UK Court approval of complex settlement

Background

The Places for People Group Retirement Benefit Scheme (the “Scheme”) provides defined benefit pensions for employees and former employees of companies in Places for People group companies, which together are a large provider of social housing in the UK.

The Scheme closed to new members in 2004 and to future accrual in 2010.

Between 1993 and 2011, various deeds and other documents were executed (or purported to be executed) to vary benefits under the Scheme. Most amendments sought to reduce future benefits but certain changes were intended to advantage members, in accordance with the employer group's core values and its wish to maintain good relations with employees.

Three types of issue

Many of the documents which purported to amend benefits were affected by one or more of the following issues:

• Validity Issues: some documents may not have been properly executed, for example by not being executed by all parties, or through failure to observe the formalities for executing a deed;
• Section 37 Issues: some benefit amendments may have been invalid because actuarial confirmation under section 37 Pension Schemes Act 1993 may not have been obtained (the issue which was considered in the Virgin Media case); and
• Rectification Issues: even if validly made, some amendments appeared not to reflect the parties' intention at the time, for example by increasing instead of reducing benefits.

The Scheme had been administered throughout as if the benefit changes had been validly made and as if they had the effect intended at the time they were executed.

Challenges faced

Resolving whether the various benefit changes had been validly made was particularly challenging because:

• Questions of different documents' validity raised complex legal points;
• The validity of an individual document could depend on the validity of an earlier document, or on provisions in an earlier document which could no longer be found; and
• The interests of multiple stakeholders were involved, including those of former members who had transferred out and whose transfer values had been calculated on the assumption that the benefit changes were validly made.

Avoiding complex litigation

It was recognised that resolving the issues through litigation would involve “formidable complexity and cost”. Negotiations over several years led to a proposed compromise (the “Settlement”) aimed at fairly resolving the competing interests of all stakeholders while avoiding the costs of a full trial, and the risks and uncertainties of litigation over complex legal issues.

When negotiating the Settlement, it was impractical to consult all affected stakeholders, given the large numbers involved. A “representative beneficiary” was therefore appointed to represent the interests of those who (broadly speaking) were not in favour of the various deeds being found to be valid. Court approval is required to settle a claim in which a party is acting as a representative, and the trustee therefore applied to Court seeking that approval. The effect of approval being granted was that the Settlement would bind all stakeholders.

Court orders sought

The trustee asked the Court to make:

• Rectification orders: to apply where the drafting of certain documents did not reflect the intention of the parties when they were executed;
• A representation orderappointing (on an “issue by issue” basis):
  • The trustee to represent stakeholders interested in the particular issue being determined so as uphold the validity of the deed in issue; and
  • The representative beneficiary to represent stakeholders interested in the particular issue being determined so as to defeat the validity of the deed in issue; and
• An approval order: approving the proposed compromise of the Validity Issues and the Section 37 Issues.

The two defendant employers were not included in the representation order, as they were parties to the case themselves and were represented by their own legal team.

The Settlement

The parties reached the Settlement, broadly, on the basis that:

• All the deeds concerned were agreed to be valid (subject to section 67 Pensions Act 1995 and any fetters in the amendment powers) and were not impacted by any failure to obtain actuarial confirmation under section 37;
• All the deeds and documents concerned would be interpreted in accordance with amendments sought by the trustee under its rectification claim;
• The trustee and the employers would execute deeds to validate benefit improvements (including linking pension increases to RPI not CPI) which had purportedly been made by deeds in 2010 and 2011; and
• Further benefits (the “Additional Benefits”) would be given to members and other stakeholders, to reflect the possibility that they might (in the event of a favourable outcome for the representative beneficiary had the matter gone to trial) be entitled to higher benefits than were provided under the Scheme's current administrative practice.

Calculation of the Additional Benefits

The parties developed a complex probability model which involved 13 specific points (“Junctures”) at which each of the deeds in issue could either be valid or invalid, depending on how the Validity Issues and/or the Section 37 Issues could be determined. The validity or invalidity of a deed at an earlier Juncture could affect the outcome of a deed's validity at later Junctures.

The parties considered the legal arguments arising at each Juncture and assigned a percentage probability of the deed being determined to be “valid” or “invalid”.

Combining the Junctures resulted in 34 different possible outcomes (“Scenarios”). The cumulative probability of each Scenario occurring was used to calculate the Additional Benefits under the Settlement.

Approval of the representation order and the Settlement

The judge concluded that it was appropriate to make the representation order and to approve the Settlement, having consideration for the following.

• The Settlement's approach, in particular its focus on the probabilities at the Junctures, was an acceptable and sensible way of reaching agreement on the kinds of issue concerned.
• The parties had taken “extreme care” to ensure that the Settlement method produced realistic outcomes, including through engagement of specialist actuaries.
• The interests of all stakeholders had been appropriately considered.
• The parties had shared their perspectives on each issue and had revised their thinking in light of the other's representations and when external circumstances changed (in particular, following the judgment in Virgin Media).

Given the rigour of the process undertaken by the parties, which had produced an “eminently reasonable outcome”, the judge was also satisfied that the notifications which the trustee had provided to stakeholders were sufficient and appropriate, without the need for a wider consultation exercise.

Rectification

The judge was also satisfied that the trustee's arguments for rectification had been amply supported by evidence and decided to make the rectification orders sought. He noted in particular that:

• Many of the documents apparently increased benefits, sometimes retrospectively, even though they were executed when there was concern about the affordability and sustainability of the Scheme; and
• There was no evidence of the employer or trustee estimating the likely cost of such benefit increases at the time, or of their announcing the increases to members.

These factors alone strongly suggested that the apparent benefit increases were unintended and inadvertent.

Comment

While more complex than many examples of its type, this case demonstrates how trustees facing material uncertainty as to the benefits members are entitled to can achieve legal certainty in a way that is binding on members, while ensuring that all members' interests have been fairly represented. The judgment contains some useful guidance as to the approach the Courts will take in deciding whether the settlement was for the benefit of all represented persons, which should help in future cases.

Authored by Jill Clucas.