Avon Cosmetics Limited v Dalriada Trustees Limited & Ors

Where a pension amendment exceeds the scope of the power because it prejudices protected accrued rights, the court should preserve the valid part where the valid and invalid effects are conceptually distinct and the surviving provision retains the amendment’s substantial purpose and effect.

The court need not investigate what the decision-maker would hypothetically have done if the legal limit had been understood. That inquiry is not part of the test for excessive execution. It may instead be relevant to a separate claim based on inadequate deliberation, although reliance on competent legal advice may defeat that claim. Improper purpose is also distinct from excess of power: a legally impermissible result does not, without more, establish an improper purpose.

The proceedings concerned amendments to the Avon Cosmetics Pension Plan. The amendments closed the final-pay section, treated accrued benefits of continuing members as deferred benefits, and moved future accrual to career-average arrangements.

The court was asked to assume that the amendments were invalid insofar as they prejudiced the accrued rights of members who would be worse off on a revaluation basis, described as FS Winners. The issue for determination was whether the same amendment was nevertheless valid for members who would be better off on that basis, described as Revaluation Winners, or whether the amendment was wholly invalid as regards accrued rights.

The court also considered representation orders for the two classes of members.

1. Construction and scope of power. Pension trust instruments are construed by ordinary principles, while recognising their long-term nature and the need to give them reasonable and practical effect. The court must first identify the jurisdiction conferred by the power and then determine whether the exercise exceeded that jurisdiction.
2. Excessive execution and severance. Where an exercise exceeds a limitation on the power, the court should uphold the valid part where the valid and invalid effects are conceptually separable and the surviving exercise retains the substantial purpose and effect of the amendment. This may be achieved by construing the exercise as subject to an implied limitation. The inquiry is objective and is determined from the instrument, its context and the factual situation to which it applies.
3. The court rejected a requirement to establish, by evidence of hypothetical decision-making, that the power-holder would have made the same decision had the limitation been appreciated. Such evidence would make the validity of the amendment depend on speculative reconstruction of an earlier options exercise. The approach in IBM United Kingdom Holdings Ltd v Dalgleish was understood consistently with this objective analysis.
4. Distinct grounds of challenge. Excessive execution, inadequate deliberation and improper purpose are separate doctrines. An exercise within the scope of a power may be voidable for breach of fiduciary duty through inadequate deliberation. Here, the trustees had considered the issue of accrued rights and acted on competent legal advice, so no such breach arose. The objective of altering the scheme did not become an improper purpose merely because part of the intended result exceeded the power.
5. Application. The distinction between FS Winners and Revaluation Winners was sufficiently clear and conceptually separable. Assuming the amendment was invalid as against FS Winners, preserving it for Revaluation Winners left the substantial purpose and effect of the CARE Amendments unchanged. The amendment was therefore valid as regards Revaluation Winners.
6. Representation orders. Orders were made under CPR r19.9 appointing Avon to represent the Revaluation Winners and the seventh defendant to represent the FS Winners. Each class had the same interest in the issue, and representation furthered the overriding objective.

First-instance decision of the High Court (Business List), determining the assumed validity of the CARE amendment as between two classes of pension scheme members.