The recent decision of the High Court in Gleeds is an example of the serious consequences of the failure to follow the correct formalities for the execution deeds.
The scheme employer in this case was a partnership. Since 1 August 1990, the law has required that in order for a partnership to validly execute a deed, each partner's signature must be witnessed. In the period from 1990 to 2012 the Gleeds partners signed a whole series of deeds without their signatures being witnessed. The High Court has found that none of the deeds were validly executed and are therefore ineffective. According to the judge, this could cost the scheme £45m.
The scheme started out in 1974 as a defined benefit scheme which did not require any contribution from the members. The various documents which have now been found to be invalid include a Barber equalisation deed, deeds establishing money purchase sections, deeds introducing member contributions and a deed stopping future accrual altogether.
Apart from the obvious issue of the importance of properly following formalities for the execution of deeds, some of the key points to come from the judgment include the following:
- It is easier for members to challenge the validity of a deed where statutory requirements for execution have not been met (rather than scheme specific requirements). This is particularly the case where it is clear on the face of the deed that the requirements have not been met.
- In order for members to contractually agree to vary their rights under a pension scheme, they must be doing more than merely signing up for what they believe are their rights under the scheme. Where members signed an application form to join the new money purchase section (which we now know had not been properly created because the deed of amendment was ineffective) they were not contractually agreeing to benefits on a money purchase basis, but were merely agreeing to join the scheme in accordance with its terms. However, where employees agreed to receive a one-off pay rise in return for ceasing future defined benefit accrual, this did amount to a binding contract.
- Contractual agreements as outlined above can include matters which could not be achieved within the scheme itself due to restrictions on the amendment power. Here, the judge had found that the wording of the amendment power required final salary linkage to be maintained if future accrual ceased. This did not prevent the employees agreeing by contract to cease accrual without maintaining final salary linkage.
You can read the judgment here.
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