Avon Cosmetics v Dalriada Trustees: Court approves compromise

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In a follow-on High Court hearing held on 19 February 2024, HHJ Judge Davis-White KC has approved a compromise between the parties in the Avon Cosmetics Limited case regarding the effect of an amendment power proviso that prevented alterations being made that would ‘prejudicially’ affect accrued benefits.

The judgment provides an interesting account of the compromise process and commentary on amendment power proviso cases that protect a link to final salary including Re Courage and the recently decided Newell Rubbermaid where the judge ruled that an amendment power proviso protected the accrued final salary link through the imposition of an actuarial underpin calculated as at the date of the amendment when certain members’ benefits were converted from final salary (FS) to money purchase.

The Avon case concerns a September 2006 rule amendment to the Avon Cosmetics Pension Plan to change the accrual basis (and thereby break the link to future FS) from FS to CARE (career average revalued earnings).

In the first Avon judgment, the High Court concluded that the valid part of the amendment (affecting those members who would be better off because of the CARE amendment, Revaluation Winners) could be severed from the invalid part and thereby saved. The judgment means that Revaluation Winners will receive benefits calculated on a CARE basis.

In the first hearing, the court was asked to assume that part of the CARE amendment was invalid on the basis that the proviso prevented the link to final salary from being broken – the invalid part being the CARE amendment so far as it relates to members who would be worse off because of the change, referred to as FS Winners (FS Winners are those members who would be better off with benefits based on final salary rather than CARE).

The court was not asked to decide whether the amendment was invalid as regards FS Winners because the parties had agreed a proposed compromise for such members that had been agreed, taking into account each relevant party’s assessment as to whether the CARE amendment was valid or not. This settlement had to be approved by the court before it could be implemented.

The court-approved compromise will provide most FS Winners (with slightly different treatment for other FS Winner sub-categories) with benefits based on 70% being on a revaluation basis and 30% being provided through a greater of CARE and final salary underpin.

Part of the employer’s argument for the settlement was rather interesting – it was that the Re Courage line of cases could be distinguished from this case and have a more than real prospect of being overturned on appeal. This group of cases decided that amendment power provisos which prevent changes being made that prejudicially affect accrued benefits protect the link to future final salary. The parties agreed on the prospects of this being 30%, hence the compromise terms including a 30% underpin amount.

Another interesting point from the case relates to the timing of the calculation of an underpin that protects the link to future final salary. In Newell, the calculation was held to apply retrospectively as at the date of the amendment (so not waiting until a member’s benefits that have not yet come into payment to do so). However, in this case (subject to a few exceptions), the underpin has been approved as applying when benefits crystallise (so waiting until the position as regards final salary is known).

The judge held that Newell was distinguishable on its facts because in Newell the amendment related to a conversion of FS benefits to money purchase, whilst in Avon, the link to final salary was severed “in favour of an ongoing CARE Revaluation Basis.” This provides support in other similar cases to an underpin protecting final salary being calculated based on the DB formula and crystallised benefits rather than Newell having wider significance in cases where the facts and underlying amendment are sufficiently different and requiring a retrospective actuarial value approach to calculating the underpin.

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