The Pensions Ombudsman considered a situation where the trustees incorrectly ceased the payment of discretionary increases to a member's pension. The pension plan's rules required the trustees to undertake regular reviews, but the trustees decided to cease payment of increases in perpetuity. This decision was reached incorrectly, and the Ombudsman determined that, where discretion exists, it cannot be fettered.

Facts

Mr Wood is a member of the Covidien UK Pension Plan that was the result of a merger of Mr Wood's Plan with other arrangements. Pensions under Mr Wood's section of the Plan were subject to regular review to provide discretionary increases linked to the retail prices index. Mr Wood retired in 1999 and received discretionary increases from 2000 to 2011 (except in 2010 since RPI was negative this year).

Sections 51 to 54 of the Pensions Act 1995 require pensions in payment accrued from 6 April 1997 to be increased by Limited Price Indexation ("LPI"), however there is no such requirement for pensions accrued prior to that date.

Advice was received by the trustees from their administrator that there would be "no additional funding strain" if the discretionary increases continued to be awarded in relation to pre-1997 service to members in Mr Wood's section of the Plan.

The trustees decided in a conference call in June 2012 that no discretionary increase would be paid for 2012 to Mr Wood's section of the Plan (though statutory increases in relation to post-1997 service would continue, which was only two years of service for Mr Wood). This was confirmed in a subsequent letter to Mr Wood stating that the decision was reached on the basis that paying such an increase was inconsistent with the position of members from other sections of the Plan and the trustees wished to be consistent across the whole of the Plan moving forward.

The decision was not minuted or ratified in the Plan trustees' meeting. Mr Wood appealed against their decision, but the Plan trustees upheld it at a trustee meeting in September 2012, writing to Mr Wood afterwards to explain that they had to consider "the consequence on the Plan's funding position as a whole".

Determination

The Ombudsman noted the clear legal point that where discretion exists, it cannot be fettered so that its use is restricted for the future. In deciding not to pay discretionary increases in the future, this discretion was fettered by the Plan trustees since the rules of Mr Wood's section of the Plan required them to undertake reviews regularly and consider whether to exercise their discretion. Therefore, whilst the Plan trustees were entitled to decide not to pay for an increase in 2012, they could not make the decision not to pay in perpetuity.

Further, in making the decision the Plan trustees were bound to consider factors beyond that of consistency. In particular, they should have considered the April 2012 advice from the Plan administrator signifying that there would not be a funding issue. The Plan trustees were also required to consult with the company under the rules and to then consider their own obligations separately.

The decision was also made in an improper manner, namely that it was done so in a telephone conference call without minutes or subsequent ratification which was contrary to the Pensions Act 1995 and the Occupational Pension Schemes (Scheme Administration) Regulations 1996.

Therefore, the Ombudsman determined that the decision was to be remitted to the trustees and the company each year; a fresh decision was required, made in the proper manner, in respect of 2012 and 2013. The Plan trustees were also made to pay Mr Wood £200 compensation for distress and inconvenience.

Comment

This case reminds us of the importance of following the correct procedures and also the requirement for trustees not to fetter their discretion. A discretion must be exercised and a previous decision cannot bind a future exercise.