AON Trust Corporation Ltd v KPMG & Ors

A power in a pension scheme to adjust benefits to secure continued solvency may extend to pensions already in payment and may permit different reductions for different members, where the scheme’s language supports that construction.

However, reducing an accrued pension entitlement is a modification of the scheme for the purposes of section 67 of the Pensions Act 1995, even if the adjustment does not require amendment of the scheme documents.

A scheme is not a money purchase scheme where its benefits are ultimately calculated by reference to members’ average salary, or include discretionary bonuses not calculated by reference to contributions.

AON Trust Corporation Ltd, the sole trustee of the KPMG Staff Pension Fund, sought the court’s determination of five questions concerning a substantial deficit in the Pre-2000 Fund.

The principal issues were whether the scheme permitted reductions to pensions in payment, whether different reductions could be made for different members, whether the power was subject to section 67 of the Pensions Act 1995, and whether the scheme was a money purchase scheme for the purposes of the statutory funding provisions.

The court deferred the question concerning directions to the trustee until the legal questions had been determined.

1. The court answered Questions 1(i) and 1(ii) affirmatively. Clause 8.5 permitted adjustments to benefits already secured, including pensions in payment. The definition of member and the reference to benefits secured encompassed existing pensioners. The power did not require uniform reductions for all members.

2. Question 2 was also answered affirmatively. Section 67 of the Pensions Act 1995 applied to the exercise of clause 8.5. Under the definition of modifications in section 181 of the Pension Schemes Act 1993, a modification included an omission. Reducing a pension entitlement therefore modified the scheme, even if no amendment to the constituting documents was required.

3. The scheme was not a money purchase scheme. The basic pension under rule 7.2 was ultimately calculated by reference to average earnings over the member’s service, with annual factors weighting the contributions according to when they were paid. That made the benefit an average salary benefit rather than a money purchase benefit.

4. The bonus element was also not a money purchase benefit. It was contingent on a surplus, employer consent and actuarial advice, and depended on the trustees’ discretion. It need not be calculated by reference to payments made for the member. The pension as a whole was therefore not a money purchase benefit, and Question 4 did not arise.

5. The court made the representation orders and other orders sought, adjourned Question 5 with liberty to restore, and directed that KPMG pay the trustee’s and representative members’ costs as agreed or assessed.