FDR LTD V DUTTON (CA) 2017 – PENSION INCREASES
The Court of Appeal have recently overturned a judgement concerning a defined benefit pension scheme and how an underpin should operate in relation to increases to pensions in payment. The scheme's trust deed and rules contained a power of amendment which was exercisable by the trustees with the employer's consent. This, however, was subject to a limitation, whereby no change could affect prejudicially any pension already in payment or rights which had accrued.
A deed of amendment was executed by the trustees in 1991 which changed the rate at which pensions in payment were to be increased from 3% per annum (as stated in the old rule) to 5% LPI per annum (new rule). This amendment was said to apply to future pensionable service and past pensionable service alike. However, the part of the amendment which related to past pensionable service contravened the limitation to the trustees’ power of amendment. The trustees and the employer did not at first consider the potential effect of the underpin.
Once this issue was considered, it was agreed that an underpin was required. However, the trustees and the employer suggested different methods of applying such an underpin – the trustees suggested an annual and alternative approach, and the employer suggested a cumulative and then a modified cumulative approach. An annual underpin would increase the liabilities of the scheme by considerably more than a cumulative underpin.
Wording of the limitation and the Rules
"PROVIDED ALWAYS that no such alteration or addition shall (1) operate so as to affect in any way prejudicially (a) any pension already being paid in accordance with the Rules of this Deed at the date such alteration or addition takes effect or (b) any rights or interests which shall have accrued to each prospective beneficiary in respect of pension benefits secured under the Scheme up to the date on which such alteration or addition takes effect . . . "
- Old Rule, 1980:
“A pension payable under these Rules shall … be increased at each anniversary of the date of its institution by 3 per cent compound. For this purpose the date of its institution shall be regarded as the date on which a pension became payable to the Member under the Scheme or the date of the Member's death if earlier.”
- New Rule, 1991:
“The amount of a pension payable under these Rules at each anniversary of the date of its institution of that pension falling on or after 1 January 1991 shall… be increased by the lesser of 5% of that amount or such percentage of that amount as represents any increase in the Government's Index of Retail Prices since the immediately preceding anniversary date. For this purpose the date of its institution shall be regarded as the date on which a pension became payable to the Member under the Scheme or the date of the Member's death, if earlier.”
High Court decision - in favour of Trustees
The High Court favoured the trustees' more generous approach. It was explained that using the modified cumulative approach was rare, and that the trustees' approach was more common. Asplin J held the 1991 deed of amendment must be construed as having effect subject to the proviso, therefore the correct position should be interpreted as a "composite or blend" of the old and amended rules to the extent necessary to prevent prejudice to the member, so as to avoid falling in favour of one rule over the other. It was explained that the employer's approach was more complex, technical and impractical. In comparison, the trustees' approach was simple to implement. Asplin J further explained that the provisions in question should be construed so as to give reasonable and practical effect to the scheme, avoiding technicality.
Court of Appeal – accepted the employer's appeal
The Court of Appeal understood that the parties' intentions were to apply the new rule irrespective of the date of service at which an entitlement to pension accrued, but the proviso to the scheme amendment power prevented the new rule from being given effect. It was held that the key issue was the meaning of the proviso and what it would have been understood to protect. The trustees' proposals focused on the protection of the right to an annual increase at a specified rate. In contrast, it was held that the employer approached the proviso in terms of preserving a pensioner's entitlement under the old rules.
The problem with the trustees' method was that it would give a pensioner:
- more than they would have been entitled to had the old rules remained in force; and
- more than they would have been entitled to under the new rules.
Lewison LJ noted that he saw force in the High Court's "composite" rule approach but did not agree with it. The intention of the trustees and the employer was clear - they wanted to remove the old rule completely, replacing it with the new rule. The question was: to what extent did the proviso frustrate that intention? When considering this point it was noted that the terms of the proviso were such that any change in the rules must not prejudicially affect any pension in payment or any accrued pension rights.
The Judge further said that "the right that has been preserved by the proviso is in my judgment the old right and not some amalgam of the old and new".
He concluded that the modified cumulative approach (favoured by the employer) preserved the relevant right protected by the proviso, as it enabled "a pensioner to take the benefits of the new rule if, in any given year, it produces a better outcome for her". This approach was held to interfere least with the altered scheme.
Wedlake Bell Comment
The two judgments seemed to focus on different aspects of why a particular approach should be followed or not. The High Court focused on favouring a more common approach that would produce the least amount of technicality and impracticality, whereas the Court of Appeal focused on the intentions of the parties and the best approach to use which would not frustrate this or provide benefits which would have been more than the beneficiaries should be entitled to. The decisions given in this case did not relate to the common general application of or preference for the use of certain methods to calculate pension increases. Rather, the case arose from an ambiguity that came out of an amendment, and an existing underpin which ultimately frustrated the amendment.