With pension schemes in deficit and employers under pressure, trustees will be on the look-out for negligence from solicitors. Neil Smith and Peter Maguire report

With the severity of the recession beginning to bite across the profession, law firms and their insurers are naturally concerned about the claims and losses that may be coming their way. This article looks at one of the areas under scrutiny: pensions.

Why are claims on the increase?

Pensions is a highly technical and heavily regulated area. As such, trustees and employers are seeking more legal advice and are more reliant upon it. Where losses are incurred (as in the current economic climate), clients tend to pore over the advice they have received and are more likely to take a robust view if there have been errors.

As a result of poor investment terms and improving mortality rates, defined benefit schemes are, across the board, in deficit. In the recession, many companies are becoming insolvent, leaving their schemes in deficit and without an employer to make good the shortfall. In these circumstances, trustees are more inclined to scrutinise the advice they have received in order to assess whether this has exposed the scheme.

Drafting scheme documents and amendments to schemes

This remains the principal area where solicitors are exposed to claims. There have historically been problems arising out of equalisation drafting errors (that is, where the draftsman has failed to close the 'Barber window') following clarification of Barber in the September 1994 case of Coloroll.

Particular care must be taken when amending pension scheme rules. Rectifying a mistake, if it appears to give a pension scheme member a greater benefit than intended, may not be possible even if the parties to the document (the trustees and employer) agree that a mistake was made.

By their nature, scheme rules are intended to confer rights upon those who are not signatories; that is, the scheme beneficiaries. Furthermore, it has to be recognised that even those who are signatories may not have read the document with the care it deserves. Indeed, they may not have read it at all, but merely relied upon the professionals to ensure that its provisions are correct. This was evident in Lansing Linde v Alber, where the court, when asked to rectify a particular provision, concluded that the only shared intention of the parties was to execute the deed blindly. Even if rectification of such an error can be achieved, as in AMP (UK) v Barke, the cost of the court application with representation for all interested parties may be considerable and those costs may have to be borne by the solicitor responsible for the error in question.

A simple and 'correct' amendment to one rule may have an unintended knock-on effect on another rule. In AMP (UK) v Barker, an intended improvement to incapacity benefits overlooked the fact that benefits for members leaving service were also linked to the incapacity benefit. The result was a dramatic and unintended increase in early leaver benefits.

Where a solicitor is unfamiliar with a document (or a series of documents) that are voluminous and may have been prepared by another firm, it is not difficult to see how an error or omission is made. While the client may expect a simple change made quickly, a detailed examination of all the scheme documents will usually be required.

In practice, mistakes are probably most likely to be made when drafting a new set of rules for a new client when the intention is to replicate existing provisions, clarify a number of others and generally update the rules in order to reflect best practice.

Practical steps to minimise the risk of errors include the following:

• When asked to comment on documentation, solicitors should make it clear to the actuary at the outset whether or not the actuary will be expected to complete a certificate pursuant to Section 67 of the Pensions Act 1995 (which indicates that accrued rights cannot be adversely affected by any amendments to scheme rules). This should focus the actuary's mind on the need to identify any changes that might affect members' benefits;
• The last definitive deed and rules, together with any subsequent amendments, booklets and announcements, should always be obtained before undertaking this task. Inconsistencies between documents and any changes or assumptions made in the drafting of the new rules need to be drawn to the clients' attention and instructions taken on how to deal with them;
• A copy of the old rules can be used as a checklist so that each existing provision is considered and re-drafted or incorporated into the new rules;
• Copies of all drafts (including electronic versions and hard copies bearing manuscript amendments) should be retained in order to ensure the existence of a proper paper trail; and
• Preparing the first draft of a new definitive deed is a major undertaking. Drafting should not, so far as is practicable, be undertaken on a piecemeal basis.

Conflicts of interest

Where a firm acts for the trustees of a scheme, it must inform the trustees as soon as it becomes aware of a conflict of interest in order that the professional advice requirements under Section 47 of the Pensions Act 1995 are met.

Pensions solicitors frequently act for the employer of a pension scheme, as well as the trustees. Solicitors must, therefore, always be alert for conflicts, such as requests from the employer for advice about mergers, closures or termination.

There may be occasions of potential conflict (for example, scheme mergers) where there is no actual conflict of interest. Firms should advise their clients of such potential conflicts at the earliest opportunity and discuss with them whether there is a significant risk of conflict that would preclude the solicitors from acting. Such advice should be recorded in writing, and in certain circumstances the client may need to obtain independent advice.

If issues of this nature are not canvassed with clients, there is a risk that difficulties will arise at a later date should an actual conflict of interest emerge. This could, in turn, lead to the solicitor's advice being called into question and a court will generally be more willing to castigate an error as negligent if it concludes that the solicitor had put himself into a position of conflict.

Failure to give or to qualify advice

The interpretation of scheme rules may, like many other documents in the pensions area, give rise to difficult questions of construction. The fact that a solicitor's interpretation is not ultimately upheld does not, of itself, connote negligence, provided that the opinion he expressed was a reasonable one by reference to the standards of reasonably competent solicitors specialising in pensions law.

In Pinsent Curtis v Capital Cranfield Trustees, the former legal advisers were held to be negligent for failing to advise the former trustees, prior to expiration of a termination notice served by the employer, that under the rules of the scheme the trustees were entitled to demand the full deficit shortfall calculated on a buy-out basis. The trustees did not make the demand, the employer become insolvent and, as a result of the solicitors' negligence, the trustees missed the boat.

Where the interpretation or outcome of a point is uncertain, the solicitor should qualify his advice, in order to put the client in a position to make an informed decision as to the best way forward. Where, for example, there is a credible contrary interpretation or real scope for dispute, the solicitor will be in difficulties if he fails to identify and advise upon this.

When complex and difficult issues arise, it may well be appropriate to recommend that advice be sought from specialist counsel at the Pensions Bar.

Limitations of liability agreed between clients and other advisers

Actuaries and accountants tend to be aggressive with clients in limiting liability. This can, in turn, prejudice the position of solicitors in seeking contributions from those other advisers. In practice, most large firms of solicitors agree proportionate liability clauses with clients in order to obviate this risk.

As in many other areas of practice (for example, commercial property), the economic downturn has exacerbated the liability risks facing pensions lawyers. Where firms have adopted the type of approach set out above, however, the risk of claims will be substantially reduced and they will be well placed to defend any claims that do materialise.

Neil Smith is a partner in the pensions team and Peter Maguire a partner in the insurance and reinsurance group at CMS Cameron McKenna.