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Invalid scheme amendments

There are many circumstances in which the trustees or sponsor of an occupational pension scheme may wish to make amendments to the governing provisions of the scheme. If it emerges that a scheme amendment is invalid, then changes which may have been treated as part of the scheme’s structure for years could in fact be ineffective, resulting in an increase to the scheme’s benefits and liabilities.

How do you amend a pension scheme?

An amendment to a pension scheme will only be valid if:

  • it is a proper exercise of the amendment power contained within the scheme’s trust deed and rules; and
  • it complies with overriding legislation, such as the statutory restrictions on scheme amendments (eg section 67 of the Pensions Act 1995).

Each scheme has its own specific amendment power, which must be considered in detail against any proposed change. The wording of the provision will set out the persons and procedures that will be required for a valid exercise of the power. It may set out restrictions on the type of amendments that may be made, the involvement of the sponsor and trustee in the process, and the necessary documentation steps to evidence the change. The form of the amending document, its content and how it is executed are all important elements in achieving a valid amendment.

In addition, trustees and scheme sponsors need to consider whether a proposed amendment would be restricted by overriding legislation – in particular, section 67 of the Pensions Act 1995. This prohibits any amendment which would or might convert a member’s subsisting right from a salary-related benefit to a money-purchase benefit without the member’s consent, or reduce any pension in payment without the pensioner’s consent. The provision also prohibits changes which would or might have a detrimental effect on a member’s existing rights under the scheme, unless the member consents or the scheme actuary has provided the trustees with a statement that the benefits provided immediately before and after the change are actuarially equivalent.

What are the consequences of getting it wrong?

If a scheme amendment is invalid, the change it purports to make will not be effective. In a recent case, over 30 deeds of amendment to a pension scheme had not been properly executed.1 As a result, the changes those deeds intended to make (including a closure to future accrual) were not effective. The judge in that case concluded that ‘unfortunate consequences are, I am afraid, unsurprising when so many documents have not been validly executed’. 

Briggs v Gleeds (2014)

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What happens when your newly appointed legal advisers discover that over 20 years' worth of deeds amending your pension scheme had been invalidly executed? Do the changes to reduce the DB accrual rate, introduce member contributions, close the DB section to future accrual, and introduce new DC sections (among others) nevertheless take effect? A High Court judgment considering these unfortunate facts makes sobering reading, and has worrying consequences for scheme sponsors and trustees who discover invalidly executed documents in their pension scheme’s dim and distant (or, indeed, more recent) past. 

In this case, the judge concluded that, as the defective deeds were improperly executed, they were ineffective in making the intended changes. This opened a can of worms for the trustees and sponsor, who needed to unpick scheme activity from 1980 as a result of the Court’s decision.

As a result of the ensuing unravelling exercise, some members stood to lose out on all the benefits they believed they had built up, whereas others stood to gain unexpected windfalls where past liability management exercises to reduce their future benefits were not effective.

Practical implications

Lessons to be learned from this case are:

  • Always employ legal experts to advise you on how to go about amending your pension scheme and the proper formalities to follow.
  • If you are acquiring a defined benefit pension scheme, for example on the acquisition of a company, do ask your lawyers to carry out some careful due diligence, particularly if fundamental changes have been made to the scheme over its history and you are relying on those changes having been validly made when assessing the liabilities you will be assuming in relation to that scheme.

The facts in more detail

The Gleeds Retirement Benefits Scheme was established in 1974. Its sponsor was a partnership, and so each amending deed had to be executed by partners in the Gleeds group. From August 1990, the Law of Property (Miscellaneous Provisions) Act 1989 amended execution formalities and required that each partner’s signature on a deed should be witnessed.

Deeds of amendment were prepared by the Scheme’s external administrator, however, none of the 30 amending deeds executed after August 1990 complied with the new statutory execution requirements. This was an error on the part of the Scheme administrator. The errors came to light on the appointment of new legal advisers to the Scheme in 2010. The High Court was asked to determine whether or not the 30 amending deeds were effective in introducing the purported changes. Some were highly significant changes to the Scheme’s structure, such as a reduction in the accrual rate, closure to future accrual and the introduction of new DC sections.

A key aspect of this case is its exploration of the legal concept of ‘estoppel’ – broadly whether a party to an agreement is prevented at law (‘estopped’) from challenging the agreement where that party relied to its detriment on the other party’s representation. Here, the scheme sponsor argued that the members of the Scheme had relied, to their detriment, on the trustees and their advisers, and had believed that the deeds had been properly executed and that the purported changes had taken effect. As a result, estoppel would prevent the membership challenging the invalid execution of the deeds and prevent their benefits from being any different to those they believed they had built up.

Decision

Previously, any estoppel had to be based on fact rather than law, on the basis that each party is as well placed as the other to confirm the law. While the judge did concede that it may be possible for an estoppel to be based on statements of the law, he held that estoppel cannot be argued where a document has been invalidly executed, as it would go against Parliament’s intentions and undermine certainty as to execution formalities.

Furthermore, a party must show more than just passive acceptance in order to be estopped from challenging an agreement. In the case of a pension scheme, estoppel has to be applied with caution, as the membership is likely to show passive acceptance rather than the positive conduct needed to infer reliance where there are benefit changes. In this case, the judge determined that there had been passive acceptance by most of the membership, and so the sponsor could not argue that the membership had relied to its detriment on the changes. This meant that it was only in cases where there was explicit member contractual agreement to a change that those members could be said to have relied on those particular changes, and those changes would stand.

On the basis that the deed to close the Scheme to future DB accrual was not effective, the sponsor successfully argued that the Scheme was nevertheless closed by an extrinsic contract which was effective for those members who had returned a form agreeing to the closure in return for a one-off salary increase. This was not the case, however, for the handful of members who did not return the form and had, therefore, continued to accrue DB benefits.

What happens when your newly appointed legal advisers discover that over 20 years' worth of deeds amending your pension scheme had been invalidly executed? Do the changes to reduce the DB accrual rate, introduce member contributions, close the DB section to future accrual, and introduce new DC sections (among others) nevertheless take effect? A High Court judgment considering these unfortunate facts makes sobering reading, and has worrying consequences for scheme sponsors and trustees who discover invalidly executed documents in their pension scheme’s dim and distant (or, indeed, more recent) past. 

In this case, the judge concluded that, as the defective deeds were improperly executed, they were ineffective in making the intended changes. This opened a can of worms for the trustees and sponsor, who needed to unpick scheme activity from 1980 as a result of the Court’s decision.

As a result of the ensuing unravelling exercise, some members stood to lose out on all the benefits they believed they had built up, whereas others stood to gain unexpected windfalls where past liability management exercises to reduce their future benefits were not effective.

Practical implications

Lessons to be learned from this case are:

  • Always employ legal experts to advise you on how to go about amending your pension scheme and the proper formalities to follow.
  • If you are acquiring a defined benefit pension scheme, for example on the acquisition of a company, do ask your lawyers to carry out some careful due diligence, particularly if fundamental changes have been made to the scheme over its history and you are relying on those changes having been validly made when assessing the liabilities you will be assuming in relation to that scheme.

The facts in more detail

The Gleeds Retirement Benefits Scheme was established in 1974. Its sponsor was a partnership, and so each amending deed had to be executed by partners in the Gleeds group. From August 1990, the Law of Property (Miscellaneous Provisions) Act 1989 amended execution formalities and required that each partner’s signature on a deed should be witnessed.

Deeds of amendment were prepared by the Scheme’s external administrator, however, none of the 30 amending deeds executed after August 1990 complied with the new statutory execution requirements. This was an error on the part of the Scheme administrator. The errors came to light on the appointment of new legal advisers to the Scheme in 2010. The High Court was asked to determine whether or not the 30 amending deeds were effective in introducing the purported changes. Some were highly significant changes to the Scheme’s structure, such as a reduction in the accrual rate, closure to future accrual and the introduction of new DC sections.

A key aspect of this case is its exploration of the legal concept of ‘estoppel’ – broadly whether a party to an agreement is prevented at law (‘estopped’) from challenging the agreement where that party relied to its detriment on the other party’s representation. Here, the scheme sponsor argued that the members of the Scheme had relied, to their detriment, on the trustees and their advisers, and had believed that the deeds had been properly executed and that the purported changes had taken effect. As a result, estoppel would prevent the membership challenging the invalid execution of the deeds and prevent their benefits from being any different to those they believed they had built up.

Decision

Previously, any estoppel had to be based on fact rather than law, on the basis that each party is as well placed as the other to confirm the law. While the judge did concede that it may be possible for an estoppel to be based on statements of the law, he held that estoppel cannot be argued where a document has been invalidly executed, as it would go against Parliament’s intentions and undermine certainty as to execution formalities.

Furthermore, a party must show more than just passive acceptance in order to be estopped from challenging an agreement. In the case of a pension scheme, estoppel has to be applied with caution, as the membership is likely to show passive acceptance rather than the positive conduct needed to infer reliance where there are benefit changes. In this case, the judge determined that there had been passive acceptance by most of the membership, and so the sponsor could not argue that the membership had relied to its detriment on the changes. This meant that it was only in cases where there was explicit member contractual agreement to a change that those members could be said to have relied on those particular changes, and those changes would stand.

On the basis that the deed to close the Scheme to future DB accrual was not effective, the sponsor successfully argued that the Scheme was nevertheless closed by an extrinsic contract which was effective for those members who had returned a form agreeing to the closure in return for a one-off salary increase. This was not the case, however, for the handful of members who did not return the form and had, therefore, continued to accrue DB benefits.

Where can issues arise?

Recent case law illustrates particular circumstances where issues can arise.

Implied duty of trust and confidence

Employers have an implied duty of good faith towards the pension scheme membership as a whole, including towards ex-employees and dependants, and arguably also towards the trustees themselves. Recent decisions by the Court of Appeal have provided clarity on how to assess this duty.

Retrospective amendments

Some scheme amendment powers may allow an amendment to take effect from a date earlier than the date on which it is made. An amendment made under such a power would also have to comply with section 67 of the Pensions Act 1995, and must be a valid back-dated amendment rather than ’an attempt to re-write history’.

IMG Pension Plan (2009, 2010 (appeal))

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A restrictive amendment power could not simply be overridden by replacing it or getting members to sign an application form consenting to their benefits changing from DB to DC. 

Can an amendment power be overridden? What sort of agreement would be needed between the employer and a member to do so? Can future benefits be changed from DB to DC where an amendment power prevents changes which reduce the value of members’ benefits? What is the effect of a compromise agreement on putative pension rights? These were key questions considered by the High Court and Court of Appeal in the case of IMG Pension Plan, HR Trustees Ltd v German.

Practical implications

The key lessons from this case are as follows:

  • When amending a pension scheme, ensure that you understand the scope of the amendment power and any restrictions on that power. Identify any obstacles in the deed and rules so that you can ensure that your changes are valid and cannot be successfully challenged.
  • Check for any restrictions in your amendment power, any inconsistencies in the deed and rules that may bring the power you wish to rely on into doubt, and whether you are able to make the amendment with retrospective effect.
  • If you are relying on a separate agreement with employees to make a change, it must have all the ingredients of a contract, which the employee has entered into freely.
  • Note: The Gleeds decision is also relevant to extrinsic contracts and potentially conflicts with this case in relation to the importance of informed consent. To read more, see the discussion above.

The facts in more detail

The IMG Pension Plan was established in 1977 by a deed which was supplemented by rules that were not adopted until 1981. The deed and the rules contained two different amendment powers: the earlier one being a unilateral trustee power, subject to a restriction on amendments ‘reducing the value of benefits secured by contributions already made’; and the one under the 1981 rules gave the amendment power to the employer and trustees, jointly, with no such restriction. The Plan was converted from a DB scheme to a DC scheme from January 1992, under a deed dated March 1992.

Until 1992, IMG was both the employer and trustee of the Plan. Members signed an application form confirming that they wished to continue participating in the newly converted DC scheme. The current trustee applied to the court for determination of certain issues around the validity and effect of aspects of the conversion of the scheme to a DC scheme, in particular relating to the power of amendment and the validity of the exercise of that power at various points in the history of the scheme.

Decision

The court decided as follows:

  1. It is not possible to override an amendment power by its replacement with a new one: ‘it cannot have been the draftsman’s intention to permit such amendments by an indirect route where he had prohibited them directly’.
  2. The original amendment power prohibited changes which reduced ‘the value of benefits secured by contributions already made’. The judge followed the case of Courage, ruling that this restriction must be interpreted so that the final salary link had to be preserved in relation to benefits accrued prior to the date of the scheme conversion. Here, where those final salary benefits had been converted to money purchase benefits, the scheme had to operate an underpin preserving the future monetary value of the benefits accrued by the member in respect of pre-amendment service (including a final pensionable pay link), ie the restriction in the rules could not reduce the value of the future final salary benefits accrued to members by virtue of their service to the date of the change.
  3. The amendment power was silent on retrospective changes. The judge held that while backdating an amendment is not of itself objectionable (and had some sympathy with the employer’s arguments that the employees were all aware of the intended effective date of the change), here the amendment was an unacceptable attempt to ‘rewrite history’, and should not be permitted. The change, therefore, took effect from the date of the deed – 1 March 1992 – rather than from January 1992.
  4. The signed application forms were not a form of extrinsic contract that could prevent members from claiming DB benefits from the date of the change; members had not been given any real choice or detailed information about the change at the time they would have signed the forms (the latter came later in a new explanatory booklet). They were essentially presented with a fait accompli – there was no suggestion that their agreement was required.

A technical point was appealed regarding whether IMG could rely on a subsequent agreement under which the employees agreed to waive their DB rights. The High Court had decided that it could not, as section 91 of the Pensions Act 1995 prohibited the surrender by a member of their rights or entitlements to a pension under an occupational pension scheme (other than in a number of limited circumstances). The Court of Appeal decided, however, that where there is a question about the rights or entitlement of a member, such that it has to be determined by a legal determinator, section 91 does not apply and the parties to that dispute can enter into a compromise of that dispute, provided it is a bona fide compromise of a disputed or doubtful entitlement or right.

A restrictive amendment power could not simply be overridden by replacing it or getting members to sign an application form consenting to their benefits changing from DB to DC. 

Can an amendment power be overridden? What sort of agreement would be needed between the employer and a member to do so? Can future benefits be changed from DB to DC where an amendment power prevents changes which reduce the value of members’ benefits? What is the effect of a compromise agreement on putative pension rights? These were key questions considered by the High Court and Court of Appeal in the case of IMG Pension Plan, HR Trustees Ltd v German.

Practical implications

The key lessons from this case are as follows:

  • When amending a pension scheme, ensure that you understand the scope of the amendment power and any restrictions on that power. Identify any obstacles in the deed and rules so that you can ensure that your changes are valid and cannot be successfully challenged.
  • Check for any restrictions in your amendment power, any inconsistencies in the deed and rules that may bring the power you wish to rely on into doubt, and whether you are able to make the amendment with retrospective effect.
  • If you are relying on a separate agreement with employees to make a change, it must have all the ingredients of a contract, which the employee has entered into freely.
  • Note: The Gleeds decision is also relevant to extrinsic contracts and potentially conflicts with this case in relation to the importance of informed consent. To read more, see the discussion above.

The facts in more detail

The IMG Pension Plan was established in 1977 by a deed which was supplemented by rules that were not adopted until 1981. The deed and the rules contained two different amendment powers: the earlier one being a unilateral trustee power, subject to a restriction on amendments ‘reducing the value of benefits secured by contributions already made’; and the one under the 1981 rules gave the amendment power to the employer and trustees, jointly, with no such restriction. The Plan was converted from a DB scheme to a DC scheme from January 1992, under a deed dated March 1992.

Until 1992, IMG was both the employer and trustee of the Plan. Members signed an application form confirming that they wished to continue participating in the newly converted DC scheme. The current trustee applied to the court for determination of certain issues around the validity and effect of aspects of the conversion of the scheme to a DC scheme, in particular relating to the power of amendment and the validity of the exercise of that power at various points in the history of the scheme.

Decision

The court decided as follows:

  1. It is not possible to override an amendment power by its replacement with a new one: ‘it cannot have been the draftsman’s intention to permit such amendments by an indirect route where he had prohibited them directly’.
  2. The original amendment power prohibited changes which reduced ‘the value of benefits secured by contributions already made’. The judge followed the case of Courage, ruling that this restriction must be interpreted so that the final salary link had to be preserved in relation to benefits accrued prior to the date of the scheme conversion. Here, where those final salary benefits had been converted to money purchase benefits, the scheme had to operate an underpin preserving the future monetary value of the benefits accrued by the member in respect of pre-amendment service (including a final pensionable pay link), ie the restriction in the rules could not reduce the value of the future final salary benefits accrued to members by virtue of their service to the date of the change.
  3. The amendment power was silent on retrospective changes. The judge held that while backdating an amendment is not of itself objectionable (and had some sympathy with the employer’s arguments that the employees were all aware of the intended effective date of the change), here the amendment was an unacceptable attempt to ‘rewrite history’, and should not be permitted. The change, therefore, took effect from the date of the deed – 1 March 1992 – rather than from January 1992.
  4. The signed application forms were not a form of extrinsic contract that could prevent members from claiming DB benefits from the date of the change; members had not been given any real choice or detailed information about the change at the time they would have signed the forms (the latter came later in a new explanatory booklet). They were essentially presented with a fait accompli – there was no suggestion that their agreement was required.

A technical point was appealed regarding whether IMG could rely on a subsequent agreement under which the employees agreed to waive their DB rights. The High Court had decided that it could not, as section 91 of the Pensions Act 1995 prohibited the surrender by a member of their rights or entitlements to a pension under an occupational pension scheme (other than in a number of limited circumstances). The Court of Appeal decided, however, that where there is a question about the rights or entitlement of a member, such that it has to be determined by a legal determinator, section 91 does not apply and the parties to that dispute can enter into a compromise of that dispute, provided it is a bona fide compromise of a disputed or doubtful entitlement or right.

Power of amendment

An amendment will not be valid if it falls outside any restrictions written into the amendment power under which it is made. The amendment power itself will not be valid if it infringes overriding legislation.

Failure to comply with the formal requirements of a power of amendment may make the amendment invalid.4 For example, amendments have on occasion been ruled invalid because they were required to be signed by hand but in fact names were printed at the end of the deed, or where actuarial advice was required under the rules but was not in fact obtained. There is a sense that in recent years the courts have taken a more flexible approach by holding in certain instances, on equitable grounds, that non-compliance with the formal requirements of an amendment power was not fatal to the amendment itself.However, it is also arguable that these cases turned on their own particular facts, and it may not be possible to rely on them where the terms of the power of amendment have not been strictly followed.

Improper purpose

The Court of Appeal has recently ruled that trustees did not act for a proper purpose in using a unilateral power to amend scheme rules to allow discretionary pension increases to be paid to members. The decision was being appealed to the Supreme Court, but a settlement has been agreed.


1 Briggs v Gleeds (2014).

2 HR Trustees v German (IMG Pension Plan) (2009).

Safeway v Newton (2017).

4 Capita ATL Pension Trustees v Gellately (Sea Containers) (2011).

5 HR Trustees v Wembley (2011).

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