Mr H (CAS-33253-W9R0): Complaint regarding discretionary bonuses (28 September 2022)

TPO did not uphold a complaint by Mr H that no discretionary bonuses had been awarded to his section of the scheme since 2015. Under the terms of his section, any bonuses declared by the Trustee were applied to pay increases to pensions.

Facts

Mr H became a member of the scheme on 1 January 1976.

On 1 October 1989, Mr H’s Plan Benefit Statement was issued. The notes section of this document said:

“In addition to the guaranteed returns, bonuses may be declared by the Committee of Management annually which will increase all earned benefits. Once declared, bonuses cannot be taken away and become themselves guaranteed.”

On 31 October 1990, Mr H became a deferred member in the “Series 1” section of the scheme.

On 6 February 1991, TPT Retirement Solutions (“TPT”), the provider of the scheme, wrote to Mr H outlining his options regarding his deferred pension. It said the deferred pension at his date of leaving was £6,264.99 per year. It confirmed his deferred pension would: “…increase by bonuses declared each September up to retirement age and in payment or until you decide to transfer. The estimated pension at age 65 (assuming 6% pa increases) is £13,362.77 a year.”

On 6 April 1997, the PA95 came into force. This required that pensions in payment that relate to pensionable service on and after 6 April 1997 had to be increased by Limited Price Indexation (“LPI”) (the increase in the relevant index up to a maximum of 5%). There was no statutory requirement to increase pensions in payment that had accrued before that date.

From 2002 onwards, no discretionary increases were added to the Series 1 section of the scheme.

The 2003 trust deed and rules provided for increases by “one or a combination of” the following:

• an annual bonus of such amount (if any) as determined at the discretion of the trustee after obtaining actuarial advice
• LPI, ie a minimum requirement for all pensions in respect of pensionable service from 1 April 1997 and any part of a transfer payment received which was attributable to employment from 1 April 1997 and
• discretionary increases.

The power to pay discretionary increases was as follows:

“If the Trustee considers it appropriate having regard to the increase in the cost of living, the Trustee may, after obtaining Actuarial Advice, increase the amount of any pension or deferred pension by such amount as the Trustee shall consider appropriate but no such increase shall cause any pension to exceed Revenue Limits.”

A member guide published in August 2003 explained that “[p]ensions in respect of all contributions paid before October 2001… may be increased by a discretionary bonus if the funds held are adequate. These pension amounts are already higher because they include an agreed basic investment return.”

It also explained that, “The following additional conditions apply to all contributions paid by you or on your behalf before 1 October 2001…

• Pension: each contribution before October 2001 was converted on receipt into an amount of pension which will be paid to you from your normal pension age. These conversion rates include agreed investment returns before and after retirement.
• Bonus: a discretionary bonus (where agreed) may be added to the pension amounts secured for contributions before October 2001. This annual bonus would be smaller than the investment credit for later contributions because here 5% has already been included in the pension conversion rates (above)”.

Mr H started receiving pension payments from the scheme on 15 September 2004.

Between 2017 and 2020, there was a great deal of correspondence between the scheme and Mr H regarding increases to his pension. Ultimately, Mr H brought a complaint through the scheme’s IDRP. When that was not resolved in his favour, he complained to TPO.

In brief, Mr H complained that the cost-of-living increases were not applied to Series 1 of the scheme, but were applied to Series 2 (and subsequent Series). He considered that this caused him a financial loss and did not match his expectations when he joined the scheme.

TPO’s decision

The cost-of-living increases Mr H referred to relate to the LPI increases which were required by the PA95. Series 2 of the scheme was introduced to take account of the PA95 requirement to provide LPI increases. However, as all of his pensionable service relates to a period prior to April 1997, Mr H was not entitled to LPI increases.

TPO noted that Series 1 is in deficit on a technical provisions basis and that the trustee must consider the impact of paying bonuses on the ongoing solvency of that section. “The Trustee’s main responsibility is to meet the funding requirement of its contractual liabilities, such as paying the pensions, not to award discretionary bonuses which are ordinarily paid out of a surplus”.

Mr H’s complaint was not upheld.

Comment

This case will be of interest to trustees currently considering whether to make discretionary increases to pensions in payment in light of the cost-of living crisis. It confirms that, when exercising their discretion to pay increases, trustees need to consider carefully the governing rules of each different section of their scheme and should take into account relevant factors, including the impact of making such payments on their scheme’s funding position.

In this case, the decision made clear that the trustee was required to have regard to the employer’s on-going financial viability, noting that increasing the costs on the employer when there was an existing funding deficit would be likely to adversely affect the employer’s financial viability. It also required the trustee to consider the impact that paying discretionary increases would have on the ongoing solvency of the relevant section of the scheme.