The Court of Appeal has ruled that the trustees of two occupational defined benefit (DB) schemes can use a particular mechanism, known as a Headway agreement, to maximise the amount of s.75 debt payable by the employers.
In the case of Sarjeant and others v Rigid Group Ltd, both schemes commenced winding up in 2000. No insolvency event had occurred before the winding up in either case. The applicable legislation at the relevant time required the s.75 debt to be calculated on the MFR basis.
Based on the actuary's estimate as of 30 September 2009, the implementation of a Headway arrangement would have resulted in additional s.75 debt for the Company of GBP 1.9 million and GBP 1.6 million respectively in relation to each scheme. This would still not have been enough to fund the full buy-out cost of the members' benefits.
A Headway agreement is typically achieved by a three stage process:
- the trustees apply the entirety of the available scheme assets (after a retention for expenses) in the purchase of annuities for the payment of benefits;
- the trustees fix the "applicable time" for the calculation of the s.75 debt after the completion of stage (1) and then collect the debt from the employer;
- the trustees apply the amount of the s.75 debt in the purchase of further annuities so as to secure further benefits to which members are entitled under the scheme.
The difference in outcome is due to the fact that, under the Headwayarrangement, the liabilities discharged at stage 1 are effectively valued on the buy-out basis rather than on the prescribed s.75 basis (based on the legislation which applied at the time the schemes went into winding up, this was calculated by reference to the MFR).
The Court of Appeal did not need to rule on whether a Headwayagreement could be effective (the Headway case itself had established that it could). The key point for the Court of Appeal to determine was whether the particular rules of the schemes, which did not expressly allow the trustees to implement a Headway agreement (or indeed a partial buy-out in any other context), gave the trustees sufficient power to implement such an agreement.
The Court of Appeal, in adopting a purposive approach to the construction of the relevant rules, concluded that they did. In reaching its conclusion Patten LJ cited with approval the approach taken in theBritish Airways case.
The decision provides helpful authority for the general principles to be applied to the construction of pension schemes. The Court of Appeal noted that the starting point when considering the nature of trustees' duties under a particular rule should be the objective and purpose of the duty. In this case, the duty of the trustees under the winding up rules was to secure insurance policies or annuities which as nearly as practicable matched the beneficiaries' entitlements under the schemes.If the trustees were able to increase the value of the assets available to fund the purchase of such annuities by using a two stage rather than a one stage process, that was entirely consistent with the duty which the trustees were required to perform.
This case is useful in confirming the general principles of construction which should be used when interpreting a scheme's governing documentation. It will be of interest to employers and trustees grappling with any issue of interpretation in their scheme rules. It will not, however, be of any direct relevance to issues facing schemes have commenced winding up more recently. This is because, since the employer debt legislation changed so as to require s.75 debts to be calculated by reference to the buy-out basis (from 11 June 2003), there has not been any reason for trustees to enter Headway arrangements.