85394/2
PENSION SCHEMES ACT 1993, PART X
DETERMINATION BY THE PENSIONS OMBUDSMAN
Applicant / Mr T HieldScheme / Scottish & Newcastle Pension Plan (the Plan)
Respondents / Scottish & Newcastle Ltd (S&N)
Scottish & Newcastle Pension Plan Trustee Ltd (the Trustees)
Subject
1. Discretionary pension increases
Mr Hield complains that S&N determined not to make a discretionary increase to his pension in payment in 2010 despite an undertaking made in 2008 by Heineken NV, now its parent company, to continue the practice of providing discretionary pension increases each year in line with retail price index (RPI) (capped at 5%) on part of his pension.
He complains that the Trustees:
· failed in 2010 to safeguard the value of his pension – he says they should have ensured that Heineken NV honoured the 2008 undertaking;
· acted against his best interests by restricting the Plan’s funding for these discretionary increases to three years and using the “earmarked” funds to reduce employers’ contributions; and
· delayed in responding to his allegations under the Plan’s Internal Dispute Resolution Procedure (IDRP).
2. Data cleansing
Mr Hield’s second complaint is about the way in which the Trustees (in conjunction with the Plan’s administrator, Mercer) have been conducting a data cleansing exercise and a review of their administrative processes. He complains that they have:
· failed to provide him on a timely basis with full details of how they have calculated his pension; and
· used faulty data to determine the increases to his pension.
The Pensions Ombudsman’s determination and short reasons
1. Discretionary pension increases
The complaint is not upheld against S&N as it reached a decision that was not irrational, perverse, or in breach of its obligation of good faith.
It is also not upheld against the Trustees, who acted properly in relation to the increase decision and the funding for increases. The time taken to deal with Mr Hield’s complaint was not unreasonable.
2. Data cleansing
The complaint is not upheld against the Trustees. Any delay in provision of information or inaccuracy in the calculation has only been of very minor inconvenience or financial harm.
DETAILED DETERMINATION
PART 1 – Discretionary pension increases
1. S&N (which is the “Principal Employer” under the Plan’s rules, with associated powers) was taken over by Heineken NV at the end of April 2008. The complaint concerns matters connected to a statement made before the takeover by Heineken NV about pension increases, and the later exercise of discretion by S&N.
2. Although S&N is the Principal Employer and hence the company with power to determine pension increases, the operating UK company was, after the takeover at least, Heineken UK Ltd (Heineken UK). (Heineken UK had, before the takeover, been known as Scottish & Newcastle (UK) Ltd.)
The rules of the Plan
3. The relevant rules (the Rules) were adopted by a Trust Deed executed on 3April 2008, with an effective date of 1 April 2008. Appendix 2 to the Rules sets out specific rules relating to the “Final Salary Section”. As concerns pension increases for pensioners previously employed by S&N it says:
“14.2. Rates of increases
Any part of a pension in payment that is attributable to Pensionable Service on or after 6 April 1997 will increase in each year by the lower of:
14.2.1 the percentage increase in the retail prices index during a reference period agreed between the Principal Employer and the Trustee; and
14.2.2 5%.
The remainder of the pension will not increase, except as described below.”
“14.4. GMPs in payment
Where GMP is payable, the part of the GMP that is attributable to earnings for the tax year 1988-89 to1996-97 will increase in each year by the percentage specified in any order made by the Secretary of State …The remainder of the GMP will not increase.”
“14.6. Discretionary increases
Pension may be increased by such further amounts as the Principal Employer decides with the consent of the Trustee (given after considering actuarial advice).”
4. The statement by Heineken NV at the centre of the complaint was made very shortly before the Rules came into effect. However, in the previous version of the rules of the Plan the provisions relating to pension increases were substantially the same. In particular, in relation to discretionary increases they said:
“14 Discretionary increases
Subject to Inland Revenue Limits, the pension may be increased by such further amounts as the Principal Employer decides with the consent of the Trustee (given after considering actuarial advice).”
Material Facts
5. For 15 years before the takeover by Heineken NV, S&N had exercised discretion by increasing pensions attributable to service before 6 April 1997 on the same basis as the Rules require for pensions attributable to later service – that is, by the increase in the retail prices index (RPI), capped at 5%. (Earlier discretionary increases had not been on exactly the same basis, though they were given).
6. This practice was reflected in a Plan booklet published in 2004, which did not distinguish between pre and post 6 April 1997 pensions. It said:
“Your pension will increase in November each year in line with the retail prices index (price inflation) up to a maximum of 5% a year.”
The booklet also contained a disclaimer to the effect that the Trust Deed and Rules prevailed in the event of conflict between their provisions and the booklet. S&N say that it was not intended for members with pre 6 April 1997 membership. It was not provided to Mr Hield although it did appear on the Plan’s website. Other booklets apparently correctly referred to increases on pre 6 April 1997 pension being discretionary.
7. The practice was also reflected in the Plan’s funding. So, for example, the statement of funding principles for the valuation as at 31 October 2006, completed in October 2007, said that it was assumed that the element of pension relating to pre 6 April 1997 service in excess of guaranteed minimum pension would increase in line with prices.
8. Mr Hield is one of an organised group of members of the Plan with shared concerns. On 18 February 2008 the Chairman of the Trustees replied to a letter from Mr Hield about future increases. Among other things, the Chairman said that the Trustees had obtained a binding commitment from Heineken NV to inject £50m into the Plan and that Heineken NV had given “…positive expressions of general support for the Plan and gave no indication that they would wish to alter any aspect of it.” He went on to say that he had spoken to Heineken’s Finance Director the previous day and “…he confirmed that as a responsible employer with an excellent HR record, Heineken would look favourably at past practice and does not wish to make changes.” He added, though, that “Heineken did not offer, and the Trustee did not request, to convert any of S&N’s discretionary policies in relation to the Plan, including the discretionary policy on pension increases, into legally binding commitments.”
9. Mr Hield wrote to S&N by email on 14 March 2008. The proposed acquisition by Heineken NV was to be made by a Scheme of Arrangement, which was due to go before an Extraordinary General Meeting of S&N on 31 March. Mr Hield said that, under the terms of the Scheme of Arrangement, interested parties adversely affected by it could apply to the Court. He said that, in the absence of a commitment to maintain pension increases as before, he would be such an interested party. He proposed that S&N should obtain a commitment to maintain the existing policy in advance of the Extraordinary General Meeting.
10. The Extraordinary General Meeting was held as planned and the Scheme of Arrangement was voted on and approved.
11. Minute 3 of the minutes says:
“…it was agreed by the Board that it should be noted that an undertaking in the following terms had been given by Heineken in relation to the position of pre-1997 pensioners:-
‘Heineken can confirm that the scheme of arrangement will not affect the rights of employed, pensioner or deferred members under the S&N Pension Plan. There is a practice of providing discretionary pension increases each year in line with retail price inflation (capped at 5%) on pensions built up in the Scheme before 6 April 1997, to the extent that these exceed the Guaranteed Minimum Pension. These increases are not guaranteed and are discretionary, but it is Heineken’s intention to continue this practice.’”
The parties have generally described this as “the Undertaking” and I adopt that description without implication that it had any particular legal standing or force.
12. On 2 April 2008, Mr Hield emailed Mercer, the Plan’s administrator. He referred to the Extraordinary General Meeting and a slide that had been used in the meeting which reproduced the Undertaking (although with the addition of the word “past” before “practice”). He said that S&N’s Chairman had introduced the slide by saying:
“Specific questions have been raised about the inflationary provision for pre 1997 pensions. This direct quote from Heineken confirms their intention to fully step into the shoes of Scottish & Newcastle in this matter.”
Mr Hield suggested that if Heineken needed to be reminded of the Undertaking in future, the reminder might be better coming from the Trustees than the members, and asked for that point to be put to the Trustees.
13. In November 2008 the discretionary increase on pre 6 April 1997 pensions in excess of guaranteed minimum pension was 5% - the same as the increase under the Rules for post 5 April 1997 pensions.
14. In 2009 Heineken UK commissioned a report from KPMG LLP (KPMG) in the light of an apparent deficit in the Plan of £650m. The report, which was dated August 2009 and presented in September, considered a package of options, including no longer paying discretionary increases (or, as a half measure, not paying discretionary increases for future pensioners).
15. In November 2009 the RPI increase was zero at the calculation date and there were no increases, discretionary or otherwise.
16. In January 2010 Heineken UK took advice from their lawyers, who said that in that absence of a contractual commitment, S&N had no obligation to provide any particular level of discretionary increase.
17. By February 2010 matters had reached a point at which Heineken UK and the Trustees met to discuss the future funding of the Plan and the options that Heineken UK had been considering. The Trustees had established a sub-group consisting of independent directors (the “funding sub-group”) for the purpose. There was a meeting on 26 February at which Heineken UK said that the project on discretionary increases was intended to establish a framework for the exercise of discretion that “…would be informed by some measure of affordability…”.
18. In March the Chairman of the Trustees sent a memo to the other board members in which he noted that the initial results of a valuation of the Plan indicated a deficit of £676m as compared to £179m three years beforehand. There was £170m provision for future discretionary increases. Heineken UK had not reached a final decision in relation to discretionary increases, but they were unlikely to award full increases while such a substantial deficit remained. They had proposed reducing the advance provision by £100m. The remaining reserve would be sufficient to cover increases up to the next valuation in three years’ time. On behalf of the funding sub-group the Chairman recommended the recovery plan as a whole (which included steps other than in relation to discretionary increases) to the Trustees.
19. The matter was considered at a meeting of the Trustees on 1 April and it was minuted that the Trustees agreed to the Chairman’s recommendation.
20. In March and April consideration of the approach to discretionary increases continued. Papers were prepared for the management team of Heineken UK setting out the background, ranges of options, potential frameworks, advantages and disadvantages, risks and so on. There was reference to the view that there was no obligation to provide increases on the same basis as in the past. There was no reference, directly or indirectly, to the Undertaking.
21. In June, Mercer prepared a paper, addressed to Heineken UK, which dealt with consequential matters, should there no longer be a presumption that discretionary increases would be granted as before. It covered members who had commuted pension for cash (without distinguishing at the time of retirement whether the commuted pension related to pre or post April 1997 service), the calculation of benefits secured by additional payments such as AVCs, and calculation and apportionment of transfer credits.
22. Also in June, further papers were prepared for the management team. They recorded that in April the management team had decided to “stop discretionary increases sooner rather than later” and that the project team had been asked to consider how the impact could be reduced for those affected – for example with a hardship fund. The paper concluded that there was no workable way of reducing the impact. The management team was asked if it agreed to stopping discretionary increases despite that.