Originally Published in August 2009
In a nutshell
The minimum age at which tax-registered pension schemes can properly pay benefits (other than in cases of ill-health) increases to age 55 in April 2010. There are action points in advance of this date that both employers and trustees might wish to follow.
A recent court case has highlighted the need to pay careful attention to the "power of amendment" in scheme rules when making alterations to them. Amendments which do not strictly comply with any requirements in the amendment power are likely to be void.
Normal minimum pension age
Tax-registered pension schemes are required to comply with a variety of restrictions as the 'quid pro quo' for their favoured tax status. One such requirement is that, other than in cases of ill-health, benefits may not be paid prior to a certain age. This is the scheme's "normal minimum pension age" (or NMPA) and it is currently – and has for some considerable time been – set at age 50.
One feature of the new pensions tax regime introduced as from A-Day, 6th April 2006, was that NMPA would increase to age 55 from April 2010. Therefore, after this date, unless a member satisfies the statutory ill-health condition, his benefits cannot properly be brought into payment before age 55. Many schemes of course restrict the payment of benefits before a much higher age (60 or 65 are common), and impose conditions such as employer consent; but the ability to pay benefits early, if circumstances warrant it, will still be curtailed by the forthcoming changes.
As always, there are exceptions. (Life would be dull otherwise.) Certain individuals will retain a "protected pension age" or PPA that is lower than their NMPA, depending on their precise circumstances. In summary (the actual requirements are complex), if the member had an actual or prospective right as at 10 December 2003 to draw their benefits from an earlier age than 55, and all of those benefits become payable at the same time from the scheme, then he or she will retain a lower PPA, and hence the right to take those benefits at the same age as before. (Note that for an 'actual or prospective right' to draw benefits at a certain age to exist, there can be no requirement for any form of consent.) Certain protections also exist for members who have been the subject of bulk transfers from schemes which had earlier retirement ages than 55.
Action points
Trustees will clearly need to ensure that they pay benefits in accordance with what the law requires. There is no need to amend scheme rules, as the legislation is overriding, but this would constitute good practice. Clearly extra care should be taken, when making such a change, not to remove any lower PPA that members of a scheme may have.
Employers may also wish to take action in advance of April 2010. From a funding and a liability management perspective, it might be attractive (but please take actuarial advice first!) to put benefits into payment rather than having to administer a deferred right. We have seen instances of employers reminding members of their ability to draw benefits at 50, and removing on a temporary basis some of the bars to early retirement (such as the need for consent, or by making early retirement factors more generous for a period).
Amendments to scheme rules
On the subject of amendments to scheme rules, the High Court has recently issued a timely reminder about the need to closely follow any requirements in a scheme's "power of amendment" when altering its rules in any way.
In Walker Morris Trustees Ltd v. Masterson & Lodge, a professional trustee company sought the guidance of the court in interpreting its scheme's rules, so that it could pay the proper level of benefits to scheme members. The trustee's dilemma involved the Yorkshire Chemicals Pension Scheme and its underfunded wind-up was just one fall-out of the Yorkshire Chemicals PLC insolvency, one of the first major corporate failures of the new millennium. It is also worthy of note that the trustee company had not been involved in making the disputed amendments, having been appointed as a statutory independent trustee only when the scheme entered wind-up some years later.
The amendment power in the scheme contained a pre-requisite that a written actuarial opinion, to the effect that there would be no prejudicial impact on members' accrued benefits as a result of the intended changes, must first be obtained. However, no such opinion had customarily been obtained prior to making changes. Even though the majority of the changes were benefit improvements (and therefore clearly could not have had an adverse impact on members' benefits), and even though 'section 67 certificates' were obtained by the trustee on each occasion, the court held that the purported alterations were void for failure to comply with the requirements of the amendment power. It was adamant, as the courts consistently have been, that restrictions on altering schemes exist for a purpose, and must be followed if amendments are to be valid.
Action points
Clearly every power of amendment is slightly different, and some are very permissive whilst others involve stepping through a number of logistical hoops in order to make a change to a scheme's rules. What the recent decision reminds us is that any provisos must be carefully followed otherwise the courts will, as they have traditionally done in the past, take the view that purported alterations are void for failing to comply with the requirements of the scheme's trust deed.
So, if the amendment power says that a deed must be used to change scheme rules, a deed must be used. If it requires actuarial advice about the impact of any changes before they can properly be made, then this must be obtained. And if members are required to be told within a particular time after the amendment is made, tell them. Especial care is necessary when making substantive changes (such as closure to future accrual) as the financial ramifications of getting it wrong can be particularly significant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
