High Court decides closure to future accrual effective
The High Court has handed down its judgment in a case (Wedgwood Pension Plan Trustee Limited v Salt) about whether notices served by the participating employers were effective to stop future accrual and break the final salary link. The decision turned on the scope of a restriction on the power of amendment. It is a useful reminder to trustees and employers of the need to carefully examine the amendment power when amending scheme rules.
The participating employers in the Wedgwood Group Pension Plan served notices in 2006 terminating their liability to contribute to the scheme. The notices were served under Rule 62(a) of the 2001 Rules, which allowed participating employers to stop contributing by giving written notice to the trustee. Rule 62(a) replaced Rule 48 of the 1995 Rules, which allowed participating employers to stop contributing only if they found it "impracticable or inexpedient" to continue participating in the scheme.
The trustee applied to the Court for directions as to whether the notices had the effect of closing the scheme to future accrual and breaking the final salary link.
The issue was whether Rule 62(a) was validly introduced, having regard to the scope of the amendment power. The amendment power was subject to the following restriction: "no alteration modification or addition shall be made which shall prejudice or adversely affect any pension or annuity then payable or the rights of any Member" (emphasis added).
This restriction is different to the restrictions that have been considered in previous cases. Earlier cases have looked at the meaning of benefits “accrued” or “secured”, rather than just the “rights” of any member.
The Court decided that "the rights of any member" means the rights which have accrued to a member as a result of past service at the time the amendment was made (and those accrued rights include the final salary link). Importantly, however, it does not cover benefits which might be obtained as a result of future service with the employer.
This means that Rule 62(a) was validly introduced to the extent that it allowed future accrual to be terminated by written notice. However, the lack of any requirement under Rule 62(a) that the participating employers find it “impracticable or inexpedient” to continue contributing did "prejudice or adversely affect the rights of any Member" by making it easier for the participating employers to break the final salary link.
Instead of deciding that the introduction and exercise of Rule 62(a) was invalid, though, the Court was able to construe Rule 62(a) so that it provided the additional protection previously provided by Rule 48. This meant that a notice could only be validly served if the participating employers would have found it “impracticable or inexpedient” to continue contributions.
On the facts, the Court found that (i) the principal employer would have exercised the amendment power to introduce Rule 62(a) even if it had realised the need to comply with the restriction and (ii) there was evidence to the effect that the participating employers would have found it inexpedient to continue to participate in the scheme.
On this basis, the notices were effective both to stop future accrual and break the final salary link.
Given that the scheme is currently in an assessment period for entry into the Pension Protection Fund, the outcome of this case is a practical one. It is also fairly fact-specific. However, it serves as a useful reminder to trustees and employers of the need to carefully examine the amendment power when amending scheme rules.
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