Aon Trust Corporation Ltd v KPMG (A Firm) & Ors

An occupational pension scheme is a money purchase scheme only where every benefit is calculated solely by reference to contributions. Benefits incorporating actuarial factors, or discretionary adjustments which permit a continuing mismatch between assets and liabilities, do not satisfy that requirement.

A discretionary power to reduce accrued benefits modifies the scheme and is subject to the statutory protection of accrued rights and pensions in payment. A power expressed to adjust benefits already secured or accruing in future does not, without clear words, authorise reductions to pensions already in payment.

The sole trustee of an occupational pension scheme sought determinations concerning a substantial funding deficit. The Vice-Chancellor held that the trustee could reduce pensions already in payment, that the reduction power was subject to section 67 of the Pensions Act 1995, and that the scheme was not a money purchase scheme.

The defendants appealed on different questions. The Court of Appeal considered whether the reduction power extended to pensions in payment, whether its exercise modified the scheme for statutory purposes, and whether benefits calculated from contributions, actuarial tables and discretionary adjustments were money purchase benefits. The classification determined whether the statutory minimum funding requirement applied.

1. Disposition. The Vice-Chancellor’s answers on statutory modification and the scheme’s classification were upheld. His conclusion that pensions already in payment could be reduced was reversed. Question 1(ii), concerning differential reductions, and question 4, concerning funding on winding up, therefore did not arise. Jonathan Parker LJ gave the judgment, with which Chadwick and Mummery LJJ agreed.
2. A money purchase benefit within section 181(1) of the Pension Schemes Act 1993 must be calculated only by reference to contributions. It must be their direct product. The scheme’s standard pensions incorporated actuarial assessments of investment return, inflation and mortality. Its discretionary surplus and deficiency powers neither operated automatically nor necessarily eliminated a mismatch between assets and liabilities. The standard pension and bonuses were therefore not money purchase benefits. The scheme was not a money purchase scheme and remained within the minimum funding regime under section 56 of the Pensions Act 1995. [151]–[173]
3. A member acquired an accrued right to the unadjusted pension calculated under rule 7, subject to any later adjustment properly made under the scheme. The calculation was not merely provisional pending consideration of the surplus and deficiency powers. [160]–[167]
4. The standard pension was an average salary benefit because it was based on salary throughout the member’s pensionable employment. A bonus expressed as a percentage of accrued pension had the same character. [174]–[176]
5. The discretionary power to reduce benefits was plainly a power to modify the scheme within section 67(1) of the Pensions Act 1995. Modification was not confined to alteration of the scheme documents. Its exercise was subject to section 67(2). In that subsection, an “entitlement” meant a pension already in payment, while an “accrued right” meant a current right to a future pension. [177]–[183]
6. The pension calculation was performed once, when the pension first came into payment. A power to reduce a pension thereafter required the clearest words. Clause 8.5 referred instead to benefits secured and benefits thereafter accruing, which addressed rights accumulated to date and rights accruing in future. It did not authorise reduction of pensions already in payment. [184]–[186]

• Court of Appeal (Civil Division): By [2005] EWCA Civ 1004, upheld the Vice-Chancellor’s declarations on questions 2 and 3, but reversed the declaration on question 1(i). Questions 1(ii) and 4 did not arise.
• High Court, Chancery Division: The Vice-Chancellor declared that clause 8.5 authorised reductions to pensions already in payment, that its exercise was subject to section 67 of the Pensions Act 1995, and that the scheme was not a money purchase scheme. No citation is stated in the judgment.