The High Court has ruled that the Prudential can limit how much its pension scheme pays in discretionary pension increases. In essence, the Prudential had not broken its duty of good faith towards the pension scheme. It was entitled to have regard to its own interests and had not acted in an irrational or perverse manner.

Background

Since the Imperial Tobacco case in 1991, the principle that an employer should act in good faith in its dealings with its employees has also applied to its exercise of rights and powers in relation to its pension scheme.

In addition to that, there is a body of law which can, in some circumstances, commit an employer to implementing a course of action if it has led its employees to believe that it will carry out that action. This body of law is unknown technically as, "estoppel".

What did Prudential want to do?

Prudential changed its policy on pensions increases.

From 1997 to 2005, pension increases were in line with RPI inflation. From 2006 it wanted to cap discretionary increases at 2.5% with the possibility (but not certainty) of agreeing a higher cap in a particular year or, on the other hand, not awarding any discretionary increase at all in a particular year.

The scheme had a long history of discretionary increases. There was ample evidence that the Prudential had good reasons for its policy change and of discussions with the scheme Trustee.

The Court took a good look at (amongst other things) the Prudential's reasons for its change of policy, its talks with the Trustee, the way in which it communicated with members, members' expectations and whether the Trustee had exercises it powers correctly.

Future Action - Employers

The decision does not give employers carte blanche to behave as they wish.

Any employer wanting to change its policy on future discretionary benefits should:

  • Show why it wants to make the change
  • Make sure that it talks to the scheme trustees and communicates as well as possible with scheme members; and
  • Consider the terms of the pension scheme's documentation and the employees' employment contracts.