The Pensions Ombudsman has held that an employer’s decision not to request the scheme trustee to grant a pension increase under the scheme rules did not breach the employer’s “duty of trust and confidence” notwithstanding that the scheme rules required the employer to have regard to an aim of providing increases at a higher level (Mr Y CAS-99766-L5X6).

The scheme rules provided for pension increases in accordance with the percentage increase in the RPI, capped at 5%.  They went on to provide, ‘If in a year [RPI] is greater than [5%] the Trustee may, at the request of the Principal Company, calculate the Rate for that year as if the [maximum increase] was 10% (instead of 5%).  In relation to this provision both the Principal Company and the Trustee will have regard to the aim (stated in the “Simply Pensions” Newsletter of August 1998) of “providing annual increases in line with the RPI up to a maximum of 10% a year, subject to the finances of the Scheme”.’  The aim as stated in the Newsletter was referred to as the “Stated Aim”.

In both 2022 and 2023 the relevant RPI increase was above 5%.  The Trustee was in principle prepared to award increases in accordance with the Stated Aim, but the Principal Company decided not to request this.  The pension increase rate applied in both those years was therefore 5%.

Mr S complained that the Principal Company’s failure to request an increase in accordance with the Stated Aim was a breach of the employer’s duty not to behave in a manner likely to destroy or seriously damage the relationship of trust and confidence between employer and employee.

The Principal Company said that the reasons for its decision not to request an increase in accordance with the Stated Aim included:

• the finances of the scheme (which had not yet reached the target of being fully funded on a buy-out basis);
• the aim of strengthening the long-term financial security of the scheme for all members (recognising that approximately 40% of the membership would not benefit from discretionary pension increases); and
• enhancing the resilience of the scheme against the macro-economic environment.

The Ombudsman considered that the correct test was whether the discretion was exercised for a proper purpose in a rational manner, and was one that a reasonable decision-maker could have made. He could see no evidence that the Principal Company’s decision was irrational or perverse or one that no reasonable decision maker could have reached.  He concluded that the Principal Company had not breached its duty of trust and confidence.

Our thoughts

This case illustrates that the bar for overturning the exercise of a discretion under a scheme’s rules is high, and that an agreement to have regard to an aim of providing a specified level of pension increases is not the same thing as an absolute legal commitment to provide such increases.