FDR Ltd v Dutton & Ors

Where a pension scheme amendment is subject to a proviso protecting pensions in payment and accrued rights from prejudicial alteration, the protected entitlement is measured by the money the member would have received under the former rules. An old right to a compound increase includes repeated application of the specified percentage to the increased pension base. The percentage cannot be detached and combined with the new rule to create an amalgam of benefits. The appropriate construction is the one that preserves the old right while allowing the member any better outcome produced by the new rule.

The appeal concerned the interaction between pension scheme rules providing an annual 3 per cent compound increase and replacement rules providing increases by the lesser of 5 per cent or the rise in the Retail Prices Index. The amendment power was subject to a proviso protecting pensions already in payment and accrued pension rights from prejudicial alteration.

Asplin J held that the former and replacement rules operated as a blend, adopting the trustees’ Annual Approach: [2015] EWHC 2946 (Ch), [2015] Pens LR 569. The employer appealed, contending for the Modified Cumulative Approach. The central issue was how the replacement rules applied to benefits accrued before the amendment.

1. Appeal allowed. Lord Justice Lewison gave the leading judgment. Lord Justice Henderson and Lady Justice Gloster agreed.
2. The amendment could not operate according to its terms to the extent that the proviso protected accrued rights. The court therefore had to identify what the proviso would have been understood to protect. The relevant inquiry was not the presumed intention behind the amendment, hypothetical terms the parties might have adopted, or administrative convenience.
3. A pension in payment was prejudicially affected if the pensioner received less money in a relevant year than would have been received without the amendment. The accrued right under the former rule was not merely an abstract right to a 3 per cent annual increase. A 3 per cent compound increase required the same percentage to be applied repeatedly to a figure which had itself been increased. Separating the percentage from the pension base and combining it with the replacement rule would create a new right rather than preserve the old one.
4. The Modified Cumulative Approach preserved the protected entitlement. It calculated the pre-amendment element under both the former 3 per cent compound rule and the replacement rule, allowing the member the higher result in any relevant year. It therefore preserved the old right while permitting the member to benefit from the replacement rule where that produced a better outcome. The approach also caused the least interference with the integrity of the modified scheme, by reference to Foster Wheeler Ltd v Hanley [2009] EWCA Civ 651, [2009] Pens LR 229 at [33] and [34].

1. Court of Appeal (Civil Division) allowed FDR Limited’s appeal and adopted the Modified Cumulative Approach.
2. High Court of Justice, Chancery Division (Asplin J) had adopted the trustees’ Annual Approach: [2015] EWHC 2946 (Ch), [2015] Pens LR 569.