Case law - High Court adopts pragmatic approach in analysing defined contributions scheme that had targeted final salary benefits

Thursday, July 12, 2012

In Entrust Pension Limited v Prospect Hospice Limited and Yvonne Hunter, the High Court took a broadly pragmatic approach when faced with difficult questions about benefit promises under a pension scheme with a highly unusual structure.

The Federated Flexiplan No.1 is an industry wide pension scheme for the healthcare and educational sector. Although set up fundamentally as a defined contribution scheme, the rules contain provisions for the distribution of surplus to members. In practice, the scheme had been administered to target benefits, mimicking a final salary scheme. Since its inception in 1966 until 2002, actuarial valuations had shown a surplus. By 2005, the deficit had grown to £20 million, forcing the trustee to re-consider how it had been running the scheme. The High Court confirmed that the members who had yet to retire were entitled to defined contribution type benefits, with no guaranteed level of benefits, despite past practice and “a number of obvious infelicities of drafting” in the scheme rules. No amount of past practice could change the underlying set-up of the scheme.  Unfortunately, there was a limit to the court’s pragmatism. Some complex technical matters still remain in relation to deferred members who left service while the scheme still had a surplus. Another hearing later this year will consider those outstanding matters.

Much of the judgment turns on the specific, highly unusual structure of the scheme. However, it demonstrates that the High Court can take a common sense approach in interpreting complex documentation. It also demonstrates that no matter how long trustees may have run a scheme in a particular way, they can still change their approach if circumstances change.

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