(High Court – 7 December 2009)

Overview

In this case, the Court was asked to consider whether trustees have a duty to make rule amendments to make improvements to benefits to take account of post-A-Day changes.

The case concerned the payment of a lump sum death-in-service benefit which was restricted by the Earnings Cap (“the Cap”), where the deceased employee’s salary was substantially more than the Cap at the date of death.  Post-A-Day, the Cap could have been removed which would have resulted in a far higher lump sum payment, but the scheme rules had not been amended and were therefore still governed by the transitional tax regime which maintains the pre-A-Day Revenue Limits, including the Cap, until 5 April 2011 (or any earlier date of amendment).

The deceased’s beneficiary claimed that she was entitled to the higher, uncapped lump sum.

Facts

The deceased was a senior employee of Open Text (UK) Limited (“Open Text”) and was killed in a car crash on 30 July 2007.  Ms Power was the relevant beneficiary entitled to the lump sum death-in-service benefit which was payable on the deceased’s death under the terms of a Group Life Assurance Scheme (“the Scheme”) written under trust with Open Text acting as both the Employer and the Trustee.

The Scheme was an “exempt approved scheme” under the pre-A-Day tax regime governed by the Income and Corporation Taxes Act 1988 (“ICTA”), and it was a condition of its approval that any lump sum payable on death-in-service should not exceed four times an employee’s final remuneration.  In determining this figure, any excess over the Cap was to be disregarded.

The lump sum payable was determined to be £451,200, but if the deceased’s additional earnings over the Cap were taken into account this would have been £750,000.

The Scheme was governed by Rules dated 29 March 2006 which provided that the amendment power lay with the Trustee with the consent of the Employer.  At the time of the deceased’s death, the Rules were still governed by the transitional tax regime implemented by Schedule 36 of the Finance Act 2004 and the accompanying Modification Regulations.  This meant that the Rules continued to apply as if ICTA and the Cap remained in force unless they were amended before the transitional regime ended on 5 April 2011.  (The Court noted that there was no dispute between the parties about the effect of these statutory provisions.)

Ms Power claimed that the Rules should have been amended to terminate the transitional regime which would have resulted in the payment of the higher lump sum. She submitted that the Trustee owed a duty to the members to consider regularly whether the Rules ought to be amended, and if members would benefit as a result, to notify the Employer and invite it to consent to an amendment.

Judgment

The Court held the following:

• It was for the Employer and not the Trustee to determine the level of cover provided by the Scheme.  In making this determination, the Employer owed an implied duty of good faith to the members, but no higher duty and no duty at all to potential beneficiaries.

• On 29 March 2006, the Employer and the Trustee had agreed the terms of the trust.  The Trustee was under no immediate obligation to consider whether the terms should be changed as both parties had decided that the agreed terms were appropriate.

• As there was no duty on the Trustee to consider the level of cover or whether it should be changed, the Trustee did not need to put itself into a position where it was able to form a view as to whether the level of cover should be changed.  The duties on trustees to inform themselves before making a decision cannot include a duty to inform themselves about matters outside their concern, in this case, the level of cover.

• Although the Employer had commenced a benefit review after A-Day, this had not been completed at the date of the deceased’s death.  With hindsight, it was easy to see that it would have been simple to arrange for the Scheme to be changed and for the Cap to be removed for those beneficiaries who would have benefitted.  However, the Employer had not acted unreasonably or in breach of duty in doing what it did.

Comment

This is a pragmatic and sensible decision, which makes it clear that it is for the Employer to decide the level of scheme benefits.

Schemes which have taken no action to implement rule changes to take account of the new post-A-Day regime should commence a review of the benefit structure as soon as possible.  Once the transitional tax regime has ended on 5 April 2011, the new post-A-Day regime will automatically apply unless rule amendments have been put in place beforehand.  In particular, this will mean that in the absence of a rule amendment, the Cap and pre-A-Day revenue limits will fall away, which could result in schemes having to pay far higher benefits with consequential funding and cost implications.