Independent Trustee Services Limited v Hope & Others [2009] EWHC 2810

This case concerned the Ilford Pension Scheme (the Scheme), an under-funded defined benefits scheme closed to new members in 2002 and closed to accrual of benefits in respect of future pensionable service from February 2005.

In 2000, some senior managers accepted unreduced early retirement pensions in return for waiving certain contractual rights such as 12 months’ notice. By the date of the court application, many of those members had not reached the Scheme’s normal retirement age. This meant that, if the Scheme were taken on by the PPF, these members’ benefits would be affected by the PPF’s compensation cap. Estimates of the applicable reductions in benefits for the various retired managers were between 25 per cent and 50 per cent.

Independent Trustee Services Limited (ITS) applied to the High Court for directions in relation to a proposal to use the scheme power to buy out those members’ benefits in full before the PPF assessment period began. This would mean that, if the Scheme were accepted into the PPF, the affected members’ benefits would not be affected by the PPF compensation cap, as their benefits would be paid in full under the annuity policies purchased by ITS.

The key questions upon which ITS asked the court for directions were:

  • Was the proposal to use the buy-out power in the Scheme’s trust deed and rules in this way an “improper purpose”?
  • Was ITS entitled to take the existence of the PPF into account when exercising its buy-out power?
  • If the PPF should be taken into account, how should this be done?
  • If such a use of the power was not considered to be for an “improper purpose”, would the proposal be in any event objectionable because it would involve a breach of ITS’ duty to maintain a fair balance between different groups of beneficiaries?
  • If the proposal would otherwise be unlawful, was the court obliged to give its approval so as to ensure compliance with the EC insolvency directive provisions to protect the pension interests of past and present employees on the employer’s insolvency?

The court did not approve the buy-out proposal as it held that it would be contrary to the fundamental purposes of the pension scheme to allow ITS to apply a disproportionately large share of the fund to buy out a member’s benefits in substitution for those provided under the Scheme. The prospective availability of PPF compensation was not a relevant factor for the trustee to take into account when considering the use of the buy-out power. As the buy-out proposal was not approved, the judge considered he need not address the third and fourth questions above.

In relation to the EC law question, the court ruled that is was inconceivable that the European Court of Justice (ECJ) would find the existence of a cap on PPF compensation incompatible with article 8 of the insolvency directive. However, it was noted that it was possible that the prospective level of PPF compensation could require further reference to the ECJ in the future.

The PPF has welcomed the decision, since it has estimated that the approval of such proposals could have increased its net liabilities by approximately £380 million a year.

Comment: the judge considered the buy-out proposal to maximise benefits at the expense of the PPF to be akin to tax avoidance and a “blatant attempt to undermine or circumvent the policy of the PPF legislation”. As a result, trustees considering a buy-out will need to tread carefully and the decision effectively closes the door to similar proposals. In future, trustees will have to ask themselves whether or not they would take a proposed course of action if the PPF were not in existence as a pensions safety net.

This case is analysed more fully in our November 2009 briefing.

View the judgment.