Most investors are aware that liabilities for defined benefit pension schemes can be very significant, on occasion enough to create a transaction. As a result, extensive due diligence is needed to ensure that all post pension liabilities are fully discharged. A recent case, Merchant Navy Ratings Pension Fund Trustees Limited v Stena Line Limited and others, suggests that even companies where the pension debts have been paid in full could be liable again.
Generally, company’s obligations to a defined benefit pension scheme are due to legislation, and separately under the scheme’s documentation, consisting of its trust deed and rules. The obligations from legislation are quite clear: once the liability is demanded and paid, the obligation ceases completely. Generally, it is hard to challenge this process or even the calculation of the liability, so that, if the demand and payment have taken place, the company is clear from any statutory obligation.
However, the liability under the scheme’s documentation is entirely separate from the statutory obligation. This means that the statutory debt is due whatever the rules say, but it also means that the rules may demand a payment even if the statutory debt is paid (or none is due). The Merchant Navy case has confirmed that this might be extended - a pension scheme may change to provisions so that more money is required from a company which has ceased involvement in the scheme.
The Merchant Navy scheme was an “industry wide” scheme, which included as employers many businesses that were unconnected with each other and in fact were competitors in the shipping industry. The trustees were looking to amend the scheme rules so that the existing liabilities could be demanded from companies which no longer had employees in the scheme, some of which had paid a debt under the legislation into the scheme when they left.
The court held that the fact that some employers had paid their statutory debt and had no further liability under the rules did not stop the rules being changed to give them new liabilities. For some businesses, this would clearly give rise to an unexpected and previously non-existent liability.
The circumstances of the Merchant Navy case was unusual given the range of employers and its history and most other schemes would not be in a position where this type of change would be appropriate. Nevertheless, if the trustees are so minded and have the power under the trust deed and rules to make an amendment to make employers liable again, the law does allow them to do so.
This makes the position for investors less certain. If a target previously participated in a defined benefit pension scheme, even if there is no liability under the trust documentation and the statutory debt has been paid there is still a risk,
if small, that a liability may arise from a change to the schemes’ documentation. If the scheme is industry-wide, the risk in practice will be larger. Detailed due diligence and undertakings from decision-makers will limit this risk, but it cannot be entirely eradicated.