The High Court has clarified pensions law with a ruling that trustees cannot rely on the Pension Protection Fund's (PPF) promise of a safety net when it comes to making decisions about their scheme.

In the case of Independent Trustee Services Limited (ITS) v Hope and Others, the judgment has set out the principles which trustees must now take into account when they consider the exercise of the power to buy-out members' benefits, in particular how far trustees must take into account the existence of the PPF.

ITS, the sole trustee the underfunded Ilford Pension Scheme, developed a proposal when the scheme's sponsoring employer entered into administrative receivership in 2004. The proposal would have resulted in a better outcome for the beneficiaries than winding up the scheme outside the PPF, or with the PPF taking responsibility for the scheme.

The proposal would have seen the purchase of annuity policies from an insurance company in order to secure certain benefits for certain members before the Ilford Pension Scheme had entered the PPF assessment period. These policies would have acted as a bridge between the compensation paid out by the PPF and the benefits promised under the scheme - ITS went to the High Court for clarification on whether the proposal could proceed, but Mr Justice Henderson ruled that it was not permitted for ITS to secure as great a proportion of the benefits promised to members as possible. Effectively, this proposal was to select against the PPF, which the judge ruled unlawful.

Mark Smith, pensions specialist at European law firm Taylor Wessing, and representative for ITS in the case, commented: "This case has significant implications for how trustees take decisions on key issues, such as how best to invest scheme assets. It makes clear, for example, that trustees cannot decide to do something on the basis that if it all goes wrong, the PPF will pick up the pieces. A practical way for trustees to proceed would be to ask themselves: 'would I be taking the same decision if the PPF did not exist?' If the answer is no, trustees will now need to consider their position very carefully before proceeding."

Meanwhile, in a separate High Court judgement, it was ruled yesterday that the conversion of a final salary scheme into a money purchase scheme was unlawful. In the IMG Pension Plan HR Trustees Limited v Peter German and others case, the High Court ruled that the correct procedure be followed where amendments are to be made to a pension scheme.

"This case emphasises the importance of proper communication with employees where their consent is required - if you want consent, members have to understand what they are being asked to agree to and that they have a choice," said Simon Tyler, legal director in the pensions group at Pinsent Masons LLP.

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