Pensions Law Blog 18th April 2011

The Prudential Case: A Warning of Things to Come in Ireland?

Ireland has seen comparatively little pensions litigation over the past couple of decades. This is due in part, no doubt, to the high cost of going to court here. Another reason might well be the late Celtic Tiger and the fact that schemes flourished during the economic boom, with disputes confined to such issues as the treatment of surplus. Where litigation did arise, it tended to result from an attempt to rectify an earlier documentary error, as in such cases as Irish Pensions Trust v Central Remedial Clinic¹ and Boliden Tara Mines Ltd v Cosgrove and others².

However, with the country, its banks and many of its defined benefit (DB) pension schemes effectively insolvent and with no indication as to whether the much-delayed deadline for the submission of funding proposals by schemes will be extended beyond July 2011, the possibility of a rash of closures or reconstructions in Ireland’s remaining DB schemes looms large.

For employers, the temptation will be to reduce benefits in accordance with the Pensions Act 1990 or to walk away from an insolvent scheme entirely – something that can be done much more easily in Ireland, given the absence of an equivalent provision to section 75 of the UK’s Pensions Act 1995.

For members, there is the fear that they will be left with benefits or a transfer value worth only a fraction of what they would have been entitled to under the rules of the scheme prior to reconstruction or winding-up.

For trustees (particularly employer appointed ones) there is the dilemma of reconciling the employer’s wishes with the fiduciary duty they owe to members.

With that in mind, the decision of Mr Justice Newey in the case of Prudential Staff Pensions Limited v The Prudential Assurance Company and Others ³  may well be a timely warning from the UK of the kind of disputes Irish DB schemes may face.

The Prudential Staff Pension Scheme (the Scheme) regularly granted discretionary increases to pensions or annuities in line with the UK Retail Price Index (RPI). However, from 2005, The Prudential Assurance Company (Prudential) decided that increases would be capped at the statutory maximum for RPI linked-increases (2.5%), with any additional increase being at the discretion of the relevant employer.

In 2006, on receipt of information from the scheme actuaries, Watson Wyatt, showing the Scheme to be GBP£243 million in deficit, Prudential decided that the increase to pensions would be 2.5% notwithstanding the fact that RPI in the year to 30^th September 2005 was at 2.7%. In subsequent years, increases were again paid in respect of pensions in payment but again not in line with RPI. In 2010, with RPI negative, no increase was paid at all.

Since pension increases were no longer tied to RPI, Prudential Staff Pensions Limited (the Trustees) objected to the change in policy on the grounds of breach of good faith and brought proceedings against Prudential in the High Court, with several members joining the action to represent categories of member in the Scheme.

In his judgement published on 14^th April 2011, Newey J found, amongst other things, that Prudential’s decision not to maintain the link between pension increases and RPI did not breach the “implied obligation of good faith” of an employer towards its employees applied in Imperial Group Pension Trust Ltd v Imperial Tobacco Limited ⁴ and was not irrational or perverse. He states:

“I can well understand that members of the DB Section will have been disappointed by the 2005 Decision. I can also see that they may feel themselves to have been treated unfairly by Prudential. However, the Rules give Prudential a discretion with regard to pension increases which is not subject to any express restriction. The implied obligation of good faith will have served to qualify the discretion to an extent, but in my judgment Prudential has not breached that obligation".

Although not binding in Ireland, this case will be persuasive. Therefore, members and trustees should note that even if it has been customary for discretionary pension increases to be paid at a certain level in the past, there is no guarantee, where an employer decides to cap future increases, that it will be held to have breached its implied obligation of good faith.

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