In more detail

What was this case about?

The Court was asked to consider the effectiveness of various amendments made to the Parker Pension Plan in 1992 and later in 1993. (The assets and liabilities of the Parker Pension Plan (the Plan) were later transferred into the Newell Rubbermaid UK Pension Scheme (the Scheme) in 2007).

The intended effect of the relevant rule amendments was to introduce a new defined contribution (DC) section into the Plan, and for certain members to convert their defined benefit (DB) benefits to DC and then have them transferred into the new DC Section (the "Transfer and Conversion"). Transfer and Conversion eligibility was determined by reference to age: those under 40 were transferred automatically into the DC Section; those members who were aged between 40 and 44 had the option to transfer to the DC Section; and the over 45s remained in the existing DB Section of the Scheme. These changes were purportedly achieved by way of an interim deed dated 6 January 1992 (to which booklets setting out the relevant detail of the changes were appended and signed by relevant members) (the "1992 Deed").  A full definitive deed and rules reflecting these changes was executed on 7 April 1993 (the "1993 Deed"). The Plan (later the Scheme) was always operated on the basis that the Transfer and Conversion in respect of relevant members was effective from 1 January 1992.

In around 2013, as part of initial discussions about buying out the relevant benefits and winding-up the Scheme, questions were raised about whether the Transfer and Conversion amendments were effective from a legal perspective and court proceedings were eventually brought to determine the matter. The main questions raised with the Court can be summarised as follows:

• Did the 1992 Deed validly establish the DC Section?
• If not, did the 1993 Deed validly establish the DC Section (and from when)?  
• Without prejudice to the above questions, did all members who signed the booklets (the form of which was appended to the 1992 Deed) contractually agree to the conversion and transfer of their DB benefits into DC benefits?
• What was the effect of the proviso in the Plan's amendment power, which required that no amendment could "prejudice or impair the benefits accrued in respect of membership" up to the time of the amendment?

The Court's findings

Effectiveness of the 1992 Deed and the 1993 Deed

The Court decided that the 1992 amendments were made effectively, despite being introduced by way of an interim deed, with later "full" amendments to the Plan's trust deed and rules being made as part of the 1993 Deed. The judge considered that this type of approach should be viewed as an "executory trust" and was valid. This was a helpful confirmation from the Court on an approach that is common in the pensions industry of preparing a short-form 'interim' deed that is subsequently followed-up with a longer and more detailed 'definitive' deed.  The judge also agreed with the employer in the case that the terms of the changes, as set out in the member booklets, were sufficiently clear.    

An additional helpful finding from the judge in the case was that he still considered the 1992 Deed to have been validly executed, despite the fact that the original deed of amendment could not be located. The judge was pragmatic recognising that "it is inevitable that after 30 years the evidence may simply not be available to establish that every "i" was dotted and "t" crossed.  But this does mean that the Deed were invalid or that they should now be set aside". 

Extrinsic contracts with members

Previous court decisions have found that members can consent contractually (i.e., outside the trust deed and rules) to a change to their pension benefits, and that this can alter their pension entitlements even if there is no amendment to the pension plan rules. This is known as an 'extrinsic contract'. The judge agreed again with the employer that those members in the 40-44 category who opted to transfer to the DC Section would have been found to have validly done so under an extrinsic contract, even if the Court had found that the Transfer and Conversion had not been properly introduced under the 1992 or 1993 Deeds.  Importantly, he disagreed with an earlier decision concerning the extent to which a member needed to give "informed" consent to establish such a contract, and said this is was not an ordinary requirement of contract formation, and so it may be easier for employers and trustees to find that an extrinsic contract exists in future cases. 

Proviso in amendment power and final salary underpin

The judge found that while the proviso in the amendment power did not restrict members' benefits from being converted from DB to DC, it did require an "underpin" to ensure that they would not receive less than if the accrued DB pension had continued to be calculated by reference to the member's final pensionable salary (so-called "final salary linkage"). The judge did though note concerns in relation to the conclusions reached in earlier cases on the effect of the amendment power restriction and whether it really required a final salary link (a so called "Courage" restriction), but felt bound nonetheless to follow earlier High Court decisions in this area. 

In terms of how the underpin should operate, the Court favoured the more pragmatic approach which allowed the trustees to actuarially assess the additional sum owing in respect of the original DB to DC transfer sum paid in 1992, but using data available now. This meant that the trustees were able to continue progressing the Scheme's wind-up and buy-out, and that they would not need to wait for deferred members with the benefit of the underpin to actually leave service.

Forfeiture and interest on arrears

The judge briefly touched on the questions raised with him about whether the trustees could forfeit certain arrears of underpaid pension and what the correct rate of interest was that was payable on such arrears. On forfeiture, the judge noted that there was a trustee discretion and so the matter was for the trustees to consider.  In terms of interest, the judge left the matter to be decided upon at a later date as part of consequential matters resulting from the case.

Age discrimination

The Court held that the approach taken by the Plan in relation to members aged under 40 was not age discriminatory. Whilst not directly relevant to his decision (because the judge had already found that age discrimination could not be found to apply), the judge gave comfort that this type of age-focused approach could have been objectively justifiable in any event.  This was on the basis that the aim of the apparent discrimination between members on the basis of age was justifiable because the employer wanted to maintain inter-generational fairness.  

Interestingly, when the representative beneficiary in the case sought to argue that there was, age discrimination in this case as a result of the application of certain principles of EU law, the judge decided, following similar conclusions reached in the earlier 2023 Beattie case, that the UK's EU withdrawal legislation removed the ability for parties to rely on general principles of EU law. 

Key takeaways 

This case covered significant ground in terms of issues currently facing many pension schemes in relation to the effectiveness of historic rule amendments, in particular those preparing for buy-out.  

Our understanding is that this particular case is unlikely to be appealed, but it is interesting that a settlement was reached in another case, Avon Cosmetics Ltd, where the parties agreed the settlement, on matters similar to those relevant in this case, on the basis that the case law relating to final salary linkage and underpins had a "real prospect" of being overturned by higher courts in the future.  As more and more schemes look to wind up and buy-out, it will be interesting to see how case law on these often very thorny and case-specific issues develops. 

Please speak to your usual contact at Baker McKenzie if you would like to discuss the implications of this case further. 
A copy of the case can be found here.