The High Court has issued two recent judgments concerning the restructuring of pension schemes utilising the relevant powers of amendment, particularly the effect of restrictions/fetters on those powers.
AVON COSMETICS LTD V DALRIADA TRUSTEE LTD – High Court, 17 January 2024
Background
In this case, the High Court considered the validity and effect of an amendment to the Avon Cosmetics Pension Plan (the “Plan”) which had closed its final salary section to future accrual and introduced career average revalued earnings (CARE) benefits for future service. The amendment had broken the final salary link between accrued service and future pensionable salary increases for active members of the Plan’s final salary section.
The power of amendment
The Plan’s power of amendment was subject to a restriction preventing amendments which, at the date it was made affected ‘prejudicially’ pensions in payment or “benefits accrued or secured up to” the effective date of the date the amendment was made. It was identified that in financial terms (even though it would only become clear once an individual’s rights had crystallised), the move to a CARE basis for future service benefits could mean that certain members, depending on salary increases and the rate at which their deferred final salary benefits were revalued, would be better off as a result of the amendments (referred to as Revaluation Winners in the case) and that others would be worse off (referred to as the Final Salary [FS] Winners).
The ultimate question raised by the proceedings was whether, on the assumption that the amendment infringed the Plan’s amendment power, the infringement rendered the amendment wholly invalid, or invalid only as regards those members who would be worse off (the FS Winners).
The Court’s decision
The judge concluded that, whilst the amendment would be in breach of the amendment power and therefore invalid in respect of those who would be worse off (the FS Winners), it was nevertheless valid as regards those members who would be better off (the Revaluation Winners). The two categories in terms of construction and severance were “sufficiently different and identifiable” to allow the CARE amendments to be severed and treated as valid in part – the valid part of the exercise was therefore saved.
The judge explained that where a power such as an amendment power has been excessively executed through a legal breach or because it exceeds the power’s limits or authority, the court will “naturally incline to uphold the validity of the exercise as far as it can”.
WB Comment
The decision demonstrates the conditions that must be satisfied when considering whether the valid part of an amendment can be severed from the invalid part because it infringed a restriction in the Plan’s amendment power. It was also clear that it must be shown that the relevant parties would still have exercised the power knowing its limitations – in particular, the judge considered that it was not necessary to investigate what was “actually in the minds of the” the trustees when considering whether they would have exercised the power in the same way had they properly appreciated the limits on the power.
(In a subsequent Judgment on 19 February 2024, the High Court approved a compromise between the parties on implementation of the underpin.)
Newell Trustees v Newell Rubbermaid UK Services – HIgh COURT 23 January 2024
Background
The issue at the heart of Newell Trustees v Newell Rubbermaid UK Services concerned the conversion of a defined benefit (DB) occupational pension scheme to a defined contribution (DC) scheme.
By an interim trust deed effective 1 January 1992, a new DC section was created in the scheme. This section divided members based on their age at the end of 1991: under-40s were moved to the DC section automatically, with their accrued DB benefits being converted into cash and credited accordingly. Members aged 40-44 could choose to stay in the DB section or move to the DC section. Those over 45 remained in the DB section.
However, the scheme’s 1979 amendment deed contained a fetter preventing amendments that would prejudice or impair benefits accrued up to the time of the amendment:
“The Principal Employer and the Trustees may jointly from time to time without the consent of the Members by Deed alter cancel modify or add to any of the provisions of this Deed and by memorandum under hand signed in the case of the Principal Employer by a director duly authorised, alter cancel modify or add to any of the Rules, provided that no such alteration cancellation modification or addition shall be such as would prejudice or impair the benefits accrued in respect of membership up to that time.”
The central theme of the Newell judgement is whether the conversion from DB to DC benefits in 1992 was invalidated by the terms of the fetter.
The Court’s decision
The representative beneficiary argued that the fetter protected the benefits, not just their value, therefore including the final salary formula. The Judge disagreed, holding that the fetter protected the amount of a member’s benefits, rather than the “amorphous concept” of benefits (i.e the method of calculation).
The Judge placed particular emphasis on the wording of the fetter: “as would prejudice or impair the benefits”, the key question being whether, at the time of the conversion, the member “will be better or worse off in terms of the financial value of the benefits they are to receive“. The Judge interpreted this to mean that, at the time of the amendment, there must be some certainty as to whether the benefits would or would not be prejudiced. It was held not to be the case in Newell, as the value of the member’s DC benefits could not be accurately predicted. Therefore, at the time of the amendment, it could not be said definitively whether the pot would outperform or underperform (i.e prejudice) the DB formula.
Newell covered several other key considerations, including:
- Final Salary linkage: the Court found that the fetter protected the final salary link, applying the precedent set by the Courage case.
- Underpin: the representative beneficiary argued for recognition of an underpin to preserve a link to final salary benefits. The Judge considered this, but ultimately focused on ensuring that the DC benefits accurately reflected the actuarial value of the final salary link.
WB Comment
The Newell judgement clearly favoured the employer, considering the representative beneficiary’s arguments to be “somewhat opportunistic”. That said, the case must be read on its specific facts, meaning both the wording of the fetter and also the context of the conversion of benefits. There is argument that, in the context of other amendments, a different approach may be required.