Increases to pensions in payment for pre-1997 service are discretionary, but from 1988 to 2009, inflation-related increases were consistently given for pre-1997 service. Since 2010 inflationary increases have not been granted on pre-1997 service.
Mr Thompson does not have protected inflationary increases. When he was a trustee, they got permission/funding to apply the increases. He relied on this success, claiming there was an understanding it would continue, strengthened by assurances to this effect to members following the 2002 sale of a subsidiary.
Mr Thompson requested, but not given, a copy of the actuarial assumptions used to establish special membership terms arising from the sale. He argued that if pre-1997 pension increases were provided in the assumptions, it would be evidence that increases were non-discretionary and that there was a commitment to continue them.
Mr Thompson submitted that the Trustee and the Company incorrectly made a blanket decision not to grant any discretionary inflation increases in future.
Citing Prudential Staff Pensions v Prudential Assurance , he argued that the employer’s duty of good faith could be breached if there was a failure of process; that the manner in which the employer exercised its discretion was irrational and perverse; and that failure of process, if significantly severe, can undermine trust and confidence.
Under the rules, the principal employer may only exercise its discretion in relation to increases once the Trustee has decided to exercise discretion in favour of the increase. Once the decision has been relayed to the employer, the employer has to agree or disagree.
In 2010, the principal employer did not wait for the Trustee’s representations, as it should have done. As this is contrary to the rules, it can be considered a failure of process.
Mr Thompson also argued that it was impossible for the trustee’s discretion to have been correctly exercised, as the full trustee board was barred from entering into discussion on the matter. The discussion was limited to a sub-committee and the trustee failed to consider all relevant factors.
For the employer to have exercised discretion as per the rules, the discretion should have been considered annually. The removal of funding for increases from the 2009 valuation meant an advance decision had been made for the subsequent three years, so an annual review could not have been carried out.