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Role of trustee as guardian of the scheme’s funding position significant when interpreting scheme’s incapacity rule

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05/03/2019

This article was first published on Lexis®PSL Pensions on 8 February 2019.

Pensions analysis: Did a trustee have the power to decide that a member was not entitled to receive an incapacity pension? According to Craig Looker, director of pensions at Walker Morris LLP, the case of Universities Superannuation Scheme Ltd v Scragg and another is arguably an example of ambiguous drafting and is further evidence that lawyers should work harder to make the rules of pension schemes as clear as possible.

Universities Superannuation Scheme Ltd v Scragg and another [2019] EWHC 51 (Ch), [2019] All ER (D) 84 (Jan)

What are the practical implications of this case?

First of all, the case of Universities Superannuation Scheme Ltd v Scragg and another confirms that trustees and others should be cautious about relying on headers and sub-headers in pension scheme rules when deciding how to interpret those rules. A cautionary lesson for us all!

The case demonstrates how important it is that trustees know what their rules say when they make a decision. It also reminds us how important it is that rules are clear about who has power to do what.

In this case, the issue was whether a trustee had power to decide that a member was not entitled to receive an incapacity pension. The High Court confirmed that the trustee correctly decided this question and that the Ombudsman’s interpretation of the rules was wrong. Arguably, though, the case is an example of ambiguous drafting and is further evidence that lawyers should work harder to make the rules of pension schemes as clear as possible.

Where a scheme’s rules are ambiguous on who decides if a generous incapacity pension is payable, the role of trustees as those responsible for safeguarding the assets of the pension fund is a relevant factor when interpreting those rules. An interpretation that the trustees have no power to decide whether a member receives an incapacity pension will be hard to support. In practice, the same point could be applied to any benefit under a scheme which will put a strain on the funding of the scheme unless the drafting is unambiguous.

The Ombudsman’s interpretation of the rules would also have given the employer sole power to decide if a member met the test of incapacity, with no obligation for the employer to seek medical advice on this. Any rule which appears to give the employer this power should be treated with caution and we should also remember that the test applied by an employer to dismiss an employee for ill-health is not likely to be the same as the test for an incapacity pension under a scheme’s rules.

What was the background?

This was an appeal to the High Court on a point of law from a pensions Ombudsman’s decision which had found in favour of Mr Scragg, a former employee of Dundee University (the University).

In May 2016, Mr Scragg applied for incapacity retirement from the universities superannuation scheme (USS), a large pension scheme which provides pension benefits for (broadly) academic staff in universities and colleges. The University set out its opinion in the relevant form, that Mr Scragg was suffering from incapacity which prevented him from carrying out his duties and enclosed the medical reports which supported Mr Scragg’s application. The University would eventually dismiss Mr Scragg from employment on the grounds of ill-health.

The trustee company for the USS (trustee) referred the application to its appointed panel of three registered medical practitioners. The panel concluded that Mr Scragg was not suffering from total or partial incapacity as required under the rules of the USS rules for an incapacity pension.

Mr Scragg ultimately complained to the Ombudsman that the trustee had misinterpreted the following part of the incapacity rule:

‘The trustee company determines that the member is suffering from total incapacity or partial incapacity.’

Any decision by the trustee under this rule had to be made after receiving a medical opinion. Mr Scragg argued that once the University had decided that he was suffering from incapacity, this rule only gave power for the trustee to decide whether the incapacity was total or partial. The trustee could not disagree with the University’s opinion and concluded that the member was not suffering from incapacity at all.

The Ombudsman agreed with Mr Scragg and ordered the trustee to make a decision as to which type of incapacity applied in Mr Scragg’s case and then to pay him an incapacity pension. The trustee appealed to the High Court.

What did the court decide?

The High Court overturned the Ombudsman’s decision and confirmed that the trustee had correctly interpreted the relevant rules of the USS. The relevant rule required the trustee to decide whether the member is suffering from total incapacity, partial incapacity or no incapacity at all.

The High Court applied the principles of pension scheme interpretation set out in the Supreme Court case of Barnado’s v Buckinghamshire and Others [2018] UKSC 55, [2018] All ER (D) 25 (Nov). These principles require a greater focus on textual analysis of the wording of pension scheme rules, on the basis that they are usually prepared by a technical expert, and less focus on the factual background behind the scheme.

In this case, the High Court noted that the concept of the trustee having a power to decide whether the member is suffering any incapacity is not inconsistent with the University having first reached its own opinion on this. The University’s opinion is a relevant factor for the trustee to take into account but the weight to be given to it will vary in the circumstances.

The High Court also noted that it would be odd for the trustee to be required to accept the University’s opinion on a member’s incapacity when the trustee must then seek a medical opinion on this issue. If the medical opinion concluded that the incapacity test is not met at all, how could the trustee only have to decide whether the member was suffering a partial or total incapacity?

Finally, the High Court took into account the role of the trustee as guardian of the funding position of the USS and the cost of an incapacity benefit to the scheme. It would be surprising if the rules provided a role to the trustee in the provision of an incapacity pension, but no power to decide that the test for a pension is not met at all, given the funding strain which results from the benefit.

Craig Looker is a pensions law specialist with over ten years’ experience of advising on private and public sector pension schemes. Looker advises employers, and pension scheme trustees, and provides commercial and practical solutions to help them achieve their goals in the often inflexible world of pensions law and regulation. He is a strong advocate of plain English advice and documents. He has particular expertise in employer debt and sex equalisation issues in defined benefit schemes, as well as in pensions taxation generally. He has guided and supported several clients through projects where the Pensions Regulator had an active involvement and helped those clients to reach a positive outcome.

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