Entrust Pension Ltd v Prospect Hospice Ltd & Anor

In construing pension scheme rules, the court must undertake a unitary exercise, considering language, context and practical consequences. Where rules confer on trustees a power to add a member’s share of actuarial surplus, the absence of prescribed criteria or a valuation methodology may indicate a fiduciary discretion rather than an objectively ascertainable entitlement. The trustee must act in good faith, for the proper purpose, and give proper consideration to relevant matters. Consistent past practice does not ordinarily fetter that discretion. A deferred pension entitlement arising on leaving service must be calculated by reference to the member’s Pension Capital at that date where the rules so provide. A fiduciary trust power does not necessarily lapse through delay, but it may become incapable of exercise where the relevant surplus no longer exists.

Entrust, trustee of the Federated Flexiplan No. 1 occupational pension scheme, sought construction of provisions in the 1976 and 2005 scheme rules concerning members’ Accrued Amounts, actuarial surplus, target benefits and deferred pensions. The Scheme had historically been administered to provide target benefits, but funding deterioration led to their discontinuance for later retirements.

The representative defendants advanced competing positions for employers and deferred members. The trial concerned construction issues only, including whether surplus benefits were discretionary, when deferred members’ entitlements crystallised, whether a neglected discretion remained exercisable, and the circumstances by reference to which it should be exercised.

1. Construction of the surplus provisions. Rules 11(2) of the 1976 Rules and 11(3) of the 2005 Rules gave the Trustee a discretion whether to credit a retiring member with an amount representing a share of actuarial surplus. The Trustee also retained discretion over the amount and the method of calculation. The absence of any prescribed valuation methodology, coupled with the inherent uncertainty of actuarial surplus, strongly supported that construction.
2. The discretion was fiduciary. It had to be exercised in good faith, with genuine and responsible consideration, for the purpose for which it was conferred, and by taking relevant matters into account while excluding irrelevant matters. The Trustee had to make proper enquiries and take appropriate actuarial advice where necessary: Edge v The Pensions Ombudsman [2000] Ch 602.
3. The Scheme’s longstanding practice of providing target benefits did not convert the discretionary power into a fixed entitlement or fetter its future exercise, particularly after the Scheme’s financial circumstances changed.
4. Deferred members. Under rules 18(2) and 19(1) of the 1976 Rules, leaving service triggered an immediate entitlement to a deferred pension calculated by reference to the member’s Pension Capital at the date of leaving service. The pension should be granted on the assumption of retirement at normal pension age, with suitable actuarial adjustments for earlier payment. Appropriate annual increases should compensate for deferred receipt; interest was not added to Pension Capital as such.
5. Delay and loss of surplus. The Trustee’s fiduciary power did not lapse merely because it had failed to consider an award within a reasonable time. However, the power ceased to be capable of performance once no actuarial surplus remained. If that conclusion were wrong, the discretion had to be exercised by reference to the surplus, if any, existing when the duty was actually performed.
6. The court answered Issues 1 to 10 in favour of the employers’ construction, Issues 12(1) to (4) substantially in favour of the members, answered Issue 13 affirmatively, and answered Issue 14 as stated above. Consequential factual issues were reserved for the later trial.