An amendment to FDR’s scheme in 1991 changed the way pensions increases were calculated from 3% compound to 5% LPI, effective for members in service both before and after 1991. However, because it was identified that this would prejudicially affect those who had built up benefits before 1991, an ‘underpin’ of 3% was in place. The trustees and the employer had differing opinions however on how the underpin should be applied.
The Court of Appeal favoured the employer’s approach (‘modified cumulative’) that the increase should be the higher of:
- The pre-1991 pension as at retirement increased year on year by effect
- The pre-1991 pension as at retirement increased year on year by 5% LPI compound up to and including the year in which the increase is to take effect
The modified cumulative approach protects the amount of money in pensioners’ pockets with the least interference to the modified scheme. It also happened to be the least prejudicial and expensive approach for the employer.
The interpretation of a pension increase rule will depend on the particular wording of the rule in question. However, where the amendment power contains a proviso preventing amendments that would prejudice accrued benefits, it may be possible to justify using the modified cumulative approach if it also complies with the proviso and causes least interference to the modified scheme.