The UK case of Prudential Staff Pensions Limited v The Prudential Assurance Company Limited (April 2011) considered important issues in relation to an employer’s duties to scheme members in relation to changes to the basis of discretionary pension increases.  Under the relevant pension scheme, pensions were reviewed annually. 

The scheme rules provided that the trustees could pay “such additional benefits under the Scheme… as the Employer shall determine subject to any condition or qualifications which the Employer may require.”  For some fifteen years, the employer made discretionary pension increases over and above those required under UK law.  In 2006 the employer revised its policy and began to award increases that were capped at 2.5%.  The key question for the High Court was whether the change in the employer’s policy could be regarded as a breach of its implied obligation to employees (including pensioners as former employees) of mutual trust and confidence (also known as its duty of good faith).  It was held that the employer had not breached its duty of good faith in revising its policy on discretionary increases, and that the change was valid.  The Court emphasised that the employer’s duty of good faith in a pensions context is not a fiduciary duty, such as that owed by trustees to members, and the employer is entitled to take account of its own interests.  Breach of the employer’s duty requires conduct of “some seriousness” and the test is “a severe one”.  While the members had very strong expectations that discretionary increases would continue at a higher rate, the existence of those expectations did not mean there was any breach of duty by the employer when it changed those rates.  The Court also said that the employer was not obliged to negotiate with the trustees before making its decision.  This case suggests that a discretion to increase benefits is just that, and that past practice cannot of itself create an entitlement.

Contributed by Michael Wolfe.