• The Prudential Case: A Legal Breath of Fresh Air
  • April 27, 2011
  • Law Firm: SNR Denton - Chicago Office
  • The High Court gave judgment on 14 April in a marathon case between the Prudential and members of its pension scheme over pension increases. The dispute arose out of a decision by Prudential to cap future pension increases. The Court upheld Prudential's decision and, in doing so, held that an employer can consider its own interests when deciding the level of discretionary pension increases, if any, it will award under its pension scheme.

    The Prudential scheme rules required Prudential to “make regular reviews of each pension and annuity currently in payment”. The rules stated “No additional increases shall apply unless the Employers decide otherwise”.

    Historically, Prudential gave RPI increases on pensions; all parties accepted that these were discretionary. In 2005 Prudential decided that it would apply RPI increases but these would be capped at 2.5 per cent. It also decided it would consider whether to apply this increase every year and only decide differently in exceptional circumstances. This approach was referred to in the judgment as “the policy of RPI with the proviso”.

    The scheme members objected. They said they had a reasonable expectation that Prudential would continue to grant RPI increases, and that a sudden change of policy was unjustified and a breach of the employer’s duty of good faith.

    On the breach of the duty of good faith point, the Court emphasized that employers must not do anything that is likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. Scheme members would have to show that an employer had acted irrationally or perversely to breach the duty of good faith. Even then, the breach would need to be severe. Members would not have a claim simply because their expectations had been disappointed. There was no evidence that the duty of good faith had been breached.

    The members also sought to rely on estoppel in their case for full RPI increases. The Judge considered whether materials supplied to members contained sufficiently clear representations to found such a claim. To bring a successful claim for estoppel by representation there must be a representation of fact, an act in reliance by the claimant and damage if the defendant is not held to the representation. He ruled that this case lacked the first ingredient. Prudential had not made a clear representation that pensions in payment would be increased in line with RPI, except in times of high inflation, when lower rates would be awarded, with a “catch up” exercise later. He doubted the members had suffered any harm either.

    The scheme members also raised estoppel by convention and that the Trustee and Prudential shared a common assumption that Prudential would award pension increases under the policy of RPI with the proviso. Therefore, it would be unconscionable for Prudential to ignore that policy. The Judge rejected this argument on the same basis as the estoppel by representation. He did, however, leave the door slightly open for scheme members to prove estoppel individually.

    The Judge also rejected arguments that scheme members had a contractual claim against the Trustee for annual or other periodic increases to pensions in payment. He did not find any evidence of such a contract.

    Comment

    This case confirms that an employer can take its own interests into account when exercising discretionary powers in awarding pension increases. Since many pension schemes departed from discretionary increases after statutory increases were introduced, the decision will be of limited interest to their Trustees in this context. However, the exercise of employer discretion is found in other pension scheme rules and the decision is relevant to these. For example, many schemes contain a discretion on an employer to consent to early retirement and this consent may allow the member to retire without an actuarial reduction in the pension. The principles discussed in this case will need to be taken into consideration in this context as well.