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If a purported amendment breaches a scheme's amendment power, but some aspects of the amendment could have been validly made, will the whole amendment be invalid or only those elements that breached the amendment power? This was the issue at the heart of the case of Avon Cosmetics Limited v Dalriada Trustees Limited. In this article we take a look at the court's decision, which will be of interest to pension scheme trustees and sponsoring employers, particularly those dealing with a situation where the validity of a scheme amendment has been called into question.
In the case of Avon Cosmetics Limited v Dalriada Trustees Limited, the High Court had to consider whether an amendment that was made in breach of a restriction in the scheme's amendment power was completely invalid or only invalid in relation to those members who had been adversely affected.
Background
The scheme's amendment power contained a restriction (referred to as the "Fetter") providing that it could not be exercised in a way which prejudicially affected "benefits accrued or secured up to the date on which the amendment takes effect…"
At the time of the relevant amendment, members were accruing final salary benefits. Under the amendment, members were moved to career average (CARE) accrual for future service. As regards their accrued rights, the amendment severed the final salary link so that the value of accrued rights would no longer increase in line with increases to pensionable salary. For the purpose of valuing their rights that had accrued on a final salary basis, the member's final salary was treated as frozen on the date of the amendment. Benefits accrued on a final salary basis would then be revalued in line with statutory revaluation requirements.
It subsequently came to the parties' attention that removing the final salary link in relation to accrued rights had breached the amendment power Fetter for some members. However, this was not the case for everyone. Some members' accrued rights would be worth more if the amendment was valid. The High Court was therefore asked to decide whether the amendment should be treated as completely invalid or only invalid in respect of those members whose benefits had been adversely affected. It was not yet possible to know exactly which members would be better or worse off if the amendment applied, as this could not be calculated with accuracy until a member had left the employer's service.
The court's decision
The judge held that the amendment should still be treated as valid in relation to those members whose accrued rights would be worth more as a result of the amendment, but invalid in respect of those members whose accrued rights had been adversely affected in breach of the Fetter. The judge considered that the correct test was to consider the "substantial purpose" of the amendments as a whole. He concluded that this was to remove the final salary link by closing the final salary section of the scheme to future accruals and moving those with accrued rights to a benefit structure which revalued those rights on the basis of statutory revaluation.
The judge said that in a pensions context the court will naturally incline to uphold the validity of an amendment as far as it can. This could only happen if the valid and invalid parts of the exercise of the amendment power could be "clearly delineated". This was the case here. The concept of those whose accrued rights would be worth more as a result of the amendment and those whose accrued rights would be worth less were sufficiently different and identifiable. It did not matter that for some members it would not be known which category they fell into until a future date. The judge also concluded that the relevant legal test was not to ask what the parties would have done had the effect of the Fetter been brought to their attention at the time. It would be impractical to try to ascertain this with hindsight long after the amendment had been made.
