Of particular interest to DB schemes is the Pensions Ombudman’s (PO’s) determination that on the closing of the final salary section of an occupational pension scheme and the removal, in relation to future service, of a guarantee that benefits received would be at least as good as those in the original scheme was not invalid. In addition, under the guarantee, which still applied to frozen benefits in the closed final salary section, the member was not entitled to more generous benefits set out in a 1985 scheme booklet that conflicted with the original scheme's trust deed and rules.
The PO has dismissed a complaint by a member whose original scheme was merged with the Kingfisher Pension Scheme (KPS) in 1988, following which the employer guarantee was included in the KPS governing rules. In 2012, when the final salary section closed to future accrual, Mrs X became a deferred member of the section, entitling her to a less generous accrual rate under the original scheme's rules. The PO held that:
- the KPS rules permitted such a modification, which was not a regulated modification for regulatory purposes, and that neither the employer nor the KPS trustee had acted in a manner that was inconsistent with their duties in those roles;
- any argument based on contract by virtue of the guarantee or on legitimate expectation was unfounded;
- the 1985 scheme booklet, which contained a disclaimer, did not confer any express legal rights over those in the trust deed and rules; and
- no employment contract established a contractual right to the higher level of benefit. Arguments based on estoppel, change of position or a reasonable and continued expectation also failed.
Mrs X was employed by B&Q plc (a subsidiary of Kingfisher plc) and from 1985 was a member of the final salary B&Q (Retail) Limited Retirement Benefits Scheme (the B&Q Scheme). Under the scheme rules, active members with 20 years or more pensionable service were entitled to a full pension of two-thirds of final salary at normal pension age. Benefits for deferred members were calculated as for incapacity, with a maximum of one-sixtieth of final salary for each year of service (up to a maximum of forty years). The 1985 scheme booklet stated that a member's pension would be in proportion to his final salary at the rate of forty-sixtieths for 20 or more years’ service. It did not distinguish the position of deferred members, unlike the 1986 booklet which followed it. It also stated that “[i]n the event of any discrepancy between [the] booklet and the Trust Deed and Rules, the latter will prevail”.
In February 1988, the B&Q Scheme merged with the existing KPS, another final salary scheme. Transferring B&Q scheme members were informed that under a B&Q guarantee (the Guarantee) their benefits on retirement at normal retirement age would “be at least as good as those which would then have been paid under the B&Q Scheme”.
Following consultation with members, Kingfisher closed the final salary section of the KPS to future accrual by deed of amendment under “Project Kendall”, with effect from 30 June 2012 (the Kendall Date). Affected members, including Mrs X, joined the existing KPS money purchase section on improved terms for future service without the benefit of the Guarantee. At the same time they became deferred members of the final salary section, where the Guarantee continued to apply. By this time, Mrs X had more than 20 years’ service but was not entitled to a full pension of two-thirds of her final salary pension at the normal retirement age since, as a result of the 2012 deed of amendment, she was treated as a deferred member.
Mrs X complained to the PO on two issues:
- The amendment issue. The closure of the KPS final salary section to future accrual, rendering her a deferred member of that section, and the removal of the Guarantee for post-Kendall Date service were invalid. She claimed that the consultation was flawed and ignored members’ expectations while failing to explain the consequences of the changes; and
- The calculation issue. The Guarantee had been incorrectly interpreted in relation to her pre-Kendall Date service and the 1985 booklet should in fact apply to her. In particular, she submitted that it was an express contractual term of her employment contract as a new starter that the 1985 booklet method would apply. She claimed that she had a reasonable and continued expectation that her entitlement was as advised in 1985 and had received no communications about the 1986 booklet. She had been told by a previous head of group pensions that her annual statements did not reflect her protected position under the Guarantee, as the employer wanted to keep this advantage low key.
Among other things, the employer and the trustee (the respondents) submitted that annual benefits statements received by Mrs X showed correct deferred benefits that were significantly less that the two-thirds pension to which she claimed she was entitled.
Mrs X's case was selected as the lead complaint from three complaints on these issues made to the PO to date. Additionally, there are around 100 other potentially affected members.
The PO dismissed the complaint.
On the amendment issue, the PO said that if a modification of a scheme's deed and rules was not a statutory regulated modification and there was power to make the modification in the scheme rules, and making the modification would be a proper use of that power, then “the trustees or the employer, or both, whoever can validly exercise that power, may make the modification”.
The amendments were not a regulated modification under section 67 (of the Pensions Act 1995) since by freezing Mrs X's existing benefits they did not replace them with money purchase benefits; nor were her subsisting rights adversely affected by becoming a deferred member. The PO noted that in Stena v MNRPF , the Court of Appeal stated that “the starting point in relation to powers to amend pension schemes is that they should be given a broad interpretation” and emphasised the importance of not fettering amendment powers. He concluded that in Mrs X's case it was clearly within the scope of the amendment power to make the alterations.
In exercising their powers, employers and trustees must also act in a manner consistent with their duties in those roles. An employer must not, without reasonable and proper cause, act in a way “calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”. There had been a 60-day consultation, as required under the relevant regulations, and although members' expectations were relevant, the respondents were entitled to take their own interests and the future operation of the KPS into account. Noting that TPR had investigated the consultation process and concluded there was no case to answer, the PO held that the respondents' decision was neither irrational nor perverse.
The PO also concluded that Mrs X had no enforceable right to higher benefits in relation to post-Kendall Date service by virtue of the Guarantee, partly because Mrs X did not need to consent to the transfer. Similarly, although Mrs X had a legitimate expectation that the Guarantee would not be unpredictably removed, this did not extend to continued benefit accrual after the KPS was restructured. There was no suggestion that the Guarantee could never be amended and it was taken into account when calculating Mrs X's deferred benefits for pre-Kendall Date service.
On the calculation issue, Mrs X argued that under the Guarantee the calculation method in the 1985 booklet should apply although it conflicted with the B&Q Scheme rules as it did not distinguish deferred members. However, it is a well-established legal principle that explanatory material provided to scheme members does not generally override the trust deed and rules. The disclaimer in the 1985 booklet made this clear and also stated that the company “reserve[d] the right to terminate or amend the scheme at any time”. Therefore, the 1985 booklet did not confer any express legal rights over those in the trust deed and rules. Nor did any employment contract provided establish a contractual right to the higher level of benefit.
In addition, the PO noted the precedent in existing case law that there could be no reliance on statements inconsistent with the trust deed in order to establish an estoppel.
On the question of any reasonable and continued expectation regarding Mrs X's entitlement to receive two-thirds of her final salary pension (following the IBM case), the PO was not satisfied that the head of pensions would have told her to ignore her annual statements. Nor was he satisfied that she could have reasonably believed this was the case, especially given her various roles within the company. More generally, it was not reasonable of Mrs X to rely on the 1985 booklet in isolation, given the other conflicting information she had received.
This is a very interesting determination as “no-worse-off guarantees” have often been used in the past in circumstances where schemes are merged. However, as the risks in offering such guarantees have become more apparent, their popularity has dwindled. The main issue is usually whether there is a provision to amend or terminate the guarantee at a future date, as there was in this case. The answer depends on the wording of the guarantee, whether or not it is incorporated into the scheme rules, and other surrounding circumstances. In this instance, the PO seems to have concluded the guarantee did not confer an enforceable right, and that even if it did, that right could in any event be amended or terminated. It is unclear whether there will be an appeal, but it is conceivable that a Court could have a different view.