In HR Trustees Limited v Peter German & Anor Arnold J, in the High Court, recently held that changes made in 1992 to the IMG Pension Plan (a defined-benefit (DB) pension scheme) had been ineffective to convert members’ benefits from DB to defined-contribution (DC). The judge also held that compromise agreements later entered into with members under which they waived DB entitlements, were ineffective as contrary to section 91 of the Pensions Act 1995.
In this case, the amendment power in the IMG Pension Plan’s 1977 Deed (the 1977 Deed) stated that: “no amendment shall have the effect of reducing the value of benefits secured by contributions already made”. However, rules of the scheme that were introduced in 1981 (the 1981 Rules) contained a different amendment power with a less restrictive fetter.
The trustees and employer executed a deed on 3 March 1992 (the 1992 Amendment Deed) to convert the DB scheme into a DC scheme and back dated the deed to have effect from 1 January 1992.
Prior to the purported conversion, the employees were given: memorandums and a scheme booklet explaining the changes to the scheme; a presentation on the changes; and membership application forms to join the new DC scheme. The members returned the application forms after having signed and ticked the “yes box”.
Arnold J held that it was contrary to the restriction in the 1977 Deed to convert DB benefits that accrued before the 1992 Amendment Deed into DC benefits. He gave the following reasons:
- The fetter in the 1977 Deed was the relevant restriction that needed to be satisfied before the conversion could be ruled valid. The 1977 Deed amendment power did not give trustees the power to introduce a less restrictive amendment power in the 1981 Rules. In coming to this decision Arnold J relied on UEB Industries Ltd v W S Brabant , UEB Industries Ltd v W S Brabant  and Air Jamaica Ltd v Charlton ;
- The effect of the fetter in the 1977 Deed was to “render ineffective the amendments made by the 1992 [Amendment] Deed in so far as they reduced the value of benefits, and in particular the future final salary benefits, which had accrued to members by virtue of their Service”. Arnold J interpreted the fetter as having that meaning by relying on a number of cases, including Re Courage Group's Pension Schemes  and BHLSPF ;
- “An amendment to convert such benefits from a final salary entitlement to a money purchase entitlement is permissible, but only 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 1992 Amendment Deed only converted the scheme from the date it was executed in March 1992, instead of the earlier January date. To back date the deed to January was to treat some DB benefits as though they had always accrued on a DC basis (instead of accrued on a DB basis and then been converted into DC benefits) so was an unlawful “attempt to re-write history”. This was also restricted by the 1977 Deed fetter.
Arnold J also rejected the employer’s alternative argument that even if the conversion was unlawful under the trust deed and rules the employees had contractually agreed to changes outside the scheme. The employers relied on South West Trains Ltd v Wightman  in support of their argument. The judge held that:
- Unlike the ordinary position with commercial contracts, the position in this case is “analogous to an allegation that a contract should be inferred from conduct, and accordingly the burden of proof of intent to create legal relations is upon the proponent of the contract [the employer]”;
- The employer could not prove that there was an intention to create contractual relations because the:
- Memorandum and application forms directed attention to the booklet for the full details of the proposals;
- The presentation could not create contractual relations because it was not a comprehensive statement of the proposed changes. So the employees would still be left with the understanding that the booklet explained the proposed changes;
- The memorandums and the booklet presented the changes as already having been made (instead of being presented as proposals);
- The booklet stated that it was not comprehensive and was subject to the trust deed and rules; and
- The application form was not comprehensive, for example it did not indicate that members were being asked to give up rights they were entitled to and were protected by the 1977 Deed fetter,
- The position was fundamentally different form South West Trains because in the present case the agreement was contrary to restrictions contained in the scheme’s trust deed and rules. Furthermore, there had been no informed consent from the members that would preclude them from asserting a breach, because the members had been: unaware of the fetter in the 1977 Deed; they received no advice; the effect of the proposals were not “clearly explained” to them; they were “not given any real choice as to whether or not to consent”; and they “received the impression that they would not be adversely affected by the changes”; and
- Unlike the facts of the present case, South West Trains only involved making future pay rises non-pensionable.
For similar reasons to those mentioned above (eg no consent), Arnold J rejected a further alternative argument that that the employees had represented themselves as having accepted the changes (eg by signing the forms) and it would be unconscionable for them to act otherwise.
On a different point, the judge held that the later individual compromise agreements did not preclude members from retaining DB interests. This was because under section 91 of the Pensions Act 1995 these compromises were an unlawful “surrender” of a pensions right to which the members were “entitled”. This was true even in situations where “the member has surrendered his or her rights by entering into the agreement even if there was a bona fide dispute as the existence of those rights at the time of the agreement.”
This judgment will be of significant interest to many in the pensions industry, given the continuing trend for employers to manage their pension costs or de-risk.
This case and the recent High Court judgment in Walker Morris Trustees Ltd v Masterson  and the Supreme Court of New South Wales’s decision in ING Funds Management v ANZ Nominees  highlight the importance of carefully examining the effect of any restrictions in the amendment powers when making changes to benefits.
Where an employer is seeking to rely on South West Trains v Wightman to directly agree a change with employees outside the scheme, this case suggests that, among other things, it is prudent to provide comprehensive information about the proposed changes to members.
However, there are elements of the judge’s decision, which are difficult to reconcile with established legal principles. For example, it is unclear why a contract in these circumstances is not governed by the same rules as an ordinary commercial contract or why it is important for the members to be given a “choice” before they can consent. Furthermore, it can be prudent to ensure that members receive advice to minimise the risk of claims for mis-selling but in this case the judge suggested that not obtaining advice could also vitiate consent.
Employers may also need to carefully check whether any compromise agreements are effective following the judge’s decision that it was an unlawful “surrender” of a pensions right if there is a “bona fide dispute as the existence of those rights at the time of the agreement”.