Pru wins High Court battle over pension increases

Prudential has won its High Court dispute with members of its pension scheme over changing the basis on which it granted discretionary increases to pensions in payment.

In a judgment handed down today Mr Justice Newey rules Prudential had not breached the duty of good faith by deciding in 2005 that, while discretionary increases would continue to be based on RPI, they would in the future be capped at 2.5%.

He says this was because the decision was not irrational or perverse.

In the judgment, he says: "Even if I had been persuaded the policy had not been followed in some or all of the subsequent years, I would not necessarily have accepted that the decisions taken were irrational or perverse or otherwise breached the obligation of good faith.

"To my mind Prudential was not bound either to continue with the 2005 policy or to implement it in any particular year.

"In other words I do not think it need have been irrational or perverse of Prudential to arrive at a decision which was inconsistent with the 2005 policy."

Previously the Prudential had granted full RPI increases to its members.

Members had argued the fact increases had previously been granted on the uncapped basis for decades prevented the Prudential from changing their policy.

They said the Prudential had given the members a reasonable expectation that increases would continue to be granted at RPI, except where there was a good reason not to; for instance, where there was particularly high inflation.

They added the members' rationale for challenging the Prudential was a sudden overnight change of policy was not justified and this was a breach of the employer's duty of good faith.

Sackers acted on behalf of the members. Partner Katherine Dandy says: "The court decided that, in exercising their discretion, the employer was entitled to take into account its own interests. The 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. Indeed, the judge himself said in his conclusion that the members may feel they have been treated unfairly by the Prudential".

Allen & Overy acted on behalf of the Prudential Assurance Company.

BACKGROUND

The dispute hinged on a policy change made by the insurer to its DB scheme in 2005, which trustees said they were notified of in March 2006, that capped discretionary increases in line with RPI, limited to 2.5%.

Disgruntled members claimed since the policy change, RPI has been a few percentage points higher than the capped 2.5% so five years down the line benefits have fallen about 4% or 5% behind.

Trustees brought the case to clarify whether the company may award annual pension increases at its discretion, or whether members are entitled to increases by reference to RPI or any other rate.

The scheme rules say increases are discretionary but the representative beneficiaries (some of the members) argued the discretion should take into account the long standing nature of the previous policy for RPI going back to at least 1991.

They said Prudential had breached an obligation to act fairly and in good faith.

The case, Prudential Staff Pensions v The Prudential Assurance Company, also looked at whether changing the policy led to unfairness where members had paid additional voluntary contributions; transferred benefits from another scheme; and taken a severance on leaving and invested that back into the scheme.