From the blog: A number of important court cases involving defined benefit schemes are expected to be handed down in 2018.
At heart, each contains the same tension: a doubt regarding the interpretation or validity of a DB scheme’s governing documentation, which its sponsoring employer argues should be decided in a way that reduces the value of members’ benefits (and the cost of the scheme), and its members the opposite.
The scheme’s trustees will almost invariably be a third party.
At heart, each contains the same tension: a doubt regarding the interpretation or validity of a DB scheme’s governing documentation, which its sponsoring employer argues should be decided in a way that reduces the value of members’ benefits (and the cost of the scheme), and its members the opposite.
The scheme’s trustees will almost invariably be a third party, taking a neutral role but requiring their own legal team.
Some of these cases concern a scheme’s ability to change the index used to calculate pension increases – usually driven by a desire to switch from retail to consumer price index, which has historically been lower.
Others concern an apparent drafting error, or a failure to comply with technical requirements, which brings into question the validity of scheme deeds.
I am often asked whether court cases regarding members’ benefits are truly necessary, and whether there is an alternative. The legal costs can be high – although they are usually dwarfed by the value of the benefits at stake – and parties naturally question whether they are a good use of a scheme’s or employer’s funds.
My response is that it is vital that questions regarding members’ benefits are dealt with in an impartial, transparent and thorough manner. Members are not volunteers, and pensions are valuable assets. The rules governing pension schemes are complex and potentially difficult for an unrepresented individual member to fully understand.
The court system, and the use of a representative beneficiary with a properly funded legal team, puts the parties on an equal footing, providing members with protection they otherwise would be unlikely to afford.
Cost-efficient solutions to disputes include court-approved settlement of suitable cases, or summary judgment where the representative beneficiary agrees at an early stage on behalf of members that there is no real prospect of defending the claim.
Lawyers are also finding creative solutions, such as asking a scheme’s trustees to represent its membership so that a dispute only requires two, rather than three, legal teams.
The courts are invaluable, but the price of justice should be kept to a minimum.
Richard Bacon is an associate at law firm Eversheds Sutherland
