Pensionable pay in theory and practice

Helen Powell

How well do you know your scheme’s pensionable pay definition? Many people might be able to quote a summary of it from the members’ booklet, or give the gist of what is pensionable for their scheme. The further you get from the precise terms of the rules, though, the greater the risk of getting it wrong. Two employers have recently been told that their scheme rules didn’t say what everyone thought they did. In one case, that was an expensive mistake.

In the High Court, the BBC successfully defended its claim to have capped pensionable pay (click here for the ruling). In a sense it was lucky: it actually believed that it had a wide power under the scheme rules to determine what pay should be pensionable, and was told firmly by the court that it had got the rules wrong on this issue. However, having agreed contractual changes with its employees, the BBC was able to rely on members’ consent to the capping of pensionable pay, and so reached its objective by a different route.

Another employer was less fortunate. In its case, the scheme rules defined gross earnings for pensionable pay purposes as excluding such amounts ‘as may from time to time be agreed between the Member and the Employer’. The employer understood this as excluding bonus payments, and each yearly bonus statement included a reference to the bonus being non-pensionable. However, there had never been an express agreement between the employer and members that this was the case. The Pensions Ombudsman ruled that there was no basis on which to restrict the member’s rights to claim benefits in accordance with the scheme rules.

The Ombudsman’s ruling leaves the employer with a funding gap which could be significant, if large numbers of members are affected. The employer appears to have made a simple mistake, believing that the pensionable pay definition excluded bonus payments unless they were specifically included, when in fact it did the opposite.

For the BBC, the day was saved by agreements outside the scheme. That kind of agreement couldn’t be implied from acceptance of the bonus payments in the second case as the potential impact on the eventual calculation of pension benefits was too far removed from the bonus payment.

Trustees have to rely on salary information provided by the employer and have no automatic way of checking that all elements of pay are being correctly treated. Corporate remuneration strategies evolve, and there is a danger that information may be provided to the scheme on the basis of what ‘everybody knows’ is the way it should be done. A periodic audit to ensure that there is a correct common understanding on both the employer’s and the trustees’ side about how to treat each element of pay could help to identify or avoid this expensive problem in other cases.

Helen Powell is a senior professional support lawyer 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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