Summary

Any organisation with a defined benefit (DB) pension scheme will be aware that legacy issues can come out of the woodwork.

The High Court has ruled in another case about the rules of a DB scheme. The Judge heard arguments over whether a rule gave members a right to an underpin. The Judge concluded there was no right to the additional benefits, valued at £20 million.

This ruling might give employers grounds to hope for a new and more pragmatic approach from the Courts. Maybe that will make employers more willing to take a hard look at their scheme rules to check they know what it is they have to fund.

Court’s decision

The issue was over revaluation in deferment – in other words, the inflation protection given to deferred pensions between leaving service and retiring.

In the De La Rue Scheme the rule about revaluation referred to the rule about increasing pensions in payment; but the pension increase rule it referred to said nothing about deferred pensions. Was the cross-reference just a mistake? Or was it a poorly expressed “better of both” guarantee? Or something in between?

The Court weighed up the arguments. The Judge described the relevant rules as “obscure and poorly expressed”. He could have interpreted them either way. In the end he was swayed by the fact that there was no real reason for the rule to be interpreted in a way which complicated the benefit structure. He ruled there to be no underpin. In effect, he gave the employer the benefit of the doubt.

Commentary

Pension schemes are complicated and so is pensions legislation. It is quite common for DB schemes to have rules that may be unclear, particularly where there is more than one set of rules applying, written in different words. A new trust deed and rules was often a job done on a tight budget. Typically, instructions were given by the pensions manager with the goal of simply tweaking the rules to reflect known changes to the benefit structure. It was seen as a tidying up job.

With hindsight, documenting the effect of overriding legislation on the previous benefit structure was harder than it seemed. There may have been an advice gap too. Pension scheme trustees aren’t required to take legal advice and often didn’t, relying on the administrators or consultants. If they did, there may have been a disconnect between what the lawyers were drafting and what the administrators were doing in practice. It is unsurprising, therefore, that issues like this are now coming to light as schemes carry out data cleansing or prepare for buyout. Pensions dashboards are coming and will increase the pressure for internal due diligence.

From an employer’s point of view, the De La Rue case is encouragingly pragmatic. The Judge upheld the way the scheme had been administered. But the bigger picture is that it’s dangerous to assume the true pension liabilities are what they seem to be. Discrepancies are common, both overpayments and underpayments. Some DB schemes find they are closer to full funding than they thought. Even if it goes the wrong way, it’s arguably better to discover the real deficit when there is time for long-term planning. The worst case for trustees and employers is finding an unexpected deficit at a point when it derails corporate activity or pension scheme buyout.

Organisations with DB schemes can gain more control by reviewing the benefit structure being administered. The moral of the tale: Know Your Scheme!

Read Anna and Riccardo’s article in People Management. Different versions of this article have also been published in LexisNexis and The Legal Diary.