1 March 2024
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Court rules scheme's conversion from defined benefit to money purchase was valid

To The Point
(2 min read)

In this article we look at the case of Newell Trustees Ltd v Newell Rubbermaid UK Services Ltd in which the court considered the validity of an amendment made in 1992 in which final salary benefits had been converted to money purchase benefits.  Whilst such an amendment would not be permitted today, there are other aspects of the court's ruling which are worth noting, particularly its ruling on the practice of making an amendment via an interim deed that doesn't set out the terms of the amended rules in full, but instead provides for the scheme to be modified in accordance with the terms of an attached member booklet.

In Newell Trustees Ltd v Newell Rubbermaid UK Services Ltd the High Court has ruled that an amendment made in 1992 which converted final salary benefits to money purchase benefits was not prevented by a restriction (the "Fetter") in the scheme's amendment power.  However, an underpin needed to be applied to the benefits to avoid breaching the terms of the Fetter.  The judgment is also notable for the judge's findings about the use of interim documentation and also the position where complete copies of scheme documentation cannot be found.

The conversion to money purchase and the Fetter on the amendment power

Prior to 1992 the scheme provided only final salary benefits.  In 1992 the scheme's principal employer and its trustee executed an interim amending deed which purported to create a money purchase section of the scheme and transfer certain members to it.  Members aged under 40 were automatically transferred to the money purchase section and their accrued benefits were converted into a cash amount that was credited to their money purchase accounts.  Members aged 40-44 had the option of remaining in the final salary section or transferring to the money purchase section.

The Fetter in the scheme's amendment power prevented amendments that "would prejudice or impair the benefits accrued in respect of membership up to that time".  The judge held that this did not in principle prevent the conversion of members' benefits from final salary to money purchase.  The judge placed weight on the fact that "would prejudice" implied a level of certainty and was not the same as "would probably".  The scheme's actuary gave evidence that 19% of the under 40s and 39% of those in the 40-44 age group were better off with their money purchase benefits than they would have been had they retained final salary benefits. However, the judge held that Fetter did prevent the final salary link being broken.  The judge considered that this should be addressed by the Trustee determining whether a member's cash amount transferred into the money purchase section  in 1992 was lower than the value of the member's accrued final salary benefits at that time, taking into account actual final pensionable salary.  If so, the shortfall, with accumulated investment returns it would have earned, would need to be added to the member's pension pot.

Issues relating to the interim deed

The money purchase section had been introduced by an interim deed which provided that, pending the execution of the definitive deed, the scheme's deed and rules should be read on the basis that the amendments set out in the booklet were incorporated within them.  The judge rejected the argument that this document was insufficiently clear and complete to effect such a fundamental change to members' rights.

At the time of the court proceedings the original 1992 interim deed had been lost and the copies that could be found did not include signed copies of the booklets.  Counsel for the representative beneficiaries in the case therefore sought to argue that the employer had not established on the balance of probabilities that the relevant booklets were annexed to the 1992 deed.  The judge rejected this argument, saying that it was "somewhat extraordinary" that this was being disputed over 30 years after the deed was executed.  The judge found on the balance of probabilities that the booklet had been attached.  The parties had managed to locate the instructions given to the print room of the firm of solicitors involved in preparing the signing copy of the deeds, and these showed that the print room had been instructed to bind the relevant booklets to the deeds.

Our thoughts

Since 6 April 2006, an amendment which purports to alter defined benefits to money purchase benefits has been a prohibited amendment under section 67 of the Pensions Act 1995, so amendments of the type covered by this case could not be made today.  Nevertheless the judgment is noteworthy in showing how a court may approach the issue if the validity of such an amendment were to be challenged.  The judge's findings on the interim deed point are also noteworthy, as it was common practice in the past to make scheme amendments on interim documentation which involved attaching a booklet or announcement to a deed of amendment rather than setting out the text of the amendment in full.

To the Point 

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