DIY guide to Pension Scheme Amendments

Brian Spence

or Subscribe to Feed

Back in the old days, by which I mean pre the 1995 Pension Act, pensions was a man’s world. That’s possibly a bit sexist but bear with me. Consulting colossi bestrode the trustee meetings of the day dispensing advice with a devil may care attitude and an unfeasible moustache.

”Your pension scheme needs amending?” they would roar, unsure whether it was a question or a statement, but undeterred all the same. “I’ll sort that out for you myself, no need for those awfully expensive lawyer chaps.”

And did they need to look at the instructions (or trust deed and rules as we might call them now)? Of course not! It couldn’t be that difficult could it? Instructions? I mean, if he could get the latest new fangled Betamax video cassette recorder to work by plugging it in and poking at it’s buttons randomly for half an hour how difficult could amending a pension scheme be? Instructions? He’d get “the wife” to work out how to set the clock later……..

Fast forward 25 years.

Hot on the heals of the Dubery case we have “ Sovereign Trustees Limited v Glover and others.” The background to the ruling was that Oldham Signs Ltd Pension and Life Assurance Scheme had a final salary pension scheme. A decision was taken in 1998 that all future pension benefits should accrue on a money purchase basis. In March 2000 the company went into receivership and the pension scheme began winding-up.

In 2001 Sovereign Trustees Limited was appointed by the administrative receiver to conduct the wind-up as independent trustee of the scheme. The major issue delaying the winding-up was whether the money purchase section was validly created.

The trustees produced a minute of a meeting dated 10 February 1998 evidencing that they had resolved to close the final salary section from 6 April 1998 and that active members would accrue money purchase benefits from that date. At about the same time, the trustees had also written to all active members stating that benefits would be provided on a money purchase basis from 1 April 1998, although what was not clear was whether the announcement was issued before or after the February meeting. The trustees had also sent a summary of the new benefits and a new explanatory booklet to members.

The judge decided however that the resolution dated 10 February 1998 did not constitute an effective amendment of the scheme.

This highlights 2 fundamental issues for trustees and employers:-

•  they should take and follow professional advice if they want to make amendments of this type.

•  they need to comply with the amendment power set out in the scheme rules.

In this case the former trustees, employer and members had all believed that the benefits would be provided on a money purchase basis from April 1998, rather than a final salary basis. You would have thought to quote an old adage, that if it walked like a duck, looked like a duck and made loud quacking noises then it would be reasonable to conclude that it was, indeed, a duck. The courts decision was that it was in fact a, well, it doesn’t really matter what the court thought it was, but it definitely wasn’t a duck.

The upshot is that the scheme has been administered on the wrong basis since 1998 and the time which will need to be expended and the costs involved in putting this right will be significant. In this specific case it could mean that some members may receive very little benefit. Had the scheme still been ongoing, the employer would be facing a very large bill.

This should not be considered that this is an isolated incident and therefore unlikely to recur. It was common practice at the end of the 1990s to leave formal written amendments to a future date and rely on resolutions and announcements. Unless the rules allowed amendments to be made in this way, this could now prove to have been a very costly mistake.

Many schemes will therefore have liabilities accrued in their schemes which they may well be totally unaware of and should be considering reviewing how important decisions have been taken and documented in the past to properly identify risk and to ensure the correct processes are in place going forward.

What recent case law has confirmed is when it comes to the effective running of a pension scheme you really need to apply the Ronseal approach and ‘do exactly what it says in the Trust!’ Oh, and get a professional in to help.

ENDS

Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee

Comments