Contracts and Pension Schemes – When is a contract not a contract?

In 2010 the Government announced that the statutory minimum amounts by which pensions in payment should be increased, and deferred pensions should be revalued, would be calculated by reference to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).

Many schemes are now providing increases and revaluation based upon CPI either because the changes were automatically incorporated into the rules, or because trustees have made specific amendments to the rules. There has been a certain level of resistance to such changes by some scheme members and on a number of occasions, the Pensions Ombudsman has examined member claims that they are contractually entitled to RPI based increases (which historically have tended to be higher) rather than CPI based increases.

The Pensions Ombudsman has recently considered one such case involving Arthur Scargill, the former President of the National Union of Mineworkers, who claimed that a contract had been formed between the scheme members and the trustees wich entitled the members to a specific level of pension increase.

Mr Scargill was a member of the National Union of Mineworkers Officials’ and Permanent Employees’ Superannuation Fund. He claimed that he was entitled to pension increases in line with RPI on the part of his Scheme pension in excess of the Guaranteed Minimum Pension, which had accrued before 5 April 1997 (the Pre-1997 Pension). There is no statutory requirement to provide indexation on a Pre-1997 Pension, although trustees often have a discretionary power to provide increases on such pensions.

The Pensions Ombudsman dismissed Mr Scargill’s complaint, although he did provide some interesting observations on the existence or otherwise of contracts in a pensions context.

Mr Scargill argued that he was entitled to RPI increases based upon an agreement reached in 1975 between the trustees and members. The original trust deed of the Scheme had no power of amendment and so the then trustees obtained active members’ written consent to amend the Scheme rules in connection with annual pension increases. The announcement, which was sent outlining the amendments, stated:

“Inflation proofing by means of an annual Cost-of-Living increase to Pensions in payment. Pensions will continue to be reviewed yearly in light of rises in the Cost-of-Living. Subject to continued availability of funds. Such increase to be paid from the funds under the Trustees’ discretionary powers.”

The amendments were approved and a deed was executed in 1976 to give effect to the proposed amendments.

A further deed entered into in 2000 provided that the Pre-1997 Pension would be increased “as and when deemed appropriate by the Trustees by an amount at their discretion”.

Mr Scargill argued that the 1975 announcement was an offer made by the trustees that had been accepted by Scheme members. A contract had been formed as a result that bound the trustees to pay RPI based increases on the Pre-1997 Pension.

The Pensions Ombudsman noted that the 1975 announcement did not amount to an obligation for the trustees to provide increases but was a proposal to review pensions in payment in light of rises in the cost of living.

Because of this finding, it was not necessary for the Pensions Ombudsman to determine the contract point. Nevertheless, the Pensions Ombudsman did note that it was unlikely that all the elements necessary for the formation of a contract were present, in particular, consideration. The Pensions Ombudsman doubted whether it could be found that the members had given any consideration.

Whilst the decision in this determination is specific to the facts it does serve as a reminder that establishing the existence of a contract in such claims can be difficult. For a contract to have effect, all of the conditions for a valid and binding contract, such as offer, acceptance, consideration and intention to create legal relations, must be present.