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Pensions Update: Contractual pensionable pay cap can override scheme rules

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United Kingdom

Contractual pensionable pay cap can override scheme rules

In brief

The protections built into pension schemes (and pensions law) may prevent benefits being amended to reduce an employer's pension costs.  Or trustees may not agree to an employer's proposals where their consent is needed for rule amendments.

Some employers have sought to work around these difficulties by making changes outside their schemes on the basis that these will effectively override the scheme rules.  One of the most popular, where pensionable salary under a scheme's rules is defined by reference to basic salary, has been to categorise a portion of any increases to basic salary as non-pensionable. 

A recent High Court decision (Bradbury v British Broadcasting Corporation) confirmed that, in principle, such arrangements can be effective – provided they are implemented with care.

In more detail

In 2010, the BBC, in an effort to control its pension cost, offered pension scheme members the following choices:

  • to remain on their existing defined benefit terms but with future increases to pensionable pay capped at 1% per annum;
  • to join a new career average section, with no cap to future pensionable pay increases; or
  •  to join a defined contribution arrangement.

The BBC did not amend the scheme to reflect the limit on future increases to pensionable pay for members choosing the first option.  However, it gave members who chose to remain in the defined benefit section the option of accepting an increase in their salary on terms that their pensionable salary would only increase by 1% (that is, by less than the full amount of the increase in salary); or of having no increase in salary at all.

The Court found that the scheme rules did not give the BBC the right to limit pensionable salary in this way.  Pensionable salary was defined by reference to basic salary which, the Court decided, included all increases to basic salary.

However, the Court decided that it was possible for an employer to agree with its employees outside the scheme that an increase should not be pensionable, effectively overriding the scheme rules.  It also held that such an agreement would not breach the prohibition on a member surrendering part of his pension because, even though this prohibition extended to pension which had not yet accrued, these future pension rights did not include pension based on anticipated future pay rises.  There was no right to future salary increases and so a member could agree that only a part of such increases should be pensionable without surrendering anything.

The judge also made a suggestion, without deciding the point, regarding the implied duty of mutual trust and confidence between employers and employees.  He said that it would be difficult to show that an employer presenting such a stark choice to employees, whereby they would not receive a pay increase if they did not agree to the cap in pensionable salary, would be in breach of the implied duty.  If the BBC could show that it had legitimate financial reasons for managing its pension cost, it was unlikely that the implied duty would prevent it adopting the course of action it had pursued.

Although the Court's decision clarifies that an agreement made outside a scheme can override the scheme rules, it is not safe to assume that all such agreements will be effective.  A key feature of this case was that the rules themselves did not set out the amount of the basic salary.  The trustees had to look outside the scheme to the employer for this information.  If the employer and employees had agreed a change to the accrual rate, which is clear on the face of the rules, the position may well have been different.

Also, in the BBC case, the Court commented favourably on the fact that the consent of the employees was clear and informed and there was a real choice on offer, even if the options were not all attractive.  It is not safe to rely on the effectiveness of changes which do not have these features.

For further information or tailored advice please contact your usual Fieldfisher adviser or one of our pensions partners, Michael Calvert or David Gallagher.

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