Prudential wins case against pension scheme members

Out-Law News | 15 Apr 2011 | 12:48 pm | 1 min. read

Prudential was within its rights when it capped pension increases in its staff pension scheme, the High Court has said.

The court ruled that the company did not breach its duty of good faith by deciding in 2005 to cap annual increases under the Prudential Staff Pension Scheme at 2.5%.

The ruling will make it easier for employers to take their own interests into account when any increases to a pension scheme are discretionary.

Prudential's pension scheme rules required the company to "make regular reviews of each pension and annuity currently in payment", but that "no additional increases shall apply unless the Employers decide otherwise".

Before 2005, the company had been giving employees full increases for the rate of inflation.

In his ruling, Mr Justice Newey said that scheme members would have to show that an employer had acted irrationally or perversely before they could bring a claim against it for breaching its duty of good faith.

"[Breach] of the contractual obligation of trust and confidence which subsists between employer and employee requires conduct of some seriousness," he said. "It may be, therefore, that irrational or perverse conduct by an employer in a pensions context will not invariably give rise to a breach of the obligation of good faith, derived as it is from the obligation of trust and confidence.

"I do not consider that the criticisms of the decision advanced on the beneficiaries' behalf, whether taken individually or together, show Prudential to have acted irrationally or perversely or otherwise in breach of the obligation of good faith."

Members would not have a claim simply because their expectations had been disappointed, he said.

As Prudential was able to set pension increases under the rules without trustee consent, there was therefore no need to negotiate with the trustees before making any changes.

The scheme members also complained about the trustees' failure to award any guaranteed increases to additional voluntary contributions (AVCs). The trustees had not realised that they could have awarded those increases since this was not clear from the scheme rules.

Mr Justice Newey ruled in favour of the trustees, who need only take reasonable steps to familiarise themselves with their powers.

"There can be no absolute rule that a trustee must be aware of every possibility inherent in his powers," he said.

"This case is good news for both trustees and employers," said Simon Tyler, a pensions expert at Pinsent Masons, the law firm behind OUT-LAW.COM. "The court has recognised that we don't live in a perfect world. Employers may need to reduce benefits, and trustees may not know every detail about their scheme. Just because members may sometimes lose out as a result doesn't mean that they have a claim."