In January 2024, the High Court handed down judgment in a significant case about the effectiveness of historic changes to an occupational pension scheme. As more schemes prepare to buy out, this is likely to be a recurring theme in the years ahead.
Newell Trustees Limited v Newell Rubbermaid UK Services Limited & Anor was about whether attempts in 1992 to convert final salary benefits into money purchase benefits for certain members of the Parker Pension Plan (the Plan) were effective. The Plan was a predecessor of the Newell Rubbermaid UK Pension Scheme (the Scheme), which had been set up in 2007 and into which the assets and liabilities of the Plan transferred. Accordingly, the effectiveness of what had been done in 1992 for members of the Plan was relevant to the administration of the Scheme.
In deciding that the conversion in 1992 had been effective, Mr Justice Michael Green considered issues familiar to those working in the pensions industry, including how to construe deeds, when contracts made outside scheme rules can determine benefits, final salary linkage and the operation of underpins. He also considered arguments that are perhaps less common in pensions cases, namely, those based on age discrimination.
The judgment is long, detailed but eminently readable. Aspects of what Mr Justice Michael Green decided are likely to be pored over by professionals in the pensions industry.
The Plan's power of amendment contained a restriction or proviso (the Proviso) such that no alteration to the deed "shall be such as would prejudice or impair the benefits accrued in respect of membership up to that time."
Deeds were executed in 1992 and 1993 which purported to convert final salary benefits to money purchase benefits and to set up a money purchase section of the Plan for members who were (i) below 40 and (ii) between 40 and 44 who selected to go into the Plan's money purchase section. Members younger than 40 had no choice. Transfers thereafter took place, and the accrued final salary benefits of transferring members were converted into cash amounts and credited to their new money purchase accounts. The cash amounts calculated took no account of salary increases that transferring members might earn in the future.
In the context of an intended buy-out, a raft of issues about the effectiveness of the intended conversion were identified, which the judge determined emphatically in the employer's favour in a judgment running into 78 pages.
Resolution of the issues
Effect of the 1992 deed
The judge decided that the 1992 deed validly established a money purchase section of the Plan. That itself was an interesting finding as the judge rejected an argument that, as it was (only) an interim instrument, the court should be reluctant to construe the 1992 deed as moving members into the Plan's money purchase section.
Effect of the 1993 deed
If he was wrong about the effect of the 1992 deed, the judge found the 1993 deed effective to convert final salary benefits retrospectively from 1 January 1992. That was another interesting finding because the judge agreed it was permissible to adopt rules in a pension scheme with retrospective effect and for the "parties to agree that their relationship should be treated as having departed from historical reality in certain specified respects."
Effect of the Proviso on conversion
Rejecting an argument by affected members, the judge found that the Proviso itself did not prevent the conversion of final salary benefits to money purchase benefits.
Members had argued that the Proviso protected not just the "value" of final salary benefits that had accrued but the "benefits" themselves, in other words, the right to have a pension calculated by reference to final pensionable earnings. The judge rejected this argument and concluded that the Proviso was concerned with protecting the amount of a member's benefit rather than its method of calculation. Further, noting the words "would prejudice or impair" in the Proviso, the judge accepted the employer's argument that the conversion did not breach the Proviso because it could not be shown that, when the conversion took place, the member would be worse off in terms of the financial value of their benefits.
The judge's twin insistence that the focus had to be on the value of the benefits the member would receive and on whether the change would (not just might) reduce that value meant that final salary accrual had been terminated in 1992.
Effect of the Proviso on final salary linkage
However, although the conversion was valid, the Proviso meant the final salary link could not be broken for members who transferred to the money purchase section of the Plan, the judge concluding that he could not depart from the Courage case.
The judge wrestled with what his conclusion as to final salary linkage meant in practice. In the end, he concluded that transfer sums paid to those who had transferred did not have to preserve the final salary benefits they had accrued up to the date of transfer. Rather, a final salary underpin should be applied to their benefits. The effect of this was that the trustee had to calculate whether the transfer sum was higher or lower than the accrued benefits on 1 January 1992 by reference to members' final pensionable salaries, taking into account salary increases after 1 January 1992. If the transfer sum was lower, the shortfall plus investment returns would need to be added to each member's money purchase pot together with interest.
Although he said it was not necessary for his decision given his findings on the validity of the 1992 and 1993 deeds, the judge concluded that, by signing and returning various forms, members had contractually agreed to the conversion of their final salary benefits and to joining the money purchase section of the Plan for future accrual. (In fact, a finding that members had contractually so agreed was not incompatible with a finding that there had also been a valid amendment to the Plan's deed).
In so doing, the judge found that the requirements for a valid contract of offer, acceptance, consideration and an intention to create contractual relations had been established, notwithstanding that aspects of the booklets on which the offers to members to transfer were, in some respects, vague or ambiguous. The judge rejected an argument by affected members that the employer had to go beyond this and show that they had given their informed consent to the changes, this not being a case in which members were asked to consent to a breach of trust.
The above did not exhaust the issues in the case. It was claimed that what had been done in 1992 infringed age discrimination law in that different categories of members were treated differently based on their age (those below 40 transferred automatically to the new money purchase section, those 40 – 44 had an option to transfer and those over 44 had no choice but to remain in the Plan's final salary section).
The judge rejected arguments based on age discrimination. The discrimination legislation was not in force in 1992. In any event, he did not think there was any rule in the Scheme in conflict with the non-discrimination rule, so the trustee was able to administer the Scheme in accordance with its rules. If he was wrong on that, the judge said that the alleged less favourable treatment for those under 40 would have been "justified" and so permitted by the relevant legislation.
What the judge said about Courage and final salary linkage may be the subject of discussion. The judge declined the opportunity to address various arguments made by the employer, implying that Courage was too well-established for those arguments to prevail. However, it does not appear those arguments were made on the basis that Courage had been wrongly decided. For example, having decided that the final pensionable salary link had not been broken, the judge does not appear to have grappled with the fact that, because of the lack of a definition of "pensionable employment" in the Plan's 1979 deed, it might be that a member's pensionable employment for the purpose of determining their final salary benefits ceased on transfer to the money purchase section in 1992.
In addition, the way in which the judge gave effect to his finding that final salary linkage had been preserved (i.e., not by awarding members final salary benefits but by actuarially comparing the transfer sum with the value of benefits that accrued, adjusted for future salary increases) might also attract interest.
In his judgment, the judge acknowledged that affected members would likely be worse off than they would have been had they retained their final salary benefits. He accepted they would be disappointed with the outcome. In words that will bring comfort to many in the pensions industry, the judge noted that the fact that, due to the passage of time, it was not possible to establish that every 'i' was dotted and 't' crossed did not mean that deeds were invalid or should be set aside.
It remains to be seen whether the case will go to the Court of Appeal. However, experience shows that it is difficult for representative beneficiaries in pensions cases to bring a case to appeal.
Not atypically in pension cases, the judge observed that the change made in 1992 had not been opposed by anybody at the time. It was only in the context of a buy-out that ways of challenging what had been done thirty years ago had been identified. Such words are telling, and it will be interesting to see whether they commend themselves to judges deciding future cases brought about by preparations for buy-out.
For further information, or to discuss any of the points raised in this article, contact Ian Gordon or James Barnett.