Out-Law News 2 min. read

High Court backs employer in dispute over closure of Wedgwood defined benefit pension scheme


Employers in the Wedgwood Group Pension Plan validly closed the scheme to future accrual and ended the link between benefits and final salary in 2006, the High Court has ruled.

Penelope Reed QC, sitting as a High Court judge, found that a proviso in the scheme amendment rules preventing any alteration that would "prejudice or adversely affect any pension or annuity then payable or the rights of any member" referred only to benefits already accrued, and not any future benefits under the scheme.

Judge Reed said that this interpretation was consistent both with the natural meaning of the words "the rights of any member" and with the particular rules developed by the courts for interpreting the wording of pension scheme rules.

The "proper approach to construction of a pension scheme", as determined by the courts, requires scheme rules to be "construed so as to give a reasonable and practical effect to the scheme bearing in mind that the scheme has to be operated against a constantly changing commercial background", the judge said.

"I also bear in mind that it is important to avoid unduly fettering a power to amend the provisions of the scheme as it is important for the parties to be able to make changes which might be required by the exigencies of commercial life," she said.

"A power of amendment which prevented the employer from curtailing the right of existing members to continue to accrue benefits in circumstances where the employer was in financial difficulties and finding it difficult to fund the plan makes far less sense than a construction which protects rights which members have gained through past employment but enables the employer to stop those benefits accruing in the future," she said.

Most of the Wedgwood companies became insolvent in 2009 while the scheme's 'last man standing' rules, which made the last surviving company responsible for the whole scheme, pushed that company into insolvency the following year. The scheme has been in Pension Protection Fund (PPF) assessment since 2010, and the PPF will pay out compensation to the scheme members based on the value of their benefits under the scheme.

The scheme rules were re-written in 2001 but an earlier rule, which dated back to 1995, allowed a company to withdraw from the scheme if it was "impractical or inexpedient" for it to continue to participate. This rule also severed the final salary link by terminating pensionable service in respect of scheme members employed by that employer.

The 2001 rules did not require an employer to show impracticability or inexpediency in order to withdraw from the scheme and also allowed employers to stop contributions in respect of only some members, as opposed to full withdrawal. However, Judge Reed found that, without retaining the "impracticable and inexpedient" requirement, the employers' only option would have been to withdraw from the scheme altogether.

Serving notice in respect of only some of the members under the contested rule was clearly "less prejudicial to the members" than full withdrawal, she said.

Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that the case was an interesting one which "shows the lengths to which the court will go to give effect to what the parties were trying to achieve".

"Whilst this may encourage other judges to be pragmatic in the future, the real message is to be careful when closing pension schemes, especially if the powers being relied upon have changed over the years. Otherwise, there's a risk that they aren't quite as closed as you think," he said.

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