Earlier this year the Trustee of the Merchant Navy Ratings Pension Fund (“Fund”) won High Court approval over a deficit contribution model, allowing it to collect funding from around a further 210 former sponsors.
Following a one-month hearing towards the end of 2014, Mrs Justice Asplin handed down her judgment approving the proposed deficit contribution model on 25 February 2015.
The Trustee of the 30,000-member scheme had taken the decision to close it to future accrual in 2001, when only 40 employers still had actively accruing members within the Fund.
The Fund was closed in deficit as the remaining sponsors created a deficit reduction plan (“Plan”) looking to eliminate the underfunding by 2007.
Under this Plan:
- the liability for employer contributions rested solely on the 40 companies that employed active members of the Fund as at 1999;
- broadly, no contributions were required from the 200-odd employers who stopped employing active members of the Fund before 1999, although a number of historic employers made significant voluntary contributions to the Fund between 2001 and 2006.
However, economic circumstances prevented the Plan from working and as a result the Fund still retains a deficit of near £500M.
The approximately 40 contributing former sponsors were forced to seek assistance from approximately 210 former sponsors and initiated a two-year legal dispute that ended in 2011.
Back then the Court ruled that the Trustee had the power to amend the Rules of the Fund so as to introduce a deficit repair regime that required contributions from all employers.
In the High-Court a Cooper-type application was made, 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.
It should be noted that in such proceedings neither the Court nor any other party has the power to suggest alternative solutions.
In determining whether to approve the Trustee’s proposal for the new deficit contribution regime requiring payment from all employers 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.
However, here it was determined that this duty was equivalent to the duty to “promote the purpose for which the trust was created” and therefore best interests are decided within the limit of the scheme rules and the benefits that the members were intended to receive. Practically though this is simply a change of wording rather than a change in approach.
2. To what extent can trustees take employers’ interests into account when making decisions?
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, the best outcome for members would be to seek higher deficit contributions from employers with strong covenants.
Previously this point had been unclear and the High Court held that provided that the primary purpose of securing members’ benefits due under the Fund is furthered, and the employer covenant is strong enough to fulfil that purpose, then the Trustee may take into account employers’ interests when determining the Fund’s deficit contribution regime.
However, the Trustee is not obliged to take into account employers’ interest, nor is it required to adopt the lowest risk funding regime possible.
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?
It was held that the members were not “active”, for the purposes of the s. 75 debt regime.
This was because they were entitled to enhanced revaluation of their benefits accrued prior to this date.
This confirmed the Trustee’s understanding that the Fund was “frozen” (fixing the “pool” of employers who could, in future, become liable for a s. 75 debt) in 2001.
Following this hearing, there may be scope to argue that only members who continue to accrue 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. However caution should be exercised since the judgment did not expressly address this question, and the court’s conclusions are confined to the facts of this case.