1st August 2017 Is your scheme closed in the way you think?

Significantly fewer than 1m lucky individuals were active members of private sector occupational defined benefit schemes in 2015, compared with almost 5m in 2000, according to figures from the Office for National Statistics.

There has been a steady stream of closures to accrual over that period, in an effort to reduce cost and volatility.

Once a scheme is closed, benefits for members who were active at the closure date are typically based on their service to and salary at that date, and then increased in line with inflation.

Since 1986 and a case concerning Courage Group, however, schemes whose amendment power contains a restriction preventing a reduction in benefits that have been “secured” in the scheme have had to retain a salary link for former active members’ benefits.

From 1997, section 67 of the Pensions Act 1995 prevented amendments that would affect “accrued rights”, without any reference to prospective benefits.

Therefore, schemes whose amendment powers used the word “accrued” were generally thought to be able to distinguish themselves from Courage and break the salary link.

Can you drop the salary link?

Now, after the Gleeds decision in 2014 and the Sterling case of 2015, this distinction may have fallen away.

Schemes that thought they had closed without a salary link, and have been administered on that basis for many years, may find they should have maintained that link and will need to revisit historic benefits.

In many cases this may lead to a potentially significant increase in scheme liabilities.

The judge in Gleeds decided there was no sensible rationale as to why “accrued” and “secured” should have different meanings, and it is hard to argue with that.

The result, however, is that schemes with amendment power restrictions using either “accrued” or “secured” have to continue to provide a salary link on closure. It is difficult to accept that this is the right outcome.

What should be done?

The Courage case was decided in a very different pensions environment, against a backdrop of pension surpluses, limited employer obligations and far fewer member protections.

In today’s world, with so few remaining DB schemes and a strict regulatory environment, it is difficult to make a case that either word should include a prospective entitlement to benefits based on future salary increases.

The Sterling case may result in a Court of Appeal decision dealing with this point, so we may see the end of this interpretation. In the meantime, trustees and employers should check that their scheme really is closed in the way they think it is.

Vikki Massarano, Partner

This article was published in Pensions Expert and Actuarial Post

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.