Prudential has been taken to court by the trustees of its employees’ retirement fund.

The financial services firm changed its practices in 2006 to plug a £379 million deficit in its defined benefit (DB) pension plan.

Broadly, while the trustee must apply increases required by statute to certain elements of pensions in payment, under the scheme rules all other pension increases are at the firm’s discretion.

Before 2006, the firm had awarded discretionary increases in line with increases in the retail prices index (RPI), limited to 2.5%. However, it is possible that in any year this limit will not be applied, for example, in April 2007 an increase of 2.7% was awarded.

In the past, there have been periods of high inflation when the discretionary increases awarded have failed to maintain fully the purchasing power of the pensions, although there have also been years when the increase awarded to those who have suffered a loss of purchasing power was greater than the RPI. It was Prudential’s policy to pre-fund the scheme for these increases.

The trustees have since received a number of complaints and enquiries from members regarding the firm’s change to its policy on discretionary pension increases and decided that it would be in the members’ best interests to ask the court to make a ruling on various issues.

The questions the court is being asked to consider include:

  • Whether the firm may award annual pension increases at its discretion, or whether members of the DB section of the scheme are entitled to annual pension increases (other than those required by statute) by reference to RPI or any other rate;
  • Whether the trustee has the power in any circumstances to award annual pension increases (other than those required by statute) by reference to RPI or any other rate;
  • Where additional voluntary contributions (AVCs) have been made by a member to purchase additional pension on terms that include an allowance for future pension increases, whether the trustee has the power – or the firm an obligation – to provide that AVC pension with such future increases by reference to RPI or any other rate;
  • Where funds from another pension arrangement have been transferred by a member into the scheme on terms that include an allowance for future pension increases, whether the trustee has the power – or the firm an obligation – to provide the pension arising from that transfer with such future increases by reference to RPI or any other rate;
  • Where the firm has requested the trustee provides additional benefits to a member on terms that include an allowance for future pension increases (for example, where the member has elected to forgo a specific amount of redundancy payment and is provided instead with additional benefits under the scheme), whether the trustee has the power – or the firm an obligation – to provide that additional pension with such future increases by reference to RPI or any other rate;
  • Whether the trustee and the scheme’s actuary have validly exercised their powers with respect to the terms on which AVC pensions, transfers into the scheme and augmentations have been granted and if not, the consequence of an invalid exercise of their powers;
  • and whether the firm’s new policy with respect to discretionary increases is a breach of the duties it owes to members of the scheme.

    • The court’s decision on these issues will be binding to all members of Prudential’s DB scheme, as well as the firm and the trustee.

    A Prudential spokesperson said: "We cannot comment on a legal matter which is before the Court.”

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