UK: High Court Rules Pension Scheme Closure Effective

Last Updated: 12 February 2018
Article by Mark Howard
Most Read Contributor in UK, October 2018

The High Court has found that the closure of the Wedgwood Group Pension Plan to the future accrual of benefits in June 2006 to have been effective. The Wedgwood Plan is in a PPF assessment period and if the closure had been ineffective the compensation payable to members employed after June 2006 would have been increased.

The closure of the Wedgwood Group Pension Plan ("the Wedgwood Plan") had been carried out by notice under Rule 62 of the 2001 Rules.  Rule 62 provided that a Participating Company "can stop contributing in respect of all or some of its employees by giving written notice to the Trustees" and that the members affected would then be treated as having left Pensionable Service.

The 2001 Rules had been a complete re-write of the Rules of the Wedgwood Plan and the key issue in this case was whether the introduction of Rule 62 offended the restrictions in the Wedgwood Plan's power of amendment.  The power of amendment provided that the Principal Company could alter the Rules "provided always that no alteration modification or addition shall be made which ... shall prejudice or adversely affect... the rights of any Member". 

The Judge, Penelope Reed QC, noted that there are numerous reported cases which deal with the way in which restrictions on the power of amendment in pension schemes should be construed, but none which deal with a restriction on the same terms as in the power of amendment.  Many of the cases dealt with restrictions which prevent interference with members "accrued rights" or "secured rights", rather than just the reference to "rights" as in the Wedgewood Plan power of amendment.

The Representative Beneficiary – who was arguing that the change was ineffective – argued that the "rights of any Member" included pension rights earned from future pensionable service.  In support of this, the Representative Beneficiary was relying on Lloyds Bank Pension Trust Corporation v Lloyds Bank (1996) where Mr Justice Rimer had decided that a restriction preventing an amendment "decreasing the pecuniary benefits secured... under the Scheme" meant all benefits provided by the Scheme, both accrued and in the future.  This was the only English case where a Court had found that a fetter contained in a power of amendment protected future rights.

The Judge decided that there was a distinction between the rights to a pension which a member acquires as a result of past service and the method by which the rules of the pension scheme provide that the pension payable is to be calculated.  The word "rights" did not naturally cover future service benefits and so it was ruled that the power of amendment protected past service rights only.

However, Rule 62 was a restatement of a previous rule allowing a Participating Company to withdraw if it was "impracticable or inexpedient for such Company to continue to participate in the Plan".  Rule 62 contained no such limitation on the ability of a Participating Company and the Judge decided that the rights of members had been prejudiced as it made it easier for the Participating Companies to cease to contribute to the Wedgwood Plan.

That did not mean that the closure – based on notices issued under Rule 62 – was automatically ineffective.  The Judge considered that Rule 62 could be read as being subject to the restrictions in the power of amendment – so that a notice could be served if it was "impracticable or inexpedient" for the Participating Companies to continue in the Plan.  Although the Participating Companies would not have considered this point when the notices were issued in 2006, it was very clear that the Waterford Wedgwood Group was in financial difficulties in 2006 and closure of the Wedgwood Plan was part of the plan to turn the fortunes of the companies around.  Accordingly, there was "little doubt" to the Judge that the Participating Companies would have found it "inexpedient" to continue to participate in the Wedgewood Plan.

Clyde & Co Comment

The 2017 version of the PPF's "Purple Book" – which looks at the risk profile of defined benefit schemes - estimated that 39% of defined benefit schemes have closed to future accrual.  Since the Purple Book has been compiled, schemes such as BT and University Superannuation Scheme have consulted on closure and the number of schemes closing to accrual is only going to rise.

This case highlights the importance of carefully considering the rules of a pension scheme when closing it to further accrual.  And it is not just the rules in force as at the date of the closure exercise: the history of any rules being relied upon in closing the scheme need to be considered to ensure that any amendments have been properly made and the decision making is correct.

In this particular case, the closure to future accrual was found to be effective.  But if it had not been effective, then there would have been further questions about how benefits would be adjusted for service after the date of the purported closure and the implications for PPF compensation.  These were not answered in the judgment given the Judge's decision on the effectiveness of the closure.

Wedgwood Pension Plan Trustee Limited v Salt [2018] EWHC 79 (Ch)

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