PENSIONS LITIGATION: An Introduction

As litigators, we often talk about the events of today giving rise to the litigation of tomorrow. This has never been more true for pensions litigation than over the last 12 months.

The world of a litigator and the courts can seem a long distance away from the benches of Westminster. But the events of autumn 2022, when a new prime minister took office only briefly, had more of a direct impact on pension schemes than anybody could have imagined.

Described as a “mini-budget”, the fiscal event of September 2022 was anything but “mini” in terms of its repercussions. It led directly to the LDI crisis, with pension schemes hitting the front pages and trustees and employers having to react immediately to find the collateral calls required by their provider. The consequences of this are still being felt.

2023 has also seen the courts continuing to grapple with long-standing pension issues, as well as a new Pensions Ombudsman bedding in and having to deal with an ever-increasing case load.

For trustees, employers and members alike, the challenges continue to give rise to interesting, novel and important legal actions, keeping all those involved in pensions litigation on their toes.

LDI Crisis  

Legal action for loss 

Although it may be difficult to describe any scheme as “winning” in the immediate aftermath of the LDI crisis, there were clearly some schemes which lost out significantly. Schemes which suffered particularly large losses are now carefully assessing where responsibility might lie.

Although the crisis arose following the mini-budget, the fact that its impact was not uniform does lead to questions around why some schemes suffered and others did not. Trustees are rightly considering what their loss is (and this, in itself, is likely to be a matter of debate) and looking at the actions taken by their LDI manager and investment consultants.

Whilst it is early stages for many of these potential claims, there has been clear appetite from some trustees and employers to seek to recover their losses notwithstanding the complexity involved.

Risk transfer 

Exploring potential options for securing scheme liabilities with an insurer, or adopting some other form of risk transfer exercise, is not a new phenomenon for trustees and employers. But the past year has seen an acceleration of this process for some, with the LDI crisis acting partly as a catalyst.

Whilst asset values dropped for many schemes, there was an even greater fall in the value of liabilities, narrowing, or in some cases eliminating, the funding gap. This, combined with a favourable market for risk transfer projects, has led to more schemes embarking on a derisking journey. This is not always an easy road, particularly for schemes which have perhaps reached this point in their lifecycle sooner than expected.

In the current market, insurers will want to do their due diligence and unearth all possible skeletons in the scheme’s closet before a transfer goes ahead. This is continuing to drive a need for pensions litigation solutions (often involving court applications) to resolve, amongst other things, historic drafting issues and questions about compliance with formalities in the execution of documents. The latter came particularly into focus following the recent Virgin Media v NTL Pension Trustees II Limited case.

Rectification and construction cases continue to make their way through the courts and, in most cases, there are associated professional liability questions and claims arising. Although the law associated with rectification and construction claims is established and relatively stable, claims remain costly to pursue because of the need to carefully scrutinise and provide detailed evidence as to events that often took place many years ago. The ability to “rewrite” scheme rule history through rectification is a powerful tool and the courts, quite rightly, expect trustees and employers to provide the necessary evidence before approving its use.

Although we continue to see discussions with insurers about the potential to take a pragmatic approach to some problems, the fact remains that many of these issues will inevitably require litigation before the courts and this is likely to remain the case for some time to come.

Economic Environment 

Trustee decision-making 

For many pension scheme members, the occupational pension that they receive is their primary (or sole) source of income in retirement. With inflation over the last year at levels not seen for decades, anxiety has risen amongst scheme members about the ability of their pension to protect them against rising costs.

Whilst many schemes provide annual increases to pensions that, in times of low inflation, are sufficient to keep pace with the cost of living, guaranteed increases are often subject to caps which can fall short when prices rise. This leaves some pensioners hoping that any available discretion might be exercised in their favour to provide higher increases.

For trustees and employers this presents a conundrum and a very difficult decision-making process. Businesses are themselves far from immune to cost-of-living hikes, and employers may also have an eye on the scheme’s funding position and any potential future risk transfer projects that might be on the cards.

Balancing member and employer expectations can be a challenge for trustees. If members do not receive what they consider to be an appropriate level of increase, action groups and complaints can follow. Trustees are also being questioned about their decision-making processes and their rationale for conclusions reached on an increasingly regular basis.

Pension transfers 

The rise of the pension transfer has been a theme for many years and this year has been no exception. More onerous due diligence requirements now placed on trustees and their administrators can frustrate members and lead to complaints about the time it takes to complete the transfer process.

Against the backdrop of economic instability, and significant market fluctuation, claims in relation to perceived delay have become commonplace as members seek to recover the difference between a quotation of their DC benefits at the outset of the process and the value at the time of transfer.

Trustees and administrators are also seeing an uptick in angry IFAs trying to claim against them for delays or, in some cases, a refusal to make a transfer.

The combination of the enhanced transfer due diligence requirements and the volatile market conditions has created a perfect storm for such claims. Whilst many are brought before the Pensions Ombudsman, IFAs in particular are not averse to issuing formal legal proceedings against trustees for their perceived loss.

What is Next? 

If we have learnt anything from the last year, it is that we should expect the unexpected. The themes outlined here are likely to remain relevant for some time to come, with key issues depending on the surrounding circumstances. With the Pensions Regulator always hovering in the background, new codes of practice and guidance due to be published might also elevate regulatory scrutiny and the possibility of future intervention.