Avon Cosmetics v Dalriada Trustees: court confirms partially valid CARE amendment is effective

The High Court’s recent decision in Avon Cosmetics Ltd v Dalriada Trustee Ltd considers the conditions that apply when considering severance of an amendment, and whether a partially invalid amendment can be saved.

In the case, the High Court concluded that the valid part of an amendment to the Avon Cosmetics Pension Plan which had broken the final salary link between accrued service and future pensionable salary increases upon switching from a final salary basis of accrual to one based on CARE (career average revalued earnings) in September 2006 could be severed from the invalid part and thereby saved.

The amendment power and its exercise

The Avon scheme’s amendment power was subject to the restriction that an alteration could not be made if it affected ‘prejudicially’ pensions in payment or “benefits accrued or secured up to” the effective date of the change (the Fetter).

Final Salary Winners and Revaluation Winners

It was established that moving to a CARE basis for future service benefits could detrimentally affect certain members’ accrued benefits. Although, it was not possible to determine which members would be ‘worse off’ until a member either retired or left employment when the effect of increases to salary and inflation rates would be known, it was possible to classify members as either being ‘worse off’ because of the CARE amendment (called Final Salary (FS) Winners in the case) or better off (referred to as a Revaluation Winner). 

The question before the court – could the valid part of the CARE amendment be severed?

The court did not consider whether the CARE amendment was valid and an argument that the entirety of the CARE amendment was invalid was not raised. An assumption was made that the amendment involved an ‘excessive exercise’ of the relevant power by switching FS Winners to CARE with such members being entitled to final salary benefits – it breached the Fetter.

The question that the court was asked to answer was: what was the effect of this excessive exercise of the amendment power on Revaluation Winners – on the assumption it was void in relation to FS Winners, was it also completely invalid vis-à-vis Revaluation Winners?

The issues before the court were framed in this way for two reasons: (i) because negligence court proceedings against various advisers regarding their advice on the CARE amendments were being considered, and answering the partial invalidity question would allow loss to be quantified, the cost of providing final salary benefits to all relevant members being lower than if an underpin providing the greater of final salary or CARE was applied; and (ii) because in February 2024, the court is due to consider sanctioning a compromise regarding FS Winners which influenced how the issues should be put to the court.

The considerations for the court

The judge carried out a detailed analysis of the relevant issues regarding severance including construction of pension scheme governing documents, the scope of powers and the applicable court cases. He explained that where a power such as an amendment power has been excessively executed through a legal breach or because it exceeds the power’s limits or authority, the court will “naturally incline to uphold the validity of the exercise so far as it can”.

Whether the valid element of a partially invalid amendment can be upheld depends on whether the two parts can be ‘conceptually separated’, the power must still be capable of being effective in its restricted form. The court also considered the application of a further condition, that the person exercising the amendment power ‘would still have’ done so had they known at the time about the limitations of the power.

The court’s decision – the Revaluation Winners part of the CARE amendment could be severed

The judge concluded that the FS Winners and Revaluation Winners constructs were, both in construction and severance terms, “sufficiently different and identifiable” to allow the CARE amendment to be severed and treated as valid in part, that is in relation to Revaluation Winners (on the assumption that it was invalid in respect of the FS Winners). The issue as regards not being able to determine in which group a member should be placed until their benefits crystallised did not affect this finding.

The judge also decided that treating the amendment as working only in respect of Revaluation Winners still fell directly within the overall objective intention that the trustees had when exercising the amendment power (that is to remove a final salary link by stopping future accrual and switching members to a CARE basis).

The issue of whether the trustees would have “still exercised the power” in a subjective manner did not arise in this case – to have to look at what the actual decision-maker would have done in a case such as this is not what the court has to consider – instead it needs to consider whether applying the severed part of the amendment exercise would end up with the exercise of the amendment power being ‘substantially different’ (an objective test), which as noted above, it did not.

Comments

This case demonstrates the conditions that must be satisfied when considering whether the valid part of an amendment can be severed from the invalid part – in summary: (i) it must be possible to ‘conceptually separate’ the valid part of the exercise of the amendment power from the invalid exercise; and (ii) it must be shown that the relevant parties would still have exercised the power knowing its limitations (tested objectively considering the overall purpose of the exercise, rather than looking subjectively at what was “actually in the minds of the” trustee).