In Low & Bonar v Mercer  CSOH 47 the Commercial Court of the Court of Session was asked to consider whether or not a signed Board Minute could constitute a “deed” and therefore a valid amendment to a pension scheme. Finding that “deed” has no particular legal definition in Scotland, unlike in England, the court found that it did constitute a deed. Therefore, the Normal Retirement Date of the scheme had been validly equalised when intended, there was no need to revisit pension benefits, and the professional negligence claim against the pension administrators was thrown out.
In reaching this decision the court set out key principles which apply when interpreting pension deeds and the effectiveness of amendments to pension schemes, which show that the Scottish courts will take a more flexible approach than has been the case in England.
This decision will be very welcome for those considering the validity of pension scheme amendments, where an invalid amendment could mean having to unravel years of pension scheme administration and the creation of a substantial liability for the scheme.
The Barber Window
The European decision in Barber v GRA 17 May 1990 held that pension benefits are remuneration and therefore pension schemes must have the same Normal Retirement Date (“NRD”) for men and women. At that time many pension schemes had an NRD of 65 for men and 60 for women. Following Barber schemes required to equalise NRD (at least in so far as women and men were performing equivalent roles, thereby engaging the equality requirement under Article 119 of the EEC Treaty). This could not be done immediately and so in every scheme there would be a gap between the Barber decision and equalisation. Subsequent decisions determined that the effect of Barber was that from 17 May 1990 until a scheme was validly equalised the members would have to be given the most favourable NRD under the scheme. For a scheme with an NRD of 60 for women and 65 for men this meant treating all members as having an NRD of 60 until equalisation. This period between the Barber decision and effective equalisation became known as the “Barber window”.
Barber v GRE 17 May 1990 created a lot of uncertainty at the time, the fall out of which is still being felt today. Scheme audits frequently uncover longer “Barber windows” than was intended, with the potential financial consequences often running into millions of pounds. A series of decisions from the English courts established that scheme amendment provisions must be adhered to strictly; even where it was clear that the Trustees and Company intended to equalise the scheme and the members had all been advised of the change, if the formalities were not strictly complied with the court would find that the scheme had been left unequal until a formal amending deed was signed years later. This left many schemes with a serious funding gap, which the company and/or Trustees often looked to the scheme administrators to fill.
Scots Law Solution - Minutes Construed as Deeds
In Low & Bonar v Mercer the amendment clause required amendment by deed. No formal deed was located. There was a written record of a meeting of the directors of the employer company, and separately of the Trustees, at which they resolved to amend the rules to equalise NRD at 65. There was also a written announcement to members advising them that NRD would be 65 for all members for future service. The pursuers argued that this was ineffective and equalisation had not occurred until a number of years later when a formal amending deed was executed, leaving a lengthy Barber window and requiring the Trustees to revisit benefit calculations for that period, which they estimated would result in an additional funding liability of around £10m. They sought declarator that the scheme had not been equalised until the later amending deed and recovery of the £10m from the defender, who had been the administrator of the scheme at the relevant time.
The defenders argued that signed Board Minutes could be treated as a “deed,” and therefore equalisation had been effected when intended, there was no need to revisit pension benefits and no liability. Lord Drummond Young agreed, adopting a common-sense approach which sets the Scottish courts apart from the English courts in terms of the general approach adopted.
In Low & Bonar Lord Drummond Young agreed that “deed” does not have any strict legal definition in Scotland, as it does in England. Therefore he was able to find that signed Minutes of a Board Meeting could constitute a deed:
“First, it is clear that the word "deed" has no technical meaning in Scots law. ….the word 'deed' is a word of ordinary language, because it is not in our system a term of art….. … the significant characteristics of a deed are first that it should have some degree of formality and secondly that it must demonstrate an intention to create a legal relation….”
Lord Drummond Young found that the minutes of a board meeting signed by the chairman had these key characteristics.
General Approach in Interpreting Pension Schemes
In discussing amendments of pension schemes Lord Drummond Young referred to some general principles to be applied:
- “the correct approach to interpretation is that applicable to contracts rather than the approach used for private trusts,”
- “the scheme documentation ….. must be construed objectively. …A commercially sensible construction will be preferred,”
- “the court must ….attempt to give practical effect to the scheme,”
- “it is inappropriate that an over-legalistic approach should be taken . . . the practical effect of what is done is important,”
- “there is [no] need for the court to be unduly technical or restrictive” in approach, and
- “the paramount consideration is that the exercise of the power should be clear and certain and that it should be put into some sort of permanent form.”
It is important to note that Lord Drummond Young did not disregard the amendment requirements, he agreed with English authorities which held that specific amendment requirements must be complied with. Where he departed from the English approach was in determining whether or not those specific requirements had been complied with; in doing so he applied an objective, commercially sensible approach rather than a highly technical or restrictive approach.
Membership on Special Terms
Another alternative route to amendment is by way of the “membership on special terms” provision in the scheme Deed or Rules. This commonly allows for the terms applicable to members to be altered by a decision of the Company and Trustees followed by notification to the member. Again, the traditional view following English decisions is that equalisation cannot be effected by announcement. However, in Low & Bonar v Mercer Lord Drummond Young took the view that the “membership on special terms” provision could be used as a way of altering NRD for all female members (increasing their NRD to 65). As the Minutes had been held to constitute a deed these comments were obiter dictum, but they may have left the door open for this argument to succeed in other cases.
While the decision in this case turned on the Scottish definition of “deed,” the principles set out by the court have the potential to have a much wider impact. In light of this decision we can expect a much more pragmatic approach to be taken in Scotland by parties concerned about the validity of scheme amendments following this decision.