Personal PensionSep 17 2014

Querying increases

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

This month I looked at Mr Thompson and the GE Pension Plan & The GE Supplementary Pension Scheme. He is a member of the Plan and the Scheme, and since 27 May 1988 has also served as a trustee for both.

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 [2011], 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.

Mr Thompson also argued that the employer has an implied contractual obligation to provide the pension increases owing to existing custom and practice. The firm had a history of paying discretionary pension increases. Pre-funding of the increases had been provided as part of previous valuations, and provision for inflation-related increases were included in actuarial assumptions used to calculate the lump sum paid by the employers under a 2003 agreement.

Mr Thompson alleged misgovernance by the company and the trustee. He said the chairman should be chosen by the trustee, but the Company has always chosen the chairman. A Member Nominated Trustee had not been re-appointed, des­pite having the required votes.

The ombudsman drew no inference from the fact that authority for inflation-related increases had previously been gained, stating that each year the matter should be given new consideration by the company.

The ombudsman also found that even if the trustee exercised discretion in agreeing to increases, it would not be a foregone conclusion that increases would be applied.

The ombudsman found that the practice of pre-funding increases ceased in 2003, with the cost of increases funded separately. There was also evidence in trustee minutes that the discretion had been considered annually.

There was no evidence of assurances about discretionary increases given in 2002 in relation to the sale of the subsidiary. Even if there had been, such assurances could not have been expected to last indefinitely.

The ombudsman concluded that Mr Thompson had not put forward any substantive evidence to support his allegations of impropriety in the workings of the board.

Danny Tsang is a pensions partner at Simmons & Simmons