17 October 2013 - Post by:Jason Shaw
You might think that no one wants to go to court. Isn’t it stressful, time consuming and expensive? It can also have a negative impact on the parties’ relationship with each other, unless it is properly handled. However sometimes going to court makes a good deal of sense, particularly in the world of pension schemes.
I have been involved in quite a bit of pensions litigation over the years but one area where I’ve seen it particularly help my clients is where the trustees and principal employer disagree about how to construe the scheme’s rules or whether one or other party can exercise a discretionary power in a particular way. These disagreements can often prove frustrating. Once trustees have taken legal advice it is easy for their position to become entrenched, at which point there’s very little the employer can do to persuade them away from the advice they’ve received.
In these deadlock situations the employer or trustees might want to think about asking the court to help. Either side can ask the court to determine the proper meaning of the scheme provision or piece of legislation in dispute or otherwise to resolve the dispute between the parties. Where the dispute does not involve a substantial dispute of fact – which would normally be the case when the parties are arguing over the meaning of a particular scheme rule – the trustees can use a simplified court process to have the dispute resolved. This simplified process, known as a part 8 claim, can be structured in different ways but would typically involve the trustees (who would bring the claim but be neutral on the question of how the relevant rule is to be interpreted), the employer (who would argue for the interpretation of the rule that it favours), and a representative beneficiary (a member of the scheme appointed to represent the interests of other members and argue for an interpretation contrary to the one being advanced by the employer). The advantage of the simpler process is that you avoid much of the time, and cost, inherent in the more typical contentious disputes.
What a court decision does is give the trustees and employer the certainty they need. It means they can stop arguing and just get on with making sure that the scheme is being administered properly. The other advantage of course is that, where the court makes the appropriate order, the court’s decision will also bind the scheme members.
That puts an end to the risk of further challenges in the future. In the absence of certainty, the trustees and employer run the risk that the problem may rear its head again many years down the line (usually in the form of a member complaint) by which time the issue is likely to have grown and could be harder to resolve.
Even if you can get an answer you can bank on, you might still be thinking that going to court costs too much and takes up too much time (even when using the simplified court process). But, if you break it down to a simple cost/benefit analysis, going to court might actually be worth it. Employers in particular may be able to achieve significant cost savings, for example by getting approval for a reduction of liabilities. A classic example of this is equalisation. If the trustees have advice that the scheme has not been equalised, the scheme’s liabilities could increase by millions. But, if the employer takes the matter to court and the court confirms that equalisation has been achieved, the employer will avoid that increase in liabilities.
As is always the case with litigation, you need to balance up the pros and cons before you set off on an action. But I have seen a lot of pensions litigation driven by the need for certainty and the potential financial benefit to an employer. Weigh up the benefit against the risk of losing. You might find that going to court, even with the cost of a court action, is a prudent investment.
Jason Shaw is a senior associate at Allen & Overy LLP.