In the case of Mr H (CAS-50353-Y4X5), the Pensions Ombudsman has found that an employer had given a legally binding assurance to provide a member with mirror benefits if he transferred his benefits to a new scheme following a restructuring.  A noteworthy aspect of the case is the Ombudsman's conclusion that the scheme rule providing for discretionary pension increases did not allow a zero increase.

Background

The employer issued an announcement in 1997 which invited Mr H to join the new scheme in place of the previous scheme and told him, "…your membership terms will mirror those under the [previous scheme]".  Mr H also received an announcement informing him, "The pension earned up to 31 December 1997 [the day before joining the new scheme] will receive annual increases in the same way as under the existing pension scheme.”  A letter from the employer's benefit consultants shortly before the transfer confirmed to Mr H that on transferring his membership to the new scheme, "… your accrued and future Pensionable Service benefits would mirror those that would have been available under [the previous scheme].”  

Mr H joined the new scheme for future service on 1 January 1998 and also transferred his benefits in respect of past service into the new scheme. He resigned from the employer's service in June 1998. When Mr H first started to receive his pension in 2014, his benefits were calculated on the basis that the excess over GMP increased at the rate of RPI, subject to a 5% cap.  

The benefits which transferring members were to receive under the new scheme were never formally documented in the scheme's trust deed and rules.  The scheme rules applicable to Mr H contained no provisions for increases in payment for pension in excess of GMP.  In 2015 the trustees (with collaboration from the employer) sought Counsel's advice on benefit entitlements under the scheme (though not in respect of Mr H specifically).  Counsel advised that the scheme should be administered on the basis of its trust deed and rules, and that the 1997 announcements had not been incorporated into the provisions of the scheme.  Following the Counsel's opinion, the scheme trustee informed Mr H in 2017 that he would receive no further pension increases in respect of pension in excess of GMP that had accrued before 6 April 1997.  Mr H complained.

The employer's contractual obligation

The Ombudsman found that Mr H had a contractual entitlement to pension increases that mirrored those under the previous scheme.  He found all the elements required for a contract, ie offer, acceptance, intention to create a contractual relationship, and consideration.   The 1997 announcement inviting Mr H to join the scheme had been an offer, and Mr H's election to join the new scheme was an acceptance.  There had been an intention to create contractual relations, and Mr H had provided consideration by virtue of continuing to work, paying contributions and transferring his past service benefits to the new scheme when he could have chosen to leave them in the previous scheme.  The Ombudsman noted that the amendment power under the new scheme allowed the employer to amend the scheme unilaterally, so there was nothing legally preventing the employer from giving effect to its promise under the scheme.

The Ombudsman rejected the employer's arguments that Mr H was time barred from bringing a claim.  He said that the contractual agreement to provide mirror benefits was a continuing obligation which was not actually breached until the 2017 announcement informing Mr H that he would not be entitled to increases on the part of his pre-6 April 1997 pension that exceeded his GMP.  In any event, the remedy sought by Mr H was equivalent to specific performance of the contract.  The Limitation Act 1980 on which the employer sought to rely only provided for limitation periods to apply where a claimant sought damages, not specific performance of the contract.

What was the effect of the pension increase rule in the previous scheme?

The pension increase rule in the previous scheme provided, “On each 1 April that part of the Member’s pension under rule 3 which exceeds the Member’s Guaranteed Minimum Pension shall increase at such percentage rate per annum compound as may be fixed from time to time by the Trustees at the direction of the Principal Employer and advised in writing to Members. …”

The Ombudsman concluded that the wording of the previous scheme's pension increase rule meant that there was a requirement to provide some level of increase, ie a zero increase was not permitted.  The Principal Employer was required to genuinely consider exercising the power at regular intervals, even if it decided not to change the rate of increase on a particular 1 April.  He found that at the time Mr H transferred, there had been a direction in force under the previous scheme requiring increases at least equal to the rate of increase in RPI, subject to a 5% cap.  This meant that Mr H should have been granted increases at this rate in the new scheme until such time as the Principal Employer gave a new direction varying the increase rate.

Was the scheme trustee under an obligation to provide mirror benefits to Mr H?

As the trustees had not been a party to the contract between Mr H and his employer, the Ombudsman also had to consider whether the trustees were under a legal obligation to provide mirror benefits to Mr H.  The scheme's transfer in rule provided, “the Member shall be entitled to receive out of the Scheme such further benefit as the Trustee … shall consider to be justified by the said transferred sum”.  The Ombudsman concluded that the broad wording of this rule allowed the trustees to provide that transferred in benefits would mirror those of the previous scheme, and that accordingly the trustee should have provided mirror benefits.

Our thoughts

It is perhaps not surprising that the Pensions Ombudsman found that the member was entitled to the benefits that were promised at the time of the transfer.  It was unusual to focus on the contractual obligation of the employer as a basis for the claim.  There was no limitation defence available to the employer because there was a continuing breach and because there is no limitation on specific performance.

The Pensions Ombudsman's conclusion that the wording of the discretionary pension increase rule did not allow for zero increases is also noteworthy. It contrasts with the Court of Appeal's decision in Britvic Plc v Britvic Pensions Limited (in which Addleshaw Goddard acted for the employer).  In that case the court held that a rule providing "each pension…increases in each year after it starts to be paid" could give rise to zero increases in some years.  The key difference was that the rule in the Britvic case specified that the rate of increase was the percentage increase in RPI for the previous year (subject to a cap) "or any other rate decided by the Principal Employer".  In that case the court attached weight to the fact that providing increases in line with RPI changes could give rise to zero increases if the change in RPI was negative for the relevant year. 

Employers and trustees who have a discretionary power to grant pension increases need to take care that the power is exercised in accordance with its terms.  If proposing not to grant any pension increase, they need to be sure that the power permits that.