Judgement landmark sets DB fund precedent

UK insurer Prudential has been
victorious in a court battle in which its discretionary power over
increases in pensions was challenged by the trustees of its
employees’ pension fund. The challenge related specifically to the
defined benefit (DB) portion of the fund which closed to new
members in 2003.

The court case had its origins in a
decision taken by Prudential in November 2005 that in future
pensions increases would be in line with the retail price index
subject to a normal annual maximum increase of 2.5%. The plaintiffs
in the case argued that Prudential had previously awarded pension
increases on a more generous basis.

According to High Court of Justice
papers, on 5 April 2010 the DB portion of the fund had 1,152 active
members, 20,929 deferred members and 18,554 members receiving
pensions. Assets of the DB portion of the fund were over £5bn
($8bn).

Actuarial firm Lane, Clark and
Peacock noted in a review of the case that it raised a wide range
of legal issues. For example:

• Was Prudential’s policy a
  breach of the implied duty of good faith owed by an employer to its
  current and former employees?
• To what extent is the
  employer entitled to take its own interests into account when
  exercising its discretion?
• To what extent should
  employees’ expectations weigh on employer decision
  making?
• Should benefits deriving
  from additional voluntary contributions (AVCs) and transfers-in be
  treated differently with regard to discretionary increases compared
  to other scheme benefits?

In a 30-page judgement, Justice Guy
Newey upheld the employer’s right to apply the 2.5% cap and
confirmed that the cap could apply to AVCs and transfers-in.

In his concluding remarks Newey
noted: “In my judgement, the [Prudential’s] 2005 decision [to cap
increases at 2.5%] did not breach the obligation of good faith. 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.”

His judgement has set a precedent that will no doubt be
considered carefully by companies facing mammoth DB fund
deficits.

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