Changing Pension Arrangements - Extrinsic Contracts - Pensions In 30 Podcasts, Episode 19

Subscribe via iTunes

Download the fact sheet here.

Key points

The employer and members of a scheme can contractually agree that the member's entitlement under the scheme will be different to that under the scheme rules The case of South West Trains v Wightman established that such "extrinsic contracts" could be effective Extrinsic contracts cannot affect benefits which it is agreed have been earned by members' employment before the extrinsic contract is concluded, because of section 91 of the Pensions Act 1995 Extrinsic contracts can be useful for employers looking to make changes to future pension benefits but they should always be used with care and only after taking legal advice Main sources

South West Trains v Wightman [1997] EWHC 1160 (Ch) Bradbury v BBC [2012] EWHC 1369 (Ch) Briggs v Gleeds [2014] EWHC 1178 (Ch) Pensions Act 1995 What is an extrinsic contract?

An extrinsic contract in relation to a pension scheme is an agreement between a member of the scheme and their employer that the member will receive benefits different to those set out in the scheme rules. The agreement will usually be in the member's contract of employment, or a variation to it.

The principle that benefits under a scheme could be varied by extrinsic contracts was established in the case of South West Trains v Wightman.

When are extrinsic contracts used?

Extrinsic contracts are most commonly used as a way of employers awarding pay increases which are not pensionable - the employer offers a pay increase to a member on condition that they agree it is not taken into account for the purposes of their pension benefits.

Extrinsic contracts are also sometimes used as an attempt to agree amendments to other benefits which the member will earn in respect of their future service with the employer.

Extrinsic contracts might also be used in an attempt to cure a defective amendment to a scheme - where a change to the rules was previously attempted but was ineffective for some reason, employers often argue that the member also contractually agreed to the amendment (by, for example, returning a signed option form).

What are the requirements of an extrinsic contract?

Extrinsic contracts are individual arrangements - so whether a member's pension benefits are subject to an extrinsic contract is judged individually. For an extrinsic contract to be valid, it will need to meet the requirements of a contract, i.e. that:

there is an offer by the employer - which should at least offer...