In a case concerning the IMG Pension Plan, the High Court has unravelled a purported conversion of defined benefit accrual into defined contribution benefits.

In reaching its decision, the Court had to consider such matters as the status of the Plan's power of amendment (and the extent to which it could itself be amended) and the extent to which employees can vary or waive their pension entitlements by way of contract (under the principle elucidated in the South West Trains case) or by entering into a compromise agreement.

Whilst certain aspects of the case turn on its particular facts (such as the precise wording of the amendment power), other issues are of more general application. The case is particularly relevant to employers who are implementing a change to pension benefits (for example, ceasing defined benefit accrual or making bonuses non-pensionable) via their employees' contracts of employment or via a compromise agreement.

Background facts

In very broad terms, IMG decided to convert its existing defined benefit scheme into a defined contribution scheme. The change was implemented in 1992 and covered both past and future service, by converting existing defined benefits into a monetary sum and then transferring that sum into the members' investment pots. The past service aspects of the conversion would probably be unlawful now (as a breach of section 67 of the Pensions Act 1995) but were not prevented by legislation in force in 1992.

Issues

Amending the amendment power

The Plan's amendment power in the original 1977 trust deed contained a fetter (similar, but not identical to, a restriction in the Courage case). Under the 1977 deed "no amendment shall have the effect of reducing the value of benefits secured by contributions already made". This restriction was deleted when the Plan's rules were rewritten in 1981. The question arose: which amendment power applied to the deed which purported to give effect to the conversion? The High Court decided that the 1977 version of the amendment power applied; the 1981 changes to the amendment power were outside the cope of the original power of amendment and were, therefore, invalid.

Applying the 1977 fetter: did it act to prevent the conversion?

The High Court then considered the meaning of the fetter: "no amendment shall have the effect of reducing the value of benefits secured by contributions already made". It concluded that the fetter did operate to prevent the conversion to defined contribution benefits insofar as the conversion decreased the value of future defined benefits which had accrued to members in respect of their service to the date of the amendment. In practice, this meant that the conversion was subject to an underpin "which preserves the future monetary value of the proportion of final pensionable pay which the member has accrued in respect of pre-amendment service".

The South West Trains argument: did members modify their entitlements/accrued rights by contract?

Members had received a memorandum and attended presentations which described certain aspects of the conversion. They had also completed an application form in order to participate in the Plan following the change. IMG argued that by signing the application form and by "ticking the yes box" the members had, in fact, entered into a binding contract with IMG under which he or she consented to the conversion and impliedly agreed not to claim benefits from the trustees on a different basis. This argument was based on the 1998 case of South West Trains Ltd v Wightman.

However, the Court held that IMG must establish that there was an intention by the parties to create "contractual relations". In this case, the conversion was presented to the employees as a fait accompli with "not the slightest suggestion… that this is dependent on the agreement of the employees." The judge also noted that the memorandum stated that full details of the conversion would be available in the booklet, which itself states that it is subject to the Plan's trust deed and rules. He further noted that the application form signed by the employees failed to indicate that they were being asked to consent to the conversion and did not indicate that they were being asked to give up final salary rights.

The High Court also distinguished South West Trains on the basis that, in that case, there was no suggestion that enforcing the contract would be contrary to the terms of the trust. The Court drew a distinction between using an extrinsic contract to supplement a trust deed and rules where the deed does not contain contrary provisions and using that contract to override contrary provisions where that contract does not amount to express member consent.

Compromise agreements might be an unenforceable surrender

The High Court also considered the effect of section 91 of the Pensions Act 1995 which prohibits the assignment, commutation or surrender of a "right to a future pension". The judge considered that entering into a compromise agreement under which a pension scheme member waives rights which he or she would be entitled to (but for the compromise agreement) would be a surrender contrary to section 91, even if there was a dispute over the existence of those rights at the time of the agreement.

Implications

The judgment may well be appealed. In the meantime, employers should take extra care when attempting to make changes to the existing pensions arrangements of its employees via their contracts of employment, especially where the proposed change may contradict the amendment power in the scheme's trust deed and rules. This case suggests that passive or uninformed consent by employees will not be enough to constitute an intention to create contractual relations.

It is also worth noting that the implications of the judge's comments on compromise agreements and section 91 are unclear, in that they appear to open the door to a wider interpretation of what constitutes a "right to a future pension".