In the case of Wedgwood Pension Plan Trustees v Salt, the court had to rule on the meaning of an amendment power which prohibited any amendment which "shall prejudice or adversely affect any pension or annuity then payable or the rights of any Member"
This raised the issue of whether the amendment power restriction applied to rights which a member might earn in future or only rights already accrued to the member in respect of past service. The judge held that the reference to "the rights of any Member" only covered rights accrued in respect of past service. An important factor in the judge's decision was the principle that pension scheme rules should be construed so as to give reasonable and practical effect to the scheme, bearing in mind the need to operate it against a constantly changing commercial background.
On the basis that the amendment power protected the members' right to have their accrued rights increased with future salary increases ("final salary link"), the judge held that an amendment which introduced a new rule broadening the circumstances in which employers could cease to participate in the scheme breached the restriction in the amendment power. This was because the amendment had broadened the circumstances in which the final salary link could be broken. The judge therefore needed to decide whether the new rule was invalid altogether or partially valid, ie valid to the extent that it did not breach the amendment power restriction. The judge's decision on this point was crucial, as the new cessation of participation rule had been used to close the scheme to future accrual in 2006. If the new rule had not been validly introduced, that raised the question whether the 2006 closure had been legally valid.
The judge held that in order for the amendment to be partially valid, two tests had to be satisfied:
- it must be possible to distinguish clearly the boundary between the valid and invalid elements of the amendment: and
- it must be possible to show that the trustees would still have exercised their power to make the more limited amendment had they understood the effect of the amendment power limitation.
Applying these tests to the facts of the case, the judge held that the tests were satisfied, so that the introduction of the new rule was valid to the extent that it did not go further than the old rule allowing employers to cease to participate. As the old rule had allowed employers to cease to participate and break the final salary link where continued participation was "impracticable or inexpedient", the new rule should be read as allowing employers to cease to participate in the scheme in those circumstances. The judge held that at the time when the employers had ceased to participate, the requirements of the old rule were met and that the closure was therefore valid.
This case illustrates the importance of considering the terms of a scheme's amendment power before making an amendment. In this case, the closure of the scheme in 2006 was held to be valid, but the uncertainty which arose regarding the validity of the amendment meant that the position could only be established with certainty by going to court.