Prudential has won a High Court case brought by the trustees of its own employees’ retirement fund.
The judge ruled that Prudential was able to change the basis on which the discretionary increases to pensions were granted to members of its final salary pension schemes.
The case was brought by the trustees of the Prudential Staff Pension Scheme at the request of the members of the scheme to challenge the right of the Prudential Assurance Company to unilaterally change the basis on which discretionary increases to pensions in payment were granted.
The financial services firm changed its pensions practices in 2006 to plug a £379 million deficit in its defined benefit (DB) pension plan.
While the trustee must apply increases required by statute to certain elements of pensions in payment, under the Prudential’s scheme rules all other pension increases are at the firm’s discretion.
Before 2006, the firm had awarded discretionary increases in line with increases in the retail prices index (RPI), limited to 2.5%. However, it is possible that in any year this limit will not be applied, for example, in April 2007 an increase of 2.7% was awarded.
In a statement, Prudential said: “Prudential welcomes the court’s judgement which has confirmed that it acted properly when introducing a new pension increase policy in late 2005 and awarding pension increases in subsequent years.
“Throughout the process leading up to the introduction in late 2005 of a new policy on pension increases in the Prudential Staff Pension Scheme, Prudential sought at all times to be open with the trustees of the scheme about its thinking and proposals.
“Prudential introduced the new policy, in good faith, as part of a package of measures designed to secure the financial future of its pension scheme. Prudential is also pleased that the actions of the trustees throughout the process have been upheld. The court’s judgement is lengthy and Prudential will study it carefully.”
Katherine Dandy, partner at law firm Sackers and head of its dispute resolution unit, said: “The court decided that, in exercising their discretion, the employer was entitled to take into account its own interests.
“Prudential had not breached the duty of good faith because the decision was not irrational or perverse. As you can imagine, this decision is very disappointing for the members who had come to expect a particular level of benefit.
“As the switch from the retail prices index (RPI) to the consumer prices index (CPI) is anticipated to reduce the real value of pensions, any action an employer takes to further reduce increases is under intense scrutiny.
“This week, Unilever announced its intention to close its £5 billion scheme, not giving members the full RPI increase as it had promised in previous years. No doubt Unilever members will wish, like the Prudential members themselves, that this case had gone the other way.”
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