25 June 2010 - Post by:Stephen Richards
Mervyn posted on the clash of public policies exposed by the IMG case back in February. Last week the appeal was heard in the Court of Appeal. Since the High Court’s decision last year, I have had a number of queries from clients who are concerned about the seemingly broad interpretation given in the High Court decision to section 91 of the Pensions Act 1995, which prevents members from giving up their pension entitlements.
Does section 91 stop a member from surrendering his pension entitlement in all circumstances? There is an exemption to section 91 which states that section 91 will not apply where the member acquires an entitlement to “further benefits” under the scheme. This exemption is often used when employers enter into benefit exchanges with members. For example, where a member “swaps” his right to non-statutory pension increases in exchange for something else under the scheme, such as an immediate pension increase or even for a nominal increase in pension (e.g. £1 a year) and an immediate cash lump sum outside of the scheme.
Since IMG, doubt has been cast over whether this sort of exchange will count as “further benefits”. The High Court held that section 91 has broad application in order to protect members from their own improvidence, as well as the public policy reason of preventing members from surrendering their pension entitlement and falling on state benefits in their retirement. If section 91 has broad application, will this sort of exchange be held to be exempt, or is it possible that some employers have entered into invalid exchanges with members?
The question is whether “further benefits” just means a different benefit under the scheme, or whether the alternative benefit offered needs to have some sort of increased value to the benefit it is replacing, such as being actuarially more valuable. There is no mechanism for actuarial valuation of “further benefits” laid out in the legislation. Courts will not normally enquire into the value of consideration offered, but will this approach differ for section 91 due to the policy reasons provided by the High Court? If so, making a valuation may not be easy. Take, for example, a terminally ill member. An immediate right to cash could be of much greater value to the member than a right to pension increases the member may never benefit from.
If section 91 is held to apply so broadly as to stop members from ever being able to give up pension entitlements, what would the consequences be for employers, schemes and members who have entered into benefit exchanges? Would trustees have to claim back the benefits paid to members under a benefit exchange? Would schemes have to pay the additional benefit as well as the benefit that was surrendered? There could be some severe financial implications for schemes and employers who entered into these sorts of exchanges if section 91 is held to have broad application.
The story from the court steps is that the Court of Appeal will reverse the part of the High Court decision applying section 91 to compromises of bona fide disputes, but how far the decision will go remains to be seen. It will be interesting to see whether the Court of Appeal gives guidance as to how section 91 should be interpreted and when these kinds of benefit exchanges can occur. I’m sure there are many schemes and employers who will be hoping for guidance too.
Stephen Richards is an associate at Allen & Overy LLP.