Pensions Insight: 12 to 19 February 2024

Case law round-up

Newell Trustees case: court consideration of amendment power provisos – conversion to money purchase valid but final salary link protected

The High Court has 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 in relation to a January 1992 conversion of certain members’ final salary benefits to money purchase. 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 judge, Mr Justice Michael Green, decided that the proviso which prevented amendments that “would prejudice or impair the benefits accrued in respect of membership up to that time” did not prevent the conversion but did protect the link to final pensionable salary which meant that an underpin had to be applied to the benefits of those final salary members that had transferred to the money purchase section. This underpin was not to be provided by reference to the final salary formula and future final pensionable salary but by providing the actuarial value of the accrued final salary benefits as at the date of the amendment, taking into account current data on salary increases, retirement dates and service. You can read our full case summary here.

Railways Pension Scheme appeal dismissed – meaning of determined by actuary and make good a shortfall

In a judgment handed down on 9 February 2024, the Court of Appeal has dismissed the two employers’ appeal of the High Court’s decision on the meaning of the words “as determined by the actuary” in respect of contributions (and other related matters) and “make good the shortfall” in the Railways Pension Scheme’s shortfall rule. 

(The shortfall rule provided that, if an actuarial valuation revealed a shortfall and the employer and trustee could not agree arrangements to make good the shortfall, the shortfall should be made good by the increase of contributions subject to a cap with the actuary determining both the rate and period of increase.)

The Court of Appeal’s decision means that:

• “As determined by the actuary” wording involves the “exercise of professional skill and judgment” rather than the scheme actuary carrying out a ‘mathematical calculation’, in this case, to increase contributions. 
  When doing so, the actuary should, subject to professional guidance, take into account scheme knowledge and apply relevant actuarial assumptions and methodology – relevant factors to be taken into account by the actuary in the case were held by the High Court to include affordability, value for money and collectability. 
  Also of note was the Court of Appeal’s comments regarding a scheme actuary’s role. This will differ from scheme to scheme by reference to the scheme’s governing provisions. In this case, the scheme actuary did not act in a fiduciary capacity being appointed under the rules by contract. Therefore, rather than referring to the actuary exercising discretion (which the High Court had referenced) when carrying out actuarial functions including determining a matter, it was preferable to refer to the role in a contractual manner and to the actuary exercising ‘professional skill and judgment’.
• “Make good the shortfall” in the relevant scheme rule meant that the shortfall under the relevant provision did not have to be removed entirely – the rule was not an ‘exhaustive and comprehensive regime’ for how the shortfall should be removed.

Although the judgment is case-specific, it has general relevance to many schemes whose rules often include the reference ‘determined by the actuary’, for example, in respect of augmentations, contributions commutation and early and late retirement factors. See our insight for a full summary of the High Court case.