Correcting mistakes – a cheaper alternative to rectification?

Jason Shaw

It is surprisingly common for there to be mistakes in scheme rules. Quite often, the way those mistakes are remedied is by the employer and/or trustees going to court for rectification of the erroneous provisions. Occasionally, however, it may be possible for trustees to take advantage of an alternative, and cheaper, procedure provided for under section 48 of the Administration of Justice Act 1985. Essentially, section 48 provides that where there is a question as to how the scheme rules should be construed, and a counsel of at least ten years’ call has provided a written opinion about that question, then the court may make an order authorising the trustees to take certain steps in reliance on that counsel’s opinion.

Section 48 is rarely used, for reasons I will touch on in a moment, but it was used to good effect in the recent case of Re BCA Pension Plan. Very briefly, in that case the scheme’s advisers drafted a consolidated deed and rules, but when doing so left out a crucial rule regarding increases to pensions in payment. In the absence of that rule, the rules relating to pension increases made no sense. The rules and counsel’s opinion were put before Mr Justice Snowden, who ordered that to correct the mistake, certain words should be read into the consolidated deed.

The decision in Re BCA Pension Plan was pragmatic and helpful to the trustees. So why is s48 not used more often? One reason is that the court’s decision is not binding on members. With rectification or traditional directions applications, the interests of the members will be represented in court and the trustees will seek a representation order binding all scheme members to the court’s decision. Under section 48, trustees will be protected from claims from members in relation to how they are operating the scheme, but that does not stop members from arguing that the court’s decision was wrong and that a different interpretation should be preferred. One element of the court’s order in this case is for members to be informed of the ruling and given access to the judgment – so members will have notice of this possibility. While members in the BCA case may not wish to argue that an alternative construction of the rules should apply, it is possible that in other cases where the mistake is less obvious or the provision in question is capable of multiple interpretations, members may wish to challenge the court’s decision.

Another reason why s48 is not used more often is that it may not be suitable for most cases. If, for example, the rules make perfect sense but they happen to say something that the trustees and company did not intend, then the appropriate course of action here is rectification, because the court will need to consider the evidence of the parties’ intentions when they executed the rules; the simple rubber stamping of a counsel’s opinion would not suffice.

More often than not, where there is a question of how a scheme’s rules should be construed, the parties would be better served by making a standard application to court for directions – with the alternative constructions being advanced by separate counsel and the court’s decision being binding on members. Similarly, where there has been a mistake in the drafting of a scheme’s rules, it is likely that seeking an order for rectification will be the most appropriate course of action. However, for the right case, like Re BCA Pension Plan, s48 could be a very useful tool for trustees.

Jason Shaw is a senior associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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