The ruling clarifies that amendments can be “severed” to
The ruling, made earlier this year, concerned the £334m Avon Cosmetics Pension Plan, which moved to close its final salary DB scheme in 2006, replacing it with a career average revalued earnings (CARE) structure.
However, it later emerged that the amendment may have been invalid, as it breached a so-called “fetter” in the scheme rules that prevented any change from leaving members worse off.
The switch to CARE had effectively created two groups of members: those who had benefited from the switch to a CARE structure, and those who had lost out.
This led the company, Avon Cosmetics, and the trustee board, represented in the court case by Dalriada Trustees, to seek legal clarification of the amendment’s validity and potentially overturn the move to CARE.
Judge Malcolm Davis-White, ruling on the case, determined that the amendment was invalid for the “final salary winners” – those who had been negatively affected by the 2006 change – but could remain valid for those who had benefited.
The two groups of members were “sufficiently different and identifiable” to allow the CARE amendment to be split or “severed”, the judge said, allowing those who were better off from the change to retain their benefits.
The judge estimated that applying the ruling would cost the scheme between £5.3m and £5.5m, based on the data available. The two parties have already agreed how to reimburse affected members.
Pension lawyers welcomed the ruling as it provided important clarification when dealing with historic changes to benefits.
Carolyn Saunders, partner at Dentons, said: “Issues arising out of past pension scheme amendments can be particularly difficult because they have the potential to invalidate the basis on which a pension scheme has been providing benefits for many years.
“More and more issues of this type are being discovered as an increasing number of defined benefit schemes are ‘auditing’ their benefits in advance of securing benefits with an insurer. In the circumstances, it is helpful that the court’s starting point is to validate amendments wherever it can.”
In a blog post, Ian Gordon, partner and head of pensions disputes at Gowling WLG, and Josh Sheppard, associate at the same firm, said: “The judgment is likely to be welcomed by many in the pensions industry, particularly practitioners. The statement that, in a pensions context, courts will incline to uphold the validity of the exercise of a power of amendment will be welcome and there will no doubt be hope that such an approach will be adopted in other areas of pensions practice.”
Eversheds Sutherland represented Avon Cosmetics in the case, while Dalriada and the trustee board were represented by Blake Morgan. Penningtons Manches Cooper represented a further defendant who took part in the case as a representative beneficiary.
