Pension Increases – an unusual case involving an A-Day amendment

24 / 01 / 2019

Making changes to pension increases continues to be a popular option with sponsoring employers which, if effected in the proper manner, can provide significant cost savings.  Indeed, many schemes continue to pay increases in line with the Retail Prices Index, some even provide for the cap on pension increases to be in excess of 2.5% for future service.  If the employer has an appetite to save money these benefits can potentially be altered to help achieve that goal.

There have, however, been some very high profile cases involving some household names, such as BT, Barnados and British Airways concerning pension increases, these highlight the importance of ensuring the necessary steps are complied with and due attention is given to the particular provisions and circumstance of the scheme in question before attempting to make such a change.

The latest judgment concerning pension increases has been handed down by the High Court and concerned the Coats UK Pension Scheme Trustees.  The subject matter of this case is somewhat different to the recent battles to which I refer above, this case concerned the effectiveness of an A-Day amendment, intended to maintain the status-quo with regards to the level of pension increases paid, but which the Members argued was invalid in the hope of receiving windfall pension increases. 

The rules in question contained a general provision that pension increases were to be paid at 5%.  However, the Rules also stipulated that the old Inland Revenue limits (the “IR Limits“) would prevail.  The IR Limits had the effect of capping the pension increases payable to Mr Styles and several of his colleagues (because they had sufficient pension benefits that they were caught by the IR Limits) to the lower of (i) the increase in the Retail Prices Index; and (ii) 3%.

Mr Styles and his fellow members claimed that when the IR Limits were dispensed with in 2006, in favour of a new tax regime introduced by the Finance Act 2004, their pension increases should increase to 5% as per the general pension increase provision in the scheme’s rules.  In fact, the employer had anticipated this potentially being the consequence of the changes to the tax regime and an amendment to the rules was made in 2006, reaffirmed by a second deed of amendment in 2008, both seeking to retain the IR Limits, including the particular IR Limit which would otherwise have capped the increases at (i) the lower of the increase in the Retail Prices Index; and (ii) 3%.  The members argued that the changes made under the 2008 deed were ineffective at retaining the IR Limit pension increase provision, partly due to the scheme’s power of amendment, which was subject to a restriction that no alteration could diminish the accrued rights of any member in respect of accrued scheme benefits.

Surprisingly the Pensions Ombudsman decided the original complaint in favour of the Members, suggesting a view that the rule amendment passed in 2008 was invalid.  Such a rule amendment would ordinarily be invalid under such an amendment power, and indeed, under section 67 Pensions Act 1995.  However, the fact that the rule amendment was made in accordance with the provisions of s68 Pensions Act 1995 and the Modification Regulations in this case meant that the 2008 amendment, which intended to retain the IR Limit in respect of pension increases, was capable of being effective, and indeed, the 2008 deed was so effective. The judge allowed the appeal by the employer, agreeing that pension increases were to continue to be capped at the IR Limit level (i.e. the lower of (i) the increase in the Retail Prices Index; and (ii) 3%) for the relevant members.