On 25 February 2015, the High Court handed down its much anticipated judgment in the Merchant Navy Ratings Pension Fund (MNRPF) case. Below we consider the wider impact of the judgment.
- The case arose due to the potential cross-subsidy by competing employers of their competitors’ pension liabilities under the same scheme.
- The High Court approved the Trustee’s proposals for a complex contribution agreement that affected past as well as current employers of active members. In this respect though the case is likely to apply only in circumstances very similar to those applying in the case.
- Trustees should continue to act in their beneficiaries’ best interests within the limits of their scheme rules and intended benefits.
- Trustees may, in appropriate circumstances, take into account the employers’ interests in relation to deficit funding but are not obliged to do so.
- The case may provide limited flexibility in dealing with amendment power restrictions on a closure to future accrual of benefits, but each closure will continue to need careful analysis.
The MNRPF (the Fund) is technically a “non-sectionalised multi-employer industry-wide defined-benefit CARE occupational pension scheme”. The important point is that, depending on the employer contribution regime adopted by the Fund’s Trustee (which has the sole power to make this decision), commercial competitors could be required to subsidise each others’ deficit contributions.
History of the Fund
In 2001, the Trustee introduced a new employer contribution regime (the 2001 Regime), which aimed to eliminate the Fund’s substantial deficit. The key terms of the 2001 Regime were:
- the liability for employer contributions rested solely on the 40 companies that employed active members of the Fund as at 1999 (the Current Employers);
- broadly, no contributions were required from the 200-odd employers who stopped employing active members of the Fund before 1999 (the Historic Employers). However, a subset of Historic Employers (Voluntary Employers) made significant voluntary contributions to the Fund between 2001 and 2006; and
- the Fund was closed to future accrual of years of pensionable service with effect from 2001, although certain members continued to receive enhanced revaluation of their accrued benefits. Broadly, these members included those who remained in “seagoing employment” and, in some circumstances, those who paid contributions while unemployed or were otherwise treated as not having left service for a period.
Unsurprisingly, the Current Employers began to question why they should cross-subsidise the pension deficit payments of the Historic Employers - their commercial competitors. This led to proceedings in 2009, in which it was held that the Trustee had the power to amend the Rules of the Fund so as to introduce a deficit repair regime which required contributions from all employers (both Current and Historic).
The immediate proceedings were a Cooper-type application, under which trustees faced with a particularly momentous decision can seek the Court’s confirmation that their proposed line of action is within the scope and proper exercise of their powers. In such proceedings it is not for the Court, or any other party, to suggest alternative or better ways in which the same outcome can be achieved.
Here, the Trustee asked for the Court’s confirmation regarding the terms of a complicated new deficit contribution regime, which sought payments from both Current and Historic Employers. To provide this confirmation, the Court had to answer three questions.
1. What duty do pension scheme trustees owe beneficiaries?
Prior to this judgment, it had long been understood that a trustee’s main duty was to act in the best interests of beneficiaries.
In MNRPF, however, it was held that the Trustee’s duty to act “in the best interests of beneficiaries” is a re-formulation of the duty to “promote the purpose for which the trust was created”: members’ “best interests” are decided within the limits of their scheme’s rules and the benefits they were intended to receive. In practice, this element of the case marks a change of wording rather than approach.
2. To what extent can trustees take employers’ interests into account when making decisions?
Previously, the extent to which trustees could take employers’ interests into account when making decisions was unclear. In the context of agreeing funding arrangements, tPR’s (non-binding) Funding Defined Benefits code of practice states that trustees can take account of employers’ interests, echoing its new statutory objective. The only case law stating that it is not in beneficiaries’ interests for trustees to grind their employers into the ground was decided in the context of a scheme surplus, and the extent to which this principle applied in other circumstances was unclear.
In MNRPF the question was whether the Trustee could, in introducing a new deficit contribution regime, take account of what was fair between the Fund’s employers. If the Trustee could not do so, it was arguably in members’ interests to, for example, deny Voluntary Employers credit for their previous contributions, or place the entire deficit on a small number of employers with very strong covenants.
It was held that provided (a) the primary purpose of securing members’ benefits due under the Fund is furthered, and (b) the employer covenant is strong enough to fulfill that purpose, then the Trustee could (but is not obliged to) take account of employers’ interests when deciding the scope of the Fund’s deficit contribution regime. Further, the judge found (bearing in mind that this was a Cooper-type application) that the Trustee was not required to adopt the lowest risk funding regime possible.
Pension scheme trustees should be wary of any suggestion that they are now requiredto take employers’ interests into account when reaching decisions - this goes beyond the scope of the judgment.
3. For the purposes of the s. 75 debt regime, is a scheme “frozen” if members cease to accrue years of pensionable service, but continue to receive enhanced revaluation of their benefits?
The Fund was closed to future accrual of years of pensionable service in 2001. The judgment held that members were not “active”, for the purposes of the s. 75 debt regime, solely because they were entitled to enhanced revaluation of their benefits accrued prior to this date. This was important because it confirmed the Trustee’s understanding that the scheme was “frozen” (fixing the “pool” of employers who could, in future, become liable for a s. 75 debt) in 2001.
It was hoped that the MNRPF judgment might also resolve a long-running debate in the pensions industry: were members with a Courage-type final salary link (i.e. members who had stopped accruing years of pensionable service, but maintained a link to their final salary while they remained employed by a participating employer) “active” for the purposes of the s. 75 debt regime? The judgment did not address this question directly (as there was no need to do so), and the conclusions drawn are largely confined to the facts of this case. However, there may now be scope to argue that only members who continue to accrue years of pensionable service should be considered “active” for the purposes of the s. 75 debt regime, and so members with a Courage-type final salary link do not fall within this definition.