Many pension scheme trustees will be aware of the principles that came out of the Re Courage Group's Pension Schemes case in relation to restrictions on a scheme's power of amendment. In Courage, it was decided that a condition in an amendment power which prevents any reduction in a member's "secured" benefits means that a member must remain entitled to a pension based on the member's final salary. In other words, this prevents amendments being made to a scheme that break the final salary link, on scheme closure or otherwise. 

The Avon decisions are a further evolution of judicial thinking on these principles and have potentially interesting consequences for final salary schemes. They revolve around changes made to the Avon scheme in 2006 which broke the final salary link as at the date of the closure of the scheme and also provided for revaluation of benefits up to retirement on a career average revalued earnings (CARE) basis. This resulted in the scheme having two categories of member:

• the "Revaluation winners", who were better off as a result of the 2006 changes; and
• the "Final Salary winners", who were worse off as a result of the 2006 changes and would have been better off under the previous benefit structure. 

The key question initially was whether the 2006 amendment infringed the Courage-type restriction on the amendment power and therefore whether the amendment was wholly or partly invalid for those members who would be worse off. If so, the amendment would be wholly or partly overturned, resulting in a positive impact for the Final Salary winners, but a negative impact for the Revaluation winners.

The Final Salary winners agreed a compromise of their claim to have the amendment overturned, meaning that the court was left to consider the position of the Revaluation winners and what the effect of the infringement of the amendment power was on this group i.e. was the amendment only invalid in relation to the members who were worse off (the Final Salary winners) or was it also invalid in relation to the Revaluation winners, even though that group were better off as a result of the changes? The judge decided that the amendment was effective in relation to the Revaluation winners.

The basis for the decision was that, where there has been excessive execution of a power, the court will do what it can to uphold the validity of what has been done. In this case, the exercise of the power could clearly be separated into two parts: a valid exercise, which benefited the Revaluation winners; and an invalid exercise which prejudiced the Final Salary winners. The court achieved this by implying a limitation on the terms of the exercise of the power, which had the effect of invalidating the exercise of the power in relation to those who were prejudiced by it.

The fundamental principle underlying the decision is that the courts should "make an objective enquiry as to whether the proposed severed valid exercise of power is a substantially different exercise of the power, rather than to make a subjective enquiry as to whether the decision-maker would have exercised it in that way".

Implications

The Avon decision is a reminder of how important it is to understand and comply with the terms of a pension scheme. 

Issues arising out of past pension scheme amendments can be particularly difficult because they have the potential to invalidate the basis on which a pension scheme has been providing benefits for many years. More and more issues of this type are being discovered as an increasing number of defined benefit schemes are ''auditing'' their benefits in advance of securing benefits with an insurer. In the circumstances, it is helpful that the court's starting point is to validate amendments wherever it can.