Benefit changes and privileged revaluation: active or deferred?

Jason Shaw

Benefit change projects are complex, and the risk of complaints or challenges has to be managed at all stages. The Pensions Ombudsman has recently published an interesting decision about an unusual practice for the revaluation of accrued final salary benefits after a benefit change project. In this case, the scheme had been amended in 2017 so that future benefits accrued on a CARE basis and accrued final salary benefits were to be revalued in the following way:

  1. members in pensionable service: increased by CPI + 0.5% (capped at 2.5%); and
  2. members who had left pensionable service: for pensionable service up to 5 April 2009, 5% or, if less, RPI; for pensionable service from 6 April 2009, 2.5% or, if less, RPI.

It is common to offer some form of privileged revaluation on closure to accrual projects, but this ordinarily favours those who are continuing in service with the employer. Here, the member (who was still in pensionable service – this type of member is sometimes called an ‘active deferred’) complained because his final salary benefits were being revalued less favourably than the benefits of members who had left service.

He argued that his final salary benefits had effectively been deferred as part of the benefit changes, and should therefore be treated as deferred benefits under the rules. He also claimed that the changes were in breach of the section 67 regime (because they were a detrimental modification and he had not consented to the change). The member did not dispute that the trustee had the power under the rules to choose a different index to RPI, but he argued that the trustee did not have the power to substitute a different cap, and objected to different indices applying to different classes of member.

Remind me, what is the section 67 regime?

Broadly, the section 67 regime is designed to provide protection for accrued rights from detrimental changes. This means that some changes to ‘subsisting rights’ need to comply with statutory requirements, or risk being voided by the Regulator. For members continuing in pensionable service, their subsisting rights are determined by assuming the member had, immediately before the relevant time, opted to end his or her pensionable service.

What did the Ombudsman decide?

The Ombudsman did not uphold the complaint – a member’s subsisting rights at the time of the 2017 changes did not include revaluation of a deferred pension on any particular basis. In any event, the rate of revaluation during deferment had not been altered by the 2017 amendments, and the amended rules provided the same benefits for deferred members in respect of their final salary benefits as the previous rules.

Comment

The facts of the case are somewhat unusual, in that it was an ongoing employee who complained that he was being treated unfavourably compared to deferred members. There were two key barriers to his complaint:

  1. Several court decisions have ruled, in the context of a switch from RPI to CPI, that a member has no subsisting right to a particular rate of revaluation. The Ombudsman’s conclusion is consistent with the approach in those cases (and the member did not dispute that the trustee had the power to change the index).
  2. Comparison with deferred members: section 67 assesses subsisting rights as though the member had deferred benefits, which made it impossible for the member to show that there was a detrimental change, because the treatment of deferred benefits had not been changed. What had changed was the new treatment for ‘active deferreds’. The member could benefit from that treatment, if he wished, by ceasing pensionable service – but it is not clear from the determination whether that would mean he would be able to do that and also rejoin and accrue CARE benefits for future service.

The case is a reminder about the importance of good communications: it’s easy to see why the member drew the comparison that he did, although as a matter of law it was not correct. We sometimes see underpin arrangements offered in this type of situation, to forestall concerns such as this from ongoing employees; otherwise, perhaps a greater focus on the benefits offered by ongoing membership of a salary-related scheme might have helped to relieve the member’s concerns.

Jason Shaw is a Counsel at Allen & Overy LLP.

 

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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