In April, the English High Court issued its ruling in Prudential Staff Pensions Ltd v The Prudential Assurance Company Ltd and Others. The Court found that Prudential was not obliged to provide members with inflationary rises in pension payments as the Trust Deed gave the employer a discretionary power in relation to such increases. 

The ruling is important as it outlines the parameters of an employer’s implied duty of good faith to members in relation to their pension scheme, and sets a precedent for any similar actions before the Irish Courts.

Background

The Prudential Staff Pension Scheme provides retirement and other benefits for employees and former employees of Prudential Assurance Company Ltd and other companies within the Prudential group. From 1991 to 2005 pensions were increased by reference to changes in the Retail Price Index (“RPI”). This was in line with the Rules governing the Scheme which provided that pension payments would be increased each year in line with the RPI subject to a cap of 5%.

During the 1990’s the Scheme performed very well. In April 1999 the Scheme was valued in excess of £464 million. At that time a large percentage of the assets were invested in equities. 

However by April 2005 there was a deficit of £243 million and a funding level of 94%. It was decided in November 2005 that the Company would award increases in future subject to a cap of 2.5% and that such increases could be suspended for one or more years if the funding position of the Scheme deteriorated materially. It was also decided that the Company would contribute £75 million per annum and that the Scheme should increase it’s asset allocation in bonds. The increases awarded in subsequent years varied from 2.7% in 2006 to no increase in 2010 (when the RPI was negative). In addition, Prudential reduced its annual contribution in 2010 to £50 million, with the agreement of the Trustees, due to capital constraints.

Decision

The Trustees of the Scheme applied to the Court for directions on a number of issues.  The first question was whether the decision taken by Prudential to reduce the pension increases to 2.5% breached “the implied obligation of good faith” as set down in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd (1994). In that case it was noted that contracts of employment contain an implied term “that the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee” and further that this obligation also applies in the exercise of an employers rights and powers under a pension scheme. Mr Justice Newey found that the power to increase a pension requires “a genuine and rational” exercise of discretion, and the decision must be assessed in terms of whether it was irrational or perverse. The expectation of members may be of relevance in such a determination. However, Newey J emphasised that the powers of an employer are not fiduciary and as a result he can have regard to his own interests in making such a decision.

The Scheme members argued that Prudential failed to have proper regard to the expectations of members in respect of pension increases. In this regard, the Court found that Prudential’s decision was not irrational or perverse as the current Rules of the Scheme conferred a discretion on Prudential which was not subject to any express restrictions. Whilst there had been an expectation among members that pension increases would be granted, there was also an appreciation that Prudential had not guaranteed or committed itself to increases. There had also been a change in circumstances in relation to the Scheme as investment returns had declined and the Scheme’s solvency had deteriorated.

The second question referred to the Court was whether Prudential was estopped from denying that members of the Defined Benefit Section were entitled to have their pensions increased in line with the RPI. This argument was based on estoppel by representation and estoppel by convention. Newey J found that the estoppel argument lacked the necessary “representation” as Prudential did not make a “clear representation” that it would increase pensions in line with the RPI. The Court noted that whilst members were told that pensions had in the past been increased to compensate for inflation, they were also informed that such increases were discretionary. There was also a difficulty with the issue of detriment, as membership of the Scheme, with or without pension increases in line with the RPI, could only have been a benefit. The estoppel by convention argument also failed on the basis that the communications between Prudential and members were understood to confirm that pension increases were discretionary, and as a result there was no “common assumption” between the parties.