Power of amendment: Who can change the scheme rules?
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The power of amendment is the key thing to consider before trustees can make changes to the scheme rules. What is common practice, and what should trustees be careful about after the British Airways judgment?
The BA trustees had sole power of amendment, but this did not give them a free hand to decide to change benefits, the Court of Appeal ruled. Having the power of amendment solely in the hands of the trustees – or the employer – is, however, relatively rare; usually the company and trustees exercise this together, or one of the two has to obtain the other’s consent.
Courts have 'looked a lot' at power of amendment
The courts have looked a lot at powers of amendment in the past few years and the judgments have shown that the terms of a scheme’s amendment power must be strictly followed, says Sue Tye, of counsel at Baker McKenzie.
“A good example of this is the changes – or rather purported changes – that some schemes sought to make to equalise pensions benefits in the 1990s following the Barber judgment,” said Tye. “A number of schemes issued announcements to the membership to do this, but when the power of amendment was later scrutinised by the Courts, the amendments were found to be ineffective where the power of amendment required changes to be made by deed alone.”
But it’s not just the formal requirements trustees need to be mindful of. For the BA’s trustees, it was the purpose of using their power that was key to the outcome.
“The Court determined improper purpose in exercising the power of amendment to introduce the increase power because it took the trustees into benefit design territory which was not management or administration of the scheme,” she says, and scheme design was more properly the domain of the employer.
Although the trustees decided not to appeal to the Supreme Court but settled with the company in April, the Appeal Court’s decision can be looked to by other trustees, says Tye.
She says it would have been helpful to have the Supreme Court confirm or deny this approach, and notes that even where – as was the case in BA – the trustees’ remit was to “manage and administer” the scheme, there is still a question to what extent a similar provision would need to be expressly set out in the rules or not to apply this judgment.
All trustees should be mindful of proper purpose and the BA case, whether they have sole power of amendment or not, she advises.
Need for proper purpose applies to all trustee powers
Less than 5% of schemes have sole power of amendment, estimates Clifford Sims, a partner at law firm Squire Patton Boggs.
“In my experience the origin of such powers tends to be lost in the mists of time although some arrangements which are industry-wide are more likely to have such a power, simply because there is no principal employer and it would be impractical to have to deal with getting consents from lots of employers,” he notes. More complex schemes, with different employee groups sometimes have detailed rules on how each representative group on the board has to be consulted.
A proper purpose is important for using the power of amendment, says Sims, but applies to all trustee powers, as a principle of how trustees ought to behave.
“The more difficult part of this is that it really depends what trustees are being asked to amend under their rules,” he notes, adding that the law expects trustees to take advice on how to exercise their powers.
“If trustees do exercise their powers for the wrong reason, they will of course be risking losing the protection of the indemnity in the trust deed and rules, which is a good deterrent,” says Sims.
Who can amend the power of amendment?
The question of who may amend the amendment power “is a pretty complex area”, says Sims, and one that would depend very much on the facts and scheme rules.
“The general academic position is that powers of amendment can’t themselves be amended,” he says, as otherwise the employer or the trustees could do whatever they liked. “If there is an obvious error in a power that makes it unworkable for some reason, the safest thing to do would be to apply to court to get approval for an amendment.”
But amending a power of amendment is uncommon, believes Tye. “There would arguably need to be a specific power in the scheme rules to enable this to be done, [and] even then it may be difficult,” she says. Doing so to remove restrictions is not likely to be possible, she notes, and says: “From the trustees' perspective, they would need to ask themselves, ‘How would any such amendment be in the interests of the beneficiaries?’”
Have you used power of amendment to change a scheme’s rules? What did you learn?