Closing a pension scheme to accrual – a more relaxed approach?

As more DB pension schemes have closed in recent years, one of the most problematic issues for many employers is where scheme rules are deemed to prevent them from fully breaking the link with members’ final salaries.

The Courage case from 1987 has long been authority that, in some cases, a scheme’s rules can mean that employees’ future salaries are still taken into account in benefit calculations, even after the scheme is closed. The High Court recently ruled that a termination notice given by a group of employers was effective to stop future accrual in the scheme and to break the final salary link. The decision turned on the scope of the amendment power and gives some hope to those who continue to argue that the more restrictive interpretation applied in Courage should be overruled.

What was the case about?

The case concerned the Wedgwood Group Pension Plan (the Plan).

The rules of the Plan were re-written in 2001 (the 2001 Rules), replacing the previous rules which dated from 1995 (the 1995 Rules). The 2001 Rule at the centre of this case (the Termination Power) gave a participating employer the power to “stop contributing in respect of all or some of its employees by giving written notice to the Trustees”. This widened the circumstances whereby a participating employer could cease to participate in the Plan as the 1995 Rules had required it to be “impracticable or inexpedient for such Company to continue to participate in the Plan”.

The closure of the Plan was carried out in two stages. The first stage happened in 2001 when the 1995 Rules were amended to give the employer the power to terminate accrual through notice to the trustee. The second stage happened in 2006 when the participating employers gave such notice to the trustee.

The trustee issued proceedings in the High Court. The purpose was to establish whether the employers’ notice was effective to close the Plan to accrual and to break the final salary link.

Why was the rule being challenged?

The amendment power in the 1995 Rules provided that “no alteration modification or addition shall be made which…shall prejudice or adversely affect any pension or annuity then payable or the rights of any Member”.

The trustee argued that the fetter in this power only protected members’ accrued rights. The representative beneficiary argued that future rights were protected, the Termination Power was not validly introduced and the notice to terminate was therefore ineffective.

The decision

The Court ruled that the word “rights” did not include future service benefits and that the Termination Power was validly introduced. It was, however, limited such that it could not be exercised unless an employer had found it to be “impracticable or inexpedient” to continue to participate in the Plan (as the fetter in the 1995 amendment power was implied in the Termination Power).

The Court went on to consider whether in exercising the Termination Power, the employers could have proved that it was impractical or inexpedient for them to continue to participate in the Plan. Although there was no evidence in respect of this specific issue, it was clear that the group was in financial difficulty and continued participation would have jeopardised the possibility of improving the group’s financial position. The Court commented that these factors were sufficient for the employers to have legitimately concluded that it was impracticable and inexpedient for them to continue to participate in the Plan.

Comment

This case differs from previous cases where a Courage type restriction existed in that the wording in the Plan rules referred to “rights” instead of benefits. In reaching this decision, the Court referred to previous cases but did not find them to be of great assistance. Although this case is fact-specific, it is a useful reminder that trustees should carefully examine the scope of the amendment power before making any alterations to the scheme rules. It is not yet known whether the decision will be appealed but, if it is, Counsel for the trustee has reserved the right to argue that Courage itself was wrongly decided on the question of breaking the final salary link.