From the blog: Significantly fewer than 1m lucky individuals were active members of private sector occupational DB schemes in 2015, compared with almost 5m in 2000, according to figures from the Office for National Statistics.
Once a scheme is closed, benefits for members who were active at the closure date are typically based on their service to and salary at that date, and then increased in line with inflation.
But legal cases in 2014 and 2015 mean schemes previously thought to be able to break the salary link may face significant increases in their liabilities.
There has been a steady stream of closures to accrual over that period, in an effort to reduce cost and volatility.
Once a scheme is closed, benefits for members who were active at the closure date are typically based on their service to and salary at that date, and then increased in line with inflation.
Since 1986 and a case concerning Courage Group, however, schemes whose amendment power contains a restriction preventing a reduction in benefits that have been "secured" in the scheme have had to retain a salary link for former active members’ benefits.
From 1997, section 67 of the Pensions Act 1995 prevented amendments that would affect “accrued rights”, without any reference to prospective benefits.
Therefore, schemes whose amendment powers used the word “accrued” were generally thought to be able to distinguish themselves from Courage and break the salary link.
Can you drop the salary link?
Now, after the Gleeds decision in 2014 and the Sterling case of 2015, this distinction may have fallen away.
Schemes that thought they had closed without a salary link, and have been administered on that basis for many years, may find they should have maintained that link and will need to revisit historic benefits.
It is difficult to make a case that either word should include a prospective entitlement to benefits based on future salary increases
In many cases this may lead to a potentially significant increase in scheme liabilities.
The judge in Gleeds decided there was no sensible rationale as to why “accrued” and “secured” should have different meanings, and it is hard to argue with that.
The result, however, is that schemes with amendment power restrictions using either “accrued” or “secured” have to continue to provide a salary link on closure. It is difficult to accept that this is the right outcome.
What should be done?
The Courage case was decided in a very different pensions environment, against a backdrop of pension surpluses, limited employer obligations and far fewer member protections.
GKN scheme closures and debt issuance to combat £1bn deficit
Engineering firm GKN has closed its UK defined benefit pension schemes to future accrual, and it plans to use proceeds from a debt issuance to plug a £1bn deficit on its UK post-retirement obligations.
In today’s world, with so few remaining DB schemes and a strict regulatory environment, it is difficult to make a case that either word should include a prospective entitlement to benefits based on future salary increases.
The Sterling case may result in a Court of Appeal decision dealing with this point, so we may see the end of this interpretation. In the meantime, trustees and employers should check that their scheme really is closed in the way they think it is.
Vikki Massarano is a partner at Arc Pensions Law.
