Prudential Staff Pensions Ltd v The Prudential Assurance Company Ltd & Ors

An employer’s discretion to award discretionary pension increases is constrained by the implied obligation of good faith, but that obligation does not require a substantively fair or reasonable outcome. The relevant control is whether the discretion was exercised genuinely and rationally, rather than irrationally, perversely or for a collateral purpose. The employer may have regard to its own interests, although members’ expectations may be relevant to rationality. An employer need not negotiate with the trustee, await completion of the trustee’s deliberations, or consider every potentially relevant matter separately. Communications describing increases as discretionary did not establish an estoppel requiring RPI increases. The trustee lacked power under the AVC rules to grant escalating pensions, but possessed that power in relation to transfers into the Scheme.

The trustee sought directions concerning discretionary pension increases under the Prudential Staff Pension Scheme. The proceedings concerned whether Prudential’s 2005 decision to adopt a policy of increases broadly linked to RPI subject to a normal maximum of 2.5 per cent breached the implied obligation of good faith, whether subsequent decisions were invalid, and whether members could establish estoppel-based or contractual rights to increases.

Further issues concerned the trustee’s power to grant escalating pensions for AVCs and transfers into the Scheme, and whether previous grants of non-escalating pensions were voidable under the principles discussed in Pitt v Holt.

1. Good faith. The implied obligation of good faith qualifies an employer’s pension-scheme powers, but does not impose a general requirement of substantive fairness or objective reasonableness. A non-fiduciary discretion must be exercised genuinely and rationally, and not arbitrarily, capriciously, perversely or for an improper collateral purpose. The court does not substitute its own view for that of the employer.
2. Members’ interests and expectations may be relevant when assessing irrationality or perversity. The employer remains entitled to consider its own financial interests. The court assesses the decision overall, rather than asking whether the employer considered each particular matter or applied fiduciary standards of decision-making. A sufficiently serious process failure may be relevant if it sheds light on irrationality or is likely to undermine trust and confidence.
3. Prudential’s 2005 decision was valid. It was not irrational or perverse to act on the financial information then available, to adopt a 2.5 per cent normal maximum while using longer-term funding assumptions based on full RPI increases, or to treat AVC, transfer and augmentation pensions in the same way as other Scheme pensions. Prudential was not required to negotiate with the trustee or await completion of its deliberations.
4. The later pension-increase decisions did not breach the obligation of good faith. The 2005 policy contemplated increases above 2.5 per cent as exceptional, and Prudential was not bound either to continue that policy or to apply it in a particular year.
5. The estoppel claims failed. The communications did not contain a clear and unequivocal representation or promise that pensions would necessarily increase in line with RPI. The class-wide claims also lacked sufficient proof of detriment and, in the case of estoppel by convention, no contrary assumption had crossed the line between Prudential and the members. Individual estoppel claims were left open.
6. Rule 2.2 did not empower the trustee to grant escalating pensions for AVCs. Rule 8.2, like rule 7.3, did empower it to provide escalating pensions for transfers into the Scheme.
7. The trustee acted within its powers and did not breach fiduciary duties by failing to investigate the possibility of escalating pensions. It was reasonable in the circumstances not to obtain legal advice on a point whose practical importance was not apparent. The trustee’s decisions were valid.
8. The court answered the List of Issues accordingly. Prudential was not estopped from denying entitlement to RPI increases, and the claim for directions succeeded only to the extent of the declarations and answers stated in the judgment.