“Grossing up” clauses are familiar in commercial contracts where one party is bound to make a payment to another party, and are intended to ensure that the other party is fully compensated for any tax liable on the sum received. In Davies v Novatrust Ltd [2023] EWHC 1196 (Ch), the Court was asked to construe a grossing up clause applicable to a pension benefit.   The claimant was entitled to a pension under an agreement with the defendant trustee of a trust set up by the family of the claimant’s employer, which provided that:   "The amount that will be paid to [the claimant] in each year will be that gross amount which, after deduction of tax levied at the highest rate applicable to [the claimant] in the country of [his] residence in that year, will result in a net (after-tax) amount of…"   "…the Initial Net Amount is to be grossed up such that, after payment of tax on it, [the claimant] will be left with the Initial Net Amount…”   The issue was whether the claimant’s pension was liable to be grossed up at the highest marginal rate of income tax in the UK as his place of residence (as the claimant claimed), or at the highest effective marginal rate of income tax actually payable by him (as the defendant claimed).    HHJ Jarman KC, sitting as a Deputy Judge of the High Court, applied the well-established principles of construing the terms of a contract that focused on the wording of the agreements and which required the court to apply unambiguous wording even if that course led to an improbably commercial result, citing Arnold v Britton [2015] UKSC 36 and Rainy Sky v Kookmin Bank [2011] UKSC 50. The Judge also emphasised the inadmissibility of subjective evidence of what the parties thought their agreement was, and he treated many of the background facts upon which the claimant sought to rely as just such evidence.   The Judge accepted the defendant’s case that the aim of the grossing-up clause was to protect the claimant from the incidence of tax, not to provide him with more than the net amount stipulated. The Judge held that the words were unambiguous and clear, and envisaged three steps: the payment to the claimant of a gross sum; the payment of income tax by the claimant on that sum; and the retention by the claimant after the payment of tax of the stipulated net amount. The words "applicable to" the claimant were clearly a reference to the highest rate applicable to the gross pension sum that would give him the stipulated net amount.   Having held that the claimant’s pension was to be grossed up by reference to the highest rate of income tax actually payable by him in his place of residence, the Judge agreed with the defendant that the claimant was required to provide information of his income to the defendant for the purpose of calculating the appropriate grossing up in the future, on the basis that such a requirement was a implied term of the agreement necessary to make the agreement work.

The High Court today handed down judgment in Manolete Partners plc v White [2023] EWHC 567 (Ch). This is another in a long line of cases about the Court’s jurisdiction to compel a debtor to make good a debt from his pension benefits. In this case, the assignee of a judgment creditor sought an injunction requiring the debtor to draw down his benefits under a SASS in order to pay the debt. The debtor’s principal defence was that s.91 PA 95 precluded the making of such an order. The Judge considered the previous cases, including Blight v Brewster [2012] 1 WLR 2841, Bacci v Green [2022] BPIR 641 and [2023] Pens LR 2, Brake v Guy [2022] EWHC 1746 (Ch) and Lindsay v O’Loughnane [2022] Pens LR 13. The Judge concluded that, although none of these cases had substantively considered the s.91 issue, that section did not preclude the Court from directing that payment of the drawdown benefits be made to a nominated UK bank account in the name of the debtor. This is because the order would not have the effect of restraining the debtor from receiving benefits but rather the opposite: it would ensure that payment of the scheme assets was made to the debtor, rather than remaining within the scheme. It made no difference that the order was motivated by the objective of enabling the scheme assets to be applied in satisfaction of a pre-existing judgment debt owed by the debtor.

In R (oao Fire Brigades Union) v HM Treasury [2023] EWHC 527 (Admin), the High Court today dismissed a challenge by the members of the Firefighters and NHS Pension Schemes to the Directions issued by HM Treasury in 2021 which brings the costs of remedying the discrimination arising from the McCloud decision within the Costs Control Mechanism established under s.12 of the Public Service Pension Schemes Act 2013. This means that the members of the public sector schemes will potentially bear the brunt of the remedy costs. The judgment can be found here, but a full summary will be published on the website on Thursday.

Catrin Young and Kate Granville Smith of Burges Salmon have produced a webinar in which they discuss correcting benefit underpayments in DB pension schemes. The webinar recaps what the line of cases that has emerged since the Lloyds Bank judgment in 2018, including last summer’s case of CMG Pension Trustees Limited v CGI IT UK Limited, has and has not said about correcting underpayments made to both current and former members. They then offer some practical tips on correcting benefits of current members and former “not on admin” members, covering whether there is any legal or other justification for not correcting an underpayment and any tax issues to be aware of when topping up underpaid benefits. The webinar can be found here

The first three determinations of the new Pensions Ombudsman, Dominic Harris, have just been published on the Ombudsman’s website. Of these, the most interesting is Mr R (CAS-46822-W2V2, 7 February 2023) (which can be found here), where the complainant challenged a decision of the decision-maker under the NHS Pension Scheme not to award him an ill-health early retirement benefit. The determination is of particular interest for the clear statement of the principles which the Ombudsman will apply to a challenge to the decision-maker’s decision. The Ombudsman reiterated the position taken by his predecessor that his role was to consider the decision-making process undertaken by the administrator (para 47) and went on to say that he would generally look at whether: - the appropriate evidence had been obtained and considered; - the applicable scheme rules and regulations have been correctly applied; - the decision was supported by the available relevant evidence (para 46). If the decision-maker acted in accordance with these principles, the Ombudsman will not overturn the decision merely because he would have acted differently (para 47). These principles are entirely orthodox, as are the Ombudsman’s statements that: - the weight which is attached to any of the medical evidence is for the decision-maker to decide: it can prefer evidence from its own advisers unless there is a cogent reason why it should, or should not do so without seeking clarification (para 50); - a decision to give little or no weight to any of the evidence is not the same as failing to consider it (para 51). Whilst it is no surprise that the new Ombudsman has followed the correct legal principles in coming to his decision, the fact that he has set out those principles so prominently in his determination is to be commended, not least because this ought to be of assistance to a disappointed complainant, so that they can understand the reasons why their complaint has not been upheld.

Of the seven determinations published on the Pensions Ombudsman’s website this week, one (Mr Y, CAS-74570-V0T1, 30 January 2023) related to auto-enrolment. When I interviewed Anthony Arter (Talking Pensions Ep1), he mentioned the increasing number of complaints relating to auto-enrolment, so we can expect to see more of these being dealt with by the Ombudsman. Whilst the primary role in relation to auto-enrolment lies with tPR (see s.5(1)(ca) of the Pensions Act 2004 and the compliance notice provisions in the Pensions Act 2008), and breach of the employer duty provisions does not give rise to a right of action for breach of statutory duty (s.35(1) of the Pension Act 2008), there will be occasions where the Ombudsman can act, such as where where the duty breached is also a breach of the scheme rules. A particularly interesting decision in this respect is Mr Y (PO-23597, 22 June 2022), which can be found here. At paras 65-71 of the Determination, it was indicated that a trustee might have a duty (amongst other things) to amend the scheme to ensure that the employer complied with its auto-enrolment duties. In that case, an employer had failed to re-enrol an employee in a DB scheme when the employee had asked to rejoin: the trustee was criticised for believing the non-payment of contributions was simply a matter for the employer and was ordered to pay £500 to the complainant for his distress and inconvenience. The Ombudsman relied on tPR’s guidance on the statutory increase in minimum auto-enrolment contributions, which states that scheme rules need to reflect the increase. It will be interesting to see if the Ombudsman continues to require trustees to take pro-active steps in the implementation of auto-enrolment obligations which, under the legislation, are presented to be a matter for the employer.

In my article Sole independent trustees: The need for continued member involvement, I questioned the current trend for replacing existing trustee boards with a sole independent trustee. In interesting comments made today to the Association of Member Nominated Trustees conference, as reported by Professional Pensions, Nick Gannon (Policy Lead at TPR) urged the industry to seek to a balance of experience on trustee boards between long-serving trustees and newer people with new ideas, to ensure an appropriate mix of skills. While he supported the presence of at least one professional trustee on the board, his comments suggest that such an appointment in place of the existing trustees may be less welcome. I suspect this issue will continue to tax the regulator and the industry for some time to come.

On 12 January 2023, HHJ Matthews, sitting as a High Court Judge, handed down judgment in SwissIndependent Trustees SA v Sofer [2023] EWHC 12 (Ch). This case involved the construction of a private trust, but the Judge held that the special characteristics of pension scheme documents described by Lord Hodge in Barnardo’s v Buckinghamshire [2018] UKSC 55 apply equally to private trusts, i.e. that they are not negotiated, are intended to endure for many years, and confer benefits on non-party beneficiaries. Although the Judge contrasted this approach with cases on the construction of commercial contracts, he left open the critical question of whether this justifies a different approach, and potentially different outcome, in trust/pension cases compared with commercial contract cases, holding that it would make no difference to the outcome of the case before him.

Here is a sneak preview of a news item that will be posted later in the week Court of Appeal confirms pensions bankruptcy legislation is incompatible with EU law On 16 January, the Court of Appeal in Wilson v McNamara dismissed an appeal against Nugee J’s decision on the trial of a preliminary issue (and following a reference to the Court of Justice of the European Union (“CJEU”)) that the treatment of a registered overseas pension scheme as part of a bankrupt’s estate pursuant to ss.11(2)(h) and 12(1) of the Welfare Reform and Pensions Act 1999 was discriminatory, and therefore incompatible with EU law, because it differentiated between UK and foreign migrant workers from other EU states. The appellant trustees in bankruptcy did not challenge the decision on discrimination but argued that the Judge ought to have permitted them to argue that the discrimination was objectively justified. That argument was rejected, on the basis that the trustees ought to have raised justification during the trial of the preliminary issue, and that it was immaterial that justification was referred to in the CJEU’s subsequent judgment.

In its guidance Supporting defined contribution savers in the current economic climate published on 12 January, tPR sets out its expectations as to how DC scheme trustees should be supporting savers in their investment choices, helping them to make better decisions. This includes ensuring savers have enough information to make informed decisions about their savings, even if that extends beyond what trustees are legally required to supply, and providing additional guidance, support and modelling tools. tPR also requires trustees to guide savers through the trade-offs they may need to make when deciding on their options at retirement, and to explain the risks that face them. tPR’s desire to ensure that DC savers are given all the information they need to make good choices risks exposing trustees to claims for misinformation as they are required to move beyond the traditional trustee duties to manage assets and exercise scheme powers, into what looks perilously close to giving members advice about their retirement options. In this respect, the new guidance appears to go further than both the requirements of the DC Code of Practice and the fiduciary duties of trustees (as to which, see Outram v Academy Plastics [2000] Pens LR 283). Has the difficult job of being a pension scheme trustee just got a whole lot more difficult? Will this deter even more members from becoming involved, requiring more schemes to have professional trustees, leading to increased costs for schemes and a weakening of the relationship between members and the schemes?