Alternative method of amending mistakes in scheme documents blocked by courts

The recent case of David Smithson & 7 Ors v David Hamilton (2007) could make it more difficult for a scheme's trust deed and rules to be amended where mistakes have been identified in their drafting. The traditional method of amendment is the process of 'rectification', where a deed is changed to reflect the original intention of the trustees. In this case however the trustees sought to solve the problem by using a legal rule known as the Hastings-Bass principle, whereby the incorrectly drafted provision would be set aside entirely. The trustees undertook that if the provision was set aside, they would insert a new provision that reflected their original intention.

The judge in the case disagreed that the Hastings-Bass principle was applicable in such circumstances, saying that this would amount to 'rectification by the back door', but without the usual evidential safeguards that formed part of the rectification process.

More smaller schemes to become subject to the Employer Consultation Requirements

From 6 April 2008 a new lower threshold comes into force above which employers will be required to comply with the consultation regulations contained in The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006. The new threshold requires an employer of more than 50 employees to comply with the Regulations, whereas at present the threshold is 100.

These regulations require employers to consult with employees who will be affected by a proposal to make certain listed changes to either an occupational pension scheme or to a personal pension scheme where direct payment arrangements exist. Changes that require consultation include an increase in the normal pension age of the scheme, closure to new members or a cessation of future accrual.

New HMRC regulations issued

The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007 came into force on 8 January 2008. These regulations list the non-cash benefits provided under an employer-financed retirement benefit scheme (EFRBS) by employers to their retired former employees and their families which are to be excluded from taxation.

These exclusions broadly relate to provision of accommodation, welfare counselling, recreational benefits, annual parties and equipment for disabled former employees. Exclusions also relate to advice on the writing of wills and non-cash benefits provided in connection with a termination of employment (such as retirement) that took place before 6 April 1998.

The exclusions will be backdated to apply with effect from 6 April 2006 (to apply to the tax year 2006/07 and subsequent years.

PPF 7800 January review released

The PPF's monthly update on the financial health of almost 7800 defined benefit schemes shows a worsening of their overall position to a deficit of £19.6 billion in December 2007 as against £5.2 billion in November 2007. This compares with a reported aggregate surplus of £8.4 billion in December 2006. To read the full January update click here, or visit and follow the 'PPF 7800' link.

Allied Domecq case on scheme contribution rules

The scheme specific funding rules to be found in the Pensions Act 2004 provide, inter alia, that a scheme trustee must obtain the agreement of the employer to certain matters relating to funding. These include any matter to be included in the schedule of contributions and any provisions of a recovery plan that is required to be drawn up in the event of a scheme failing to meet the statutory funding objective. It was not clear how this legislation would apply where a scheme's rules allow certain decisions relating to funding to be taken without the agreement of the employer, for example where the actuary alone may set the contribution rate without the agreement of the employer.

The recent case of Allied Domecq (Holdings) Limited v Allied Domecq First Pension Trustee has clarified the position somewhat. The judge in the case was of the opinion that as the purpose of the scheme specific funding legislation is to protect the interests of the scheme's members, for that legislation to take something away that could potentially be of benefit to the scheme, i.e. the power of the actuary alone to set contribution rates, would be contrary to its intention. He thus held that it was possible for scheme rules to modify the statutory regime. An employer will therefore not automatically have a say in the setting of contribution rates etc, notwithstanding the scheme specific funding legislation, where the scheme rules do not grant it the right to do so under normal circumstances.

We recently issued an alert on this case and the earlier British Vita case – click here to read the alert, or go to

New Secretary of State for Pensions

Following the resignation of Peter Hain from the cabinet, James Purnell was appointed as the new Secretary of State for Work & Pensions. Prior to his appointment he was Secretary of State at the Department of Culture, Media & Sport from June 2007, and before that Minister for Pensions Reform. His ministerial team includes Stephen Timms as Minister of State for Employment & Pensions Reform and Mike O' Brien who remains Minister for Pensions Reform.

Tribunal clarifies employers' duties regarding ill health retirement

Where an employee is absent from work for an extended period due to ill health, and his pension scheme contains provisions entitling him to an ill health pension on grounds of permanent incapacity, an employer will generally be expected to give consideration to ill health retirement before dismissing him for incapacity. This principle derives from the recent case of First West Yorkshire Ltd v Haigh, and would seem to apply irrespective of whether or not an employer's sickness policy expressly provides that it will consider ill health retirement.

A further interesting aspect of the case was that the employee was given a choice between taking further sick pay until his normal retirement date and then retiring on his normal pension (but with no right to apply for an enhanced ill-health pension), or being dismissed. The judge in the case held that it was unreasonable to force the employee to make such a choice, and that the employer was clearly trying to avoid the expense of providing enhanced ill-health retirement despite the provisions of its own sickness policy.

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