The scheme specific funding regime has replaced the previous statutory funding basis, the minimum funding requirement. The scheme specific funding regime was introduced by Part 3 of the Pensions Act 2004 (“PA 2004”) and the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (“Scheme Funding Regulations”). This new legislation gives effect in English law to Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provisions (“Directive”).

The general rule under PA 2004 is that for the purposes of determining the methods and assumptions for calculating the scheme’s technical provisions, and the matters to be included in the Scheme’s statement of funding principles, recovery plan and schedule of contributions, the trustees need to obtain the employer’s agreement unless certain exceptions are met. If the trustees and the employer cannot agree, the matters will be decided by the Pensions Regulator.

PA 2004 states, in simple terms, that to the extent that any provision in the scheme rules is in conflict with PA 2004, then that Scheme provision is overridden and PA 2004 prevails. This led to a belief amongst some practitioners that PA 2004 overrides the contribution rule under scheme rules in its entirety (in other words, the statutory rules under PA 2004 prevail over the scheme rules, thus weakening the trustees’ position where under the Scheme’s rules trustees have a unilateral power to demand contributions).

The decision in British Vita

This issue came before Warren J in the High Court earlier this year in British Vita v British Vita Pension Fund Trustees. In this case, the proceedings were brought by British Vita, which was the principal employer under the British Vita pension schemes. British Vita was acquired by a private equity firm in 2005. Under the scheme rules, the pension scheme trustees acting on advice of the scheme actuary had the power to determine the employer contribution rate. As a result of the acquisition of British Vita and a concern that this resulted in a worsening of the employer covenant, the trustees demanded an additional contribution from British Vita. British Vita argued that as a result of the coming into force of the new scheme specific funding regime, the trustees could not demand additional contributions under the contribution rule in the scheme rules.

Warren J held that the trustees could validly demand further contributions under the contribution rule in the scheme rules over and above the contributions specified in the Schedule of Contributions. The Schedule was still under the minimum funding regime as the scheme had not yet reached its first scheme specific valuation under Part 3 PA 2004.

However, this left the issue of what happens when the Schedule of Contributions under Part 3 of PA 2004 has been put in place. Guidance on this issue is expected from the Court of Appeal in December 2007.

Where does that leave trustees?

Our view, supported by statements made by Warren J in his judgment, is that the Schedule of Contributions under Part 3 of PA 2004 does not preclude the trustees from demanding additional contributions under the scheme rules. This is because Part 3 of PA 2004 needs to be construed against what is stated in the Directive. There is nothing in the Directive which prevents the contribution rule continuing to apply in parallel with Part 3 of PA 2004. Apart from that, as noted by Warren J, if the UK Parliament had intended to completely override a scheme’s contribution rule by PA 2004, then this could have been stated expressly. We see no reason why the employer contribution rule should not continue to have effect after the Schedule of Contribution under Part 3 of PA 2004 has been put in place. We wait to see whether the decision of the Court of Appeal will confirm this point.