A High Court judgment on the method for increasing pension payments where a power of amendment was improperly applied has been overturned by the Court of Appeal, lessening the burden on the corporate sponsor.
The dispute arose when the rules of the FDR Pension Scheme were amended to allow retrospective changes to the level of increases in 1991, despite a proviso in the trust deed preventing trustees from doing so.
Legal experts said that despite the apparently obscure particulars of Dutton & Ors. v FDR, the Court of Appeal judgment will be useful for trustees deciding how to deal with a rule change that breaches restrictions.
The judgment confirms the importance of adopting the interpretation which involves the minimum possible interference with the intended benefit structure
Richard Shelton, Eversheds Sutherland
Trustees of the FDR scheme will now have to pay annual increases for benefits accrued before 1991, according to whichever of its two increase methodologies has provided the highest cumulative pension at that point.
Amendments in breach
The scheme rules had originally promised members a fixed 3 per cent compound annual uplift in pensions.
Included in the trust deed was a power for trustees to amend the increase methodology without consulting members, with the proviso that the employer must consent to the change, and it must not “affect in any way prejudicially” pensions already in payment or existing accrued rights.
The trustees exercised this power in June 1991, switching the basis described in the rules to the retail price index, capped at 5 per cent, referred to as 5 per cent limited price indexation in the judgment.
However, the new rules did not differentiate between accrued benefits and future accrual, and were in breach of the proviso.
Neither the trustees or employer disputed that the proviso should stop the new rules being applied retrospectively. Instead the case sought to decide what should be done about pension increases, with the original 3 per cent acting as an underpin of sorts.
“Everyone accepts that the pension that’s been built up until ’91 is protected, and the question is, ‘What does this protection actually look like in practice?’” explained Mark Smith, partner at law firm Taylor Wessing.
How to apply increases?
In a High Court hearing, three models of benefit provision were presented to Justice Asplin. The Annual Approach, favoured by the trustees, would provide pensioners with yearly increases in line with whichever measure was highest for that year.
The trustees also put forward a fallback, the Alternative Method, which would select the highest of two calculations to provide the increase for any given year.
Members would either receive their original entitlement increased at 3 per cent compound up to and including the year of the increase, or the sum that they received last year, increased at 5 per cent LPI.
However, FDR put forward a Cumulative Approach, which would put the least stress on the scheme sponsor.
This required calculation of the amount of pension provided in that year by fixed compound increases, and the amount of pension provided in that year by RPI increases capped at 5 per cent. Members would receive whichever calculation delivered the highest amount for that year.
The High Court favoured the Annual Approach in its 2015 judgment, but was unanimously overturned by the Court of Appeal, with judges deciding that not only did the Cumulative Approach best carry out the effect of the words, but caused the least damage to the scheme’s deficit.
Wider impact
The judgment is only binding to the FDR scheme, which according to Smith may now have to recover any excessive increases paid, as these would not be authorised for revenue purposes.
Pressure grows to provide pre-1997 inflation-proofing
Pensions minister Richard Harrington has demanded that the chief executives of companies including Hewlett Packard Enterprise and 3M explain their refusal to grant discretionary increases to members with benefits accrued before 1997.
But he said schemes with similar rule breaches should seek expert advice, and bear the judgment in mind if reaching an agreement out of court: “There’s no reason why a court for a different scheme would come to any different conclusion.”
Richard Shelton, partner at law firm Eversheds Sutherland, said despite how specific the judgment was to this scheme, it was a “helpful reminder” of the principles that should be upheld in making these decisions.
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“The judgment confirms the importance of adopting the interpretation which involves the minimum possible interference with the intended benefit structure, so that the member doesn’t receive an unjustified ‘windfall’,” he said.
Clive Weber, partner at law firm Wedlake Bell, said the only way to get a definitive answer on a question like this would be to go through the courts.
“The problem very often is that the rule change is peculiar to the scheme in question,” he said, but added that this judgment might spur more employers to challenge their methodology.
