Amending occupational pension schemes

The court treated an amendment as valid and effective pursuant to the power in section 68 of the Pensions Act 1995 even though the amending deed did not invoke it.

15 April 2019

The court was asked to hear an appeal from the Pensions Ombudsman concerning the annual rate of increases for pensions in payment under a defined benefit pension scheme. The parties agreed that the pension increase rule provided fixed annual increases of 5 per cent. At issue was whether the rules have retained the old HMRC limits since 4 February 2008 and have restricted increases to the maximum allowable pension by the higher of 3 per cent or RPI. In reaching a decision, the judge needed to consider the effect of an amending deed which purported to keep the old limits in place.

The rules of the scheme before 6 April 2006 (A Day)

The rules pre-dated A Day. The rate of increases of pensions in payment was 5 per cent fixed per annum. However, the respondents' benefits were restricted so that they would not breach the HMRC limits. In line with most schemes, the benefit limits were set out in a separate appendix to the main document. They provided that the maximum permitted pension 'may be increased by 3 per cent for each complete year or if greater, in proportion to any increase in [RPI] since the pension commenced.'

Therefore, if the amendments to keep the old limits in place had not been made validly, the limits fell away and the members would have become entitled to uncapped increases at the fixed rate of 5 per cent per annum permitted in the main body of the rules.

The deeds of amendment after A Day

A deed of amendment made in 2006 provided for the scheme to remain subject to the requirements of approval as set out in legislation and the IR12 (2001) practice notes of HMRC. However, it only kept those limits in place until the end of the statutory transitional period on 5 April 2011.

A second deed was made in 2008. It said that, in spite of the changes made by the Finance Act 2004, the limits continued to apply, and no end date was mentioned. If effective, it would make permanent the modifications made by the 2006 deed.

The position of the respondent members

The members maintained that the 2006 deed removed the cap on increases under the HMRC limits, albeit that the transitional statutory requirements kept them in place until 2008. In addition they argued that an amendment made in the deed of amendment in 2008 was ineffective because it was not authorised by the scheme’s amendment rule.

The position of the trustee

The trustee’s position was that the rate of increase for the affected members has remained capped at the higher of 3 per cent or RPI. Alternatively, the HMRC limits were preserved by the two deeds of amendment in 2006 and 2008. In particular, the two deeds were not invalidated by the effects of section 67 of the Pensions Act 1995.

The decision of the court

The judge looked both the scheme’s own amendment power and the statutory power to amend under section 68 of the Pensions Act 1995. Firstly, he decided that the Rules provided annual increases of 5 per cent subject to the regulations and the 2006 and 2008 deeds.

He concluded that the scheme’s own amendment power could not have been exercised in a way that reduced or removed the entitlement to 5 per cent annual increases after the transitional period. Therefore, the purported use of that power was ineffective.

Dealing separately with the statutory power of amendment, he noted that a resolution under the Modification Regulations [1] allowed trustees firstly to retain the old limits beyond 5 April 2011 and secondly, to relax those limits. They expressly contemplated that a resolution made under section 68 of the Pensions Act 1995 could exercise any power of modification conferred by the rules of the scheme provided that section 67 of the Act was not contravened. In this case, relaxations made by the amendment following on from the retention of the limits were potentially beneficial to the members and did not offend section 67. Accordingly, he concluded that the 2008 Deed could have been made under section 68.

The judge then discussed the principle in Davis v Richards and Wallington Industries [2]. The principle applies when there is an intention to dispose of property to someone (who is an object of the power) and when the exercise of a power is the only means by which the intention can have effect. In such a case, the courts will presume that the person with the power intended to exercise it. The intention will be presumed even where it is not proven that the intention actually existed. Readers should note that the presumption will not apply if the evidence shows that the person intended not to use the power.

The judge decided that there was no positive evidence that the Trustee intended not to use the section 68 power. Accordingly, the 2008 Deed is to be treated as having been entered into using the section 68 power. The result was that the Trustee was treated as having made a resolution using the power in section 68 even though it had tried to use the scheme’s own amendment power.

Comment

It will be a relief to trustees that the court has been prepared to be flexible in order to achieve a fair outcome. The failure to invoke the statutory section 68 power in the 2008 Deed put the amendment at risk. He might have decided to take a more pedantic approach by deciding the section 68 power was not used. In the event, the judge used an existing legal principle to fill in the omission, allowing the deed to have the intended effect. 

There may be many other schemes in a similar position for which this judgment may prove to be helpful. This case is a reminder that the principle in Davis v Richards and Wallington Industries might assist in some cases. For advice or further information please get in touch with your usual Burges Salmon contact.

Coats UK Pension Scheme Trustees Limited v Styles and others [2019] EWHC 35 (ch)

[1] The Occupational Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2006 (SI2006/364)

[2] [1990] 1WLR 1511

Key contact

Richard Knight

Richard Knight Partner

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