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Pensions update: High Court rules on meaning of 'accrued' benefits

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United Kingdom

In brief

The High Court has given judgment in a case which emphasises the limits to what the Courts can do to assist employers and trustees faced with having to deal with inadequately implemented changes.  It confirms how difficult it is to win arguments based on the principle of estoppel – ie that employers, trustees and members should be bound to follow shared understandings (about members' benefits, for example) even where the understandings are incorrect or mistaken.

A point of more general interest is that the Court ruled on the meaning of "accrued" benefits in a restriction in the amendment power.  The Court held that, where the rules offer no guidance, a member's "accrued" benefits at the time of an amendment should be calculated using earnings at the date the member's pensionable service eventually ends, not earnings at the date of the amendment.  This is particularly relevant where final salary schemes convert to money purchase or introduce caps on the level of earnings increases which are pensionable.  Some schemes may have to review how they have carried out such changes.

In more detail

The issue in Briggs and Others v Gleeds (Head Office)(a firm) and Others was whether a series of deeds of amendment were effective despite not being properly executed.  Some of the signatures had not been witnessed, a requirement since April 1990 where individuals sign deeds.  The deeds purported to make a number of changes, including equalisation of retirement ages, reduction in accrual rates, the introduction of a money purchase section and closure of the final salary section to new members and, later, to existing members.

Legal argument centred on whether the scheme trustees and/or members were prevented (estopped) from claiming that the deeds were invalid.  The Court held that this argument was not available as between the employer and the trustees because it was clear, on the face of the deeds, that the requirement for signatures to be witnessed had not been complied with.  If deeds containing such obvious defects could be effective, Parliament's object in introducing the requirement for witnesses would be frustrated.

The Court also held that the argument was not available as between the employer and the members either.  Even though both sides may have believed the benefits reflected the amendments, the members had not positively shared their understanding with the employer.  Rather, they had passively accepted the changes and the information supplied to them.  Also, the employer had not relied on the members' understanding of the position but, rather, had relied on its own understanding and the professional advice it had obtained.

However, for some of the changes, members had signed letters accepting the changes and had received a salary uplift as a result.  The Court found that these members had entered into a contract with the employer and so were bound to accept the changes.  As it happened, most members of the final salary section had, indeed, signed letters accepting the closure of the section and the introduction of a money purchase section.

However, this closure gave rise to a further problem.  As the scheme's power of amendment contained a prohibition on amendments that prejudiced benefits "accrued" up to the time of an amendment, the Court was asked to decide whether the benefits that had accrued in the final salary section up to the date of the introduction of the money purchase section should be calculated by reference to earnings at that date or when pensionable service in the scheme ultimately ended (ie when members left the money purchase section).  The rules themselves offered no guidance.

The expression "accrued right" was used in the original form of section 67 of the Pensions Act 1995 which contains restrictions on how scheme's may amend benefits.  Section 67 explained that the expression meant the rights to which a member would be entitled if he left pensionable service at the time of the amendment.  The Court felt that this was no guidance to how similar expressions should be interpreted in amendment powers in pension schemes.

The Court concluded that there was no compelling reason for taking "accrued" to have a narrower meaning than "secured".  The Courts had previously decided that the benefits "secured" by a scheme should be calculated by reference to earnings when pensionable service eventually ends (in the Courage case) and a similar ruling was made in this case.

This will lead many schemes which have made amendments on the assumption that benefits "accrued" should be calculated using earnings at the date of the amendment to review those changes.