a number of recent decisions covered in our article on page six.

While the National Home Loans decision concerned mortgage lending, the Court in that case expressed the hope that the limits placed on solicitors’ duties by the decision would deter clients looking for someone to blame for their losses from automatically pursuing a claim against their solicitors. Given the problems being experienced with pensions shortfalls, many firms will hope that the courts will, faced with future decisions, be prepared to express a similar view. Although it may be too late for many firms to address any risk management issues arising out of Barber and pensions equalisation cases, the lessons are there to be learned.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.