Summary

The British Vita case is an important decision dealing with the interaction between a scheme’s contribution rule and the new scheme funding regime.

The Pensions Act 2004 introduced the scheme funding regime for defined benefit schemes for the first actuarial valuation with an effective date on or after 22 September 2005. This funding regime replaced the obligation that trustees had to fund in accordance with the statutory minimum funding requirement (MFR).

The British Vita case decides that, if a scheme’s contribution rule permits, trustees may make an employer contribution demand which exceeds that required under the schedule of contributions where there is no scheme funding requirement schedule of contributions in place. The judgment did not decide whether or not the position would have been different where the scheme had a schedule of contributions in place under the new regime.

This briefing note considers the decision.

Scheme funding regime: a quick reminder

The scheme funding regime requires that each scheme must have a statutory funding objective. The statutory funding objective is that the scheme must have sufficient assets to cover its technical provisions (or liabilities). Generally the trustees must set the technical provisions on the advice of the actuary and with employer agreement. However, where the trustees have sole power to set contributions, they need to consult with the employer rather than seek agreement.

The trustees are required to obtain regular actuarial valuations of the scheme on the scheme funding basis. Where there is a shortfall, the trustees must put in place a recovery plan to address the funding deficit as well as an ongoing schedule of contributions agreed by the employer. The trustees are also required to keep members informed about the funding position using regular funding statements.

The Regulator has specific powers to intervene in scheme funding where trustees and employers are unable to agree. For example, it can direct how technical provisions are to be calculated as well as impose a schedule of contributions.

Facts

In 2005 British Vita PLC (BV) was acquired by a private equity firm and was re-registered as an unlimited company. After the acquisition (which was highly leveraged) there was a major corporate re-organisation, one purpose of which was to reduce significant debt.

At the time of the acquisition, the two BV pension schemes were well funded on the middle-of-the-road assumptions which had been used at the previous actuarial valuation. After the acquisition, BV continued to contribute to the Schemes in line with the schedule of contributions.

By an undated letter sent on 26 July 2006, the trustees of the schemes demanded from BV (and not the other participating employers) an additional employer contribution of £49.6 million based on very different and conservative assumptions under their power in the contribution rule. The reason for this demand appeared to be the trustees’ perception (based on independent advice) that BV’s purchase by the private equity house had affected BV’s covenant and its ability to support the schemes. BV refused to pay the demand. The schemes’ trustees indicated that they would bring proceedings to recover the amounts demanded. As a result BV challenged the validity of the demands on the following grounds:

The scheme funding regime which came into force in December 2005 was intended to be all encompassing. As such, the trustees were no longer able to exercise their powers under the contribution rules to demand additional contributions because the demand conflicted with the scheme funding regime.

On their true construction, the contribution rules did not permit the trustees to demand the sums stipulated from BV alone in the manner they did.

What was decided?

The judge, Mr Justice Warren, decided the following:

  • There is nothing in the Act’s requirements which would prevent a scheme from being funded at a level in excess of that necessary to meet its technical provisions.
  • During the period before a scheme has its first scheme funding valuation and its first schedule of contributions on that basis in place, its contribution rule will still apply and is not restricted to the amounts shown in the MFR schedule of contributions.
  • The demands made by the trustees to BV were within the scope of the rules. However, the judge held that it was a matter to be decided in other proceedings whether or not the trustees acted properly in assigning the total amount of the demand to BV to the exclusion of the participating employers.

What was not decided?

The judge did not decide whether or not there would have been a different outcome to the case if there had already been a scheme funding regime schedule of contributions in place and the trustees had wanted to issue a demand for an amount in excess of that required by the schedule. In order to decide this question he thought that the following questions, which focus on the Regulator imposing a schedule of contributions in the absence of trustee/employer agreement, would need to be answered:

  • Does a schedule of contributions imposed by the Regulator have to specify all the contributions other than voluntary contributions?
  • If the Regulator does not have to specify all the contributions, does it have the power to override the scheme contribution rule or does the rule remain fully operational so that the Regulator has to specify the higher rate of contributions whether that is under the scheme contribution rule or the scheme funding requirement?
  • If the Regulator is not obliged to specify the higher rate of contributions, so it may specify a lower rate sufficient to meet the statutory funding objective, can the trustees nevertheless recover contributions at the higher rate?

The judge, however, does not answer any of the above questions because he had not heard any argument on the points. He also thought the Regulator might wish to express a view. He does comment that, when the provisions were being debated in the House of Lords, Baroness Hollis created the clear impression that the new legislation would not dilute trustees’ powers to set contribution rates.

Comment

This case is likely to be the first of many relating to the scheme funding requirements. The only question decided is whether or not an additional demand can be made pursuant to a scheme’s contribution rule before the scheme has gone through its first scheme funding valuation and a schedule of contributions is in place. Mr Justice Warren specifically does not decide whether or not the outcome would be the same had there been a scheme funding schedule of contributions in place. He does however raise questions that need to be answered to reach a conclusion. At the same time, the indications from the judgment suggest that the judge might prefer the view which would allow additional demands to be made under the contribution rule even where a scheme funding schedule of contributions is in place. It is a shame that the judge did not go further than he did although he clearly felt hampered by the ambiguity in the government’s statements as the Act went through Parliament.

The scheme funding requirement came into force on 30 December 2005 in relation to valuations with an effective date from 22 September 2005. This means that there will still be schemes which have not completed their first valuation on the scheme funding basis and so do not yet have a scheme funding schedule of contributions in place. The decision will be useful for trustees of such schemes which are looking to ask the employer for a special contribution under the contribution rule where they believe there has been a loss of security or support for the scheme. This will apply to leveraged transactions, but will also be relevant to other transactions where trustees believe that the employer covenant is being weakened.

However, it is important to remember that this case is only going to be relevant where it is the trustees who, under the scheme’s rules, control the setting of the employer contribution rate. There may also be further proceedings to determine whether or not the trustees acted properly in assigning the total amount in the demand to BV to the exclusion of the other participating employers. At the time of writing, we understand that the British Vita decision is going to be appealed.

This briefing note is based on the decision by Warren J in British Vita Unlimited (an unlimited company) v British Vita Pension Fund Trustees Limited and British Vita SE & D Pension Fund Trustees Limited [2007] EWHC 953 delivered on 27 April 20007