The High Court has given its decision in the Merchant Navy Ratings Pension Fund case. This case concerned proposals by the trustee to introduce a contribution structure which would require historic employers to contribute to the scheme in order to repair the scheme deficit.

By way of background, in 2001, the scheme had a significant deficit and closed to new members and future accrual. Under the scheme rules, members still in employment were defined as “active members” and had their benefits revalued in line with national average earnings or the lesser of 7% or RPI (depending on which they had chosen and referred to below as “enhanced revaluation”). The “active member” category could include members who had left employment altogether for a period.

The trustees had administered the scheme since 2001 on the basis that it was a frozen scheme.

A question arose as to whether debts could have been triggered in relation to employers who ceased to employ any “active members” after 2001 or whether such employers could not have exited the scheme and would therefore remain employers liable to contribute to the scheme.

Frozen schemes

Much of the judgment is very specific to its facts and is not of general application. However there are some points which are of wider importance.

In a multi-employer scheme, broadly speaking, a section 75 debt will arise where an employer ceases to employ anyone in a category of employment to which the scheme relates at a time when at least one other employer continues to do so. It has been the source of much discussion over the years what this test actually means, in particular whether providing a link to final salary or higher rates of revaluation to members who are still employed amounts to continuing to employ people in a category of employment to which the scheme relates.

In this case, the judge considered that the enhanced revaluation did not satisfy the test and members were no longer in employment covered by the scheme. The service to which the scheme related was all in the past and ceased in 2001 when the service related accrual of benefits ceased. The enhanced revaluation related to service up to 2001 and was a right attaching to benefits already accrued at that date. Although in most (but not all) cases it was conditional upon retaining a certain employment status (as defined in the scheme rules) it was not service to which the scheme related.

The consequence of this was that the scheme had been a “frozen scheme” for section 75 purposes since accrual ceased in 2001. This meant that when, in 2003, an employer ceased to employ any members entitled to the enhanced revaluation, no section 75 debt had been triggered so that employer remained a statutory employer for section 75 purposes and was still liable to contribute to the scheme.

The case did not specifically consider the status of a retained salary link once accrual has ceased, but the conclusions of the judge are expressed in wide terms and could be interpreted as applying to this kind of benefit structure.

What this means is that in practice, where a scheme has closed to future accrual but continues to offer a salary link, higher rates of revaluation or other non-service related benefits to employed members, consideration will need to be given as to whether any exit debts paid since closure did in fact discharge the liability of the paying employer. In many cases, there will not be an issue as, since April 2008, there has been a power for employers to trigger exit debts in frozen schemes by notice and many exits will have been structured using this provision in the alternative. For exits that were thought to have occurred prior to April 2008 or where the frozen scheme mechanism was not used, further thought will need to be given as to the impact of the judgment. However, until any appeal concludes (or there is confirmation that no appeal will take place) the best course of action will usually be to wait and see what happens.

The analysis in the judgment may also have implications for how such schemes revalue the benefits of employed members. If it is correct that members are no longer in pensionable service, then they are entitled to statutory revaluation from closure. Where this is not currently provided as an underpin, consideration should be given to whether any changes need to be made. However, again pending any appeal, it is likely most existing arrangements will continue in place.

Other points of interest

The judgment also contains useful clarification about trustees’ duties, in particular the extent to which they may take into account employer interests when exercising their powers.

The judge concluded that “there is nothing in the proper purposes principle which requires the Trustee to adopt the most extreme, most risk fee funding regime without reference to any other factors”. So, the level of prudence which trustees are required to exercise is a sensible one, not an extreme one. This is a useful confirmation of what was already understood to be the case.

In relation to how far trustees can take into account the interests of the employer, the judge says “as long as the primary purpose of securing the benefits due under the Rules is furthered and the employer covenant is sufficiently strong to fulfil that purpose, it is reasonable and proper should the Trustee consider it appropriate to do so, to take into account the Employers’ interests” when putting the new contribution structure in place and increasing the pool of employers liable to contribute to the scheme. Again, this represents welcome confirmation of trustees’ ability to consider the impact of their decisions on participating employers.