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’.
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.
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’.2
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.5 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.
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).
3 Safeway v Newton (2017).
5 HR Trustees v Wembley (2011).