Court of Appeal: disputed pension rights can be compromised

The Court of Appeal has confirmed that, where entitlement to pension benefits is disputed, section 91 of the Pensions Act 1995 does not prevent members from agreeing to compromise those rights.

This relates to an earlier High Court decision which held that a series of amendments to the Gleeds final salary scheme were invalid as the deeds were incorrectly executed.

Background: why were the amendments invalid?

The principal employer of the scheme, Gleeds, was a partnership. Legislation requires that when a partnership executes a deed, each partner’s signature must be witnessed. It was discovered that 30 deeds executed over a 17 year period had been defectively executed as the partners’ signatures had not been witnessed. The deeds included amendments regarding:

• equalisation of retirement ages for men and women;
• the introduction of two new money purchase sections;
• increasing contributions for final salary members;
• a reduction in the final salary accrual rate; and
• the closure of the final salary section to future accrual.

Gleeds argued that members were prevented from denying that the deeds were validly executed. The High Court rejected this argument and held that the defective deeds had no effect. Gleeds was partially successful in arguing that certain members had contractually agreed (in return for a one-off salary increase) to switch to a money purchase section for future service. Nevertheless it was estimated that, as a result of the ineffective changes, the scheme’s deficit could increase by £45 million.

Appeal and Compromise

Gleeds appealed the High Court decision and in an attempt to settle the matter, it was suggested that those Gleeds partners who were members of the scheme and would stand to receive a significant increase in their pension entitlements if the High Court decision was upheld would compromise the disputed rights. It was proposed that each of the partners give up their rights to the higher benefits in return for a nominal payment of £100 (significantly less than the value of the benefits at stake).

The Court of Appeal was asked to rule whether such a compromise would be void under section 91 of the Pensions Act 1995.

Court of Appeal’s decision

The Court of Appeal held that section 91 was aimed at the deliberate surrender of  actual existing rights and did not apply to pension benefits where entitlement to those benefits was disputed. The Court followed its 2010 decision in relation to the IMG Pension Plan[4] that, where entitlement to benefits is subject to a genuine dispute, section 91 did not act as a bar to a compromise which involved the member giving up any claim to those benefits.

Further the Court of Appeal held that the nominal settlement sum of £100 would not invalidate such a compromise: it was not the higher benefits the members were giving up but their right to take the matter to court claiming those higher benefits.