Newell Trustees case: Consideration of amendment power proviso

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In the Newell Trustees case, the High Court ruled on several longstanding issues of interest to the pensions industry including the effect of a proviso to the amendment power of the Parker Pension Plan (the Plan) in relation to a January 1992 conversion of certain members’ final salary (FS) benefits to money purchase (MP).

Other issues considered in the case include the validity of interim deeds, the effect of extrinsic contracts and age discrimination on the grounds that there was differential treatment of members based on their age. 

The case is also noteworthy as it considers a series of cases relating to amendment power restrictions starting with Courage Group’s Pension Schemes. It also discusses other significant pensions cases on deed validity and interpretation, construction and on age discrimination.

The effect of amendment power provisos and their limitations can have far reaching effects for FS pension schemes because, depending on their precise terms, they can prevent a scheme from being able to introduce a whole host of amendments which are designed to limit liability, for example, stopping future accrual (e.g. see here) or having to maintain a link to future final pensionable salary when doing so (as in Courage).

The assets and liabilities of the Plan had been transferred to another scheme, the Newell Rubbermaid UK Pension Plan, in 2007 – however, when considering buyout, issues were raised regarding the 1992 conversion changes and the trustee of the new scheme asked the court to assist. 

The conversion amendments

The conversion changes were made by an interim amending deed (and attached booklets) in 1992 pending the execution of a definitive amending deed that was completed in 1993. 

The treatment of members under the conversion depended on age – the FS benefits of those aged under 40 were automatically converted, FS members aged 40-44 could choose whether to switch and members aged 45 and over remained in the FS section. 

The amendment power proviso – did not prevent the conversion but did protect the final pensionable salary link

The proviso prevented amendments that “would prejudice or impair the benefits accrued in respect of membership up to that time”. The court was asked to decide whether, and to what extent, the conversion was valid considering the terms of the proviso. 

The judge held that the proviso did not prevent the scheme conversion from FS to MP – he focused on the word ‘would’ in the proviso and said that whether an amendment ‘would’ do something had to be differentiated between ‘would probably’ – there had to be ‘some certainty’ at the time of the amendment as to whether the change would be ‘valid or not’.

When applied to the proviso and the conversion this meant that, although it was possible that the cash sum that had been provided to FS members who transferred to the MP section would not provide equivalent or higher benefits to the FS ones, this did not mean that, at the time of the conversion, it ‘would’ not do so.

Although the conversion itself was found to be valid, the judge concluded that, following the cases of Courage, IMG and Gleeds, provisos such as the one in the case that protect accrued benefits do not allow the link to final pensionable salary to be severed.

How should the link to final salary be protected? – through a ‘retrospective’ underpin

The judge then had to consider how the link to final salary for those members who had transferred to the MP section should be protected. He decided that providing protection did not mean that the link to the ‘DB formula’ and future final salary had to be preserved (as was held to be the case in IMG) because this would mean there was no difference between concluding that the conversion was valid, and a future final salary underpin – it would effectively mean MP members being ‘reinstated’ into the FS section. 

Therefore, the judge decided that the underpin preserving the final salary link was something that had to be implied into the 1992 conversion amendments and “…that could have applied at the time of the amendments”. This meant that it was the actuarial value of the accrued FS benefits at the date of the amendment that had to be preserved. A retrospective approach was needed with a comparison carried out between: 

  • the cash equivalent value of the accrued FS benefits as at the date of the conversion (taking into account actual data for salary increases, retirement date and service but not waiting for members whose benefits had not yet come into payment to take them); and
  • what was actually paid into the MP pot at the time. 

If the transfer sum granted was less than this FS actuarial value, the shortfall sum would have to be provided, with investment returns and then interest added.

Effect of deeds that made the amendments – held to be valid

The court also considered whether the 1992 and 1993 deeds were valid. This part of the decision was interesting because it considered the effect of making changes in an interim manner. The judge found that both deeds were valid. The 1992 deed operated as an executory trust with beneficial interest to be set out in a later document, the 1993 deed. 

Although the 1993 deed had retrospective effect, the judge concluded that this was not an issue because it was possible for “the parties to agree that their relationship should be treated as departing from historical reality in certain specified respects”.  

Extrinsic contracts – the documents signed and returned by members as part of the conversion process in 1992 were held to be a valid contract subject to any defence to enforcement

The judge also considered whether the documents signed and returned by members as part of the 1992 conversion process formed valid extrinsic contracts. He found that all necessary elements for a contract were present – determining whether this was the case involved an objective assessment. Furthermore, it was not necessary for the members to have provided informed consent (because no breach of trust was involved). 

No age discrimination

One final issue considered in the case was whether those members who had been automatically transferred to the MP section had been unlawfully discriminated against on the grounds of age. 

The judge decided that they had not because the changes had been made before age discrimination was made unlawful in 2006. In any event, the trustee had not breached the rules of the scheme because it did not make any decision as regards member categorisation and the rules which it applied simply stated how members had been and should be placed into the different sections. Even if there had been unlawful age discrimination the judge found that the treatment would have been justified – there was a proportionate and legitimate aim of acting fairly between generations and lessening the impact for older members – the fact that the employer in introducing the changes wished to reduce costs did not affect this conclusion.

Concluding remarks

This case covers an expansive list of issues – the judge’s comments on the Courage line of cases regarding amendment power provisos that protect the link to final salary and how the final salary underpin should be structured will be of particular interest and are likely to prompt further consideration and discussion. 

Of specific note in this regard is: 

  1. the judge’s comments that, although he had to follow Courage at first instance, certain points may not have been fully argued in the Courage case – if any criticism of Courage is to be explored further it would need to be at Court of Appeal level; 
  2. the likely wider application of the decision regarding provisos that prevent amendments that ‘would’ prejudice or impair accrued benefits requiring some certainty as the amendment’s effect and being distinguishable from provisos which prevent changes that ‘would or might’ prejudice or impair accrued benefits; and 
  3. the question of whether the ‘actuarial value’ underpin approach to protecting final salary will be confined to the facts (the conversion from FS to MP being provided by way of a cash transfer sum) or have broader significance. 

One final point of interest in the case was the judge’s remarks that it was “inevitable that after 30 years the evidence may simply not be available to establish that every ‘i’ was dotted and ‘t’ crossed.” The judge emphasised that more attention should have been paid to the “realistic issues” in the case, such as the proviso. The representative beneficiary’s insistence on “pursuing all possible objections to its validity has been somewhat opportunistic”.

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