UK: Two New Cases For Pension Scheme Trustees To Be Aware Of...

Last Updated: 11 November 2009
Article by Keith Webster

Judgment has been given today in two very different High Court cases relating to pension schemes.

Duties to the PPF

The first case, ITS v Hope, considers the extent to which trustees can take into account the existence of the Pension Protection Fund (PPF) when exercising powers under the scheme rules.

In this case, it was proposed that the trustee's discretion in the Scheme rules to buy-out benefits be used to buy-out the whole of the benefits of those members currently under normal pension age (who would lose the most if the Scheme went into the PPF) and in the case of other members, buy out benefits above PPF compensation levels. This would use up all of the Scheme assets so there would be none left to transfer to the PPF. However, it would result in all members receiving all of their promised benefits from a combination of buy-out policies and the PPF. The trustees asked the court whether it could properly implement these proposals.

The judge held that this proposal would prejudice those members who were not bought out in full and would "be contrary to the fundamental purpose of the Scheme as a whole" as it would enable a disproportionately large share of Scheme assets to be applied in discharging only some of the Scheme's liabilities.

On the question of whether trustees could take into account the existence of the PPF when reaching decisions, he said that there was no single all-purpose answer to this question. It all depends on the context and purpose of the particular power and the particular way in which they wish to take the PPF into account. The judge confirmed that the PPF was not to be regarded as a beneficiary of the Scheme and so trustees did not owe duties to take into account the interests of the PPF.

However, the judge also held that "the prospective availability of compensation under the PPF... is not a relevant factor for the Trustee to take into account in the exercise of the [buy-out] power, or any power of a similar nature, because to take it into account would be contrary to the clear legislative policy of the Pensions Act 2004 and would thus be contrary to public policy". In explaining why this would be contrary to public policy, the judge considered that the proposal treated "the availability of PPF compensation as though it were an advantage to be exploited for the Scheme's benefit, whereas Parliament clearly intended the PPF to be a funder of last resort".

Construction of amendments

The second case, HR Trustees v German, demonstrates how it is not just in relation to equalisation that the construction and validity of amendments made decades ago can come back to bite trustees and employers.

The IMG Pension Plan had been established in 1977 with an amendment power which said that no amendment could reduce "the value of benefits secured by contributions already made". However, a few years later that amendment power was replaced with a provision which did not contain such a "fetter" on amendment. The judge held that this 1981 amendment power was invalid in its entirety and so the original power - and the fetter - remained.

In the early 1990s, the Plan was purportedly amended to convert the benefits under it from defined benefit to defined contribution. However, the amendment did not provide any underpin preserving future final salary benefits accrued by virtue of service up to the date of amendment. The court held that as the fetter applied, its terms operated to render the amendment ineffective to the extent there was no such underpin.

The court went on to dismiss arguments from the employer that members who had signed up to the revised terms could be regarded as bound by the purported change to the Plan. There had been no informed consent, and the change had been presented to members as "a fait accompli".

Finally, the court held that any purported compromise or waiver by a member of their pension entitlement or rights is an unenforceable surrender under section 91 of the Pensions Act 1995. This is an issue that many schemes have considered in practice, although it is perhaps the first time a judge has made such a clear statement.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 10/11/2009.

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