In the latest edition of our Taylor Wessing Pensions Bulletin we give a snapshot of the latest pensions developments below.
Please get in touch with your usual Taylor Wessing pensions contact if you would like to discuss anything you have seen in the Bulletin.
Court "blesses" Trustee decision to liquidate employers
Judgment has been given in a High Court application brought by the Trustee of the Biwater Retirement and Security Scheme, in which the court approved the Trustee's decision to wind up the Scheme's two employers, which would trigger the winding up of the Scheme itself. The employers were in a deteriorating financial position, with survival of the business an "illusory prospect", and they owed in excess of £39m to the Trustees as at May 2023. The Trustee's application was a protective measure, brought in light of the seriousness of the decision being taken. A representative beneficiary (who, having studied the evidence, found "no credible basis" to challenge the decision) was appointed to represent the interests of members, and the Pension Protection Fund ("PPF"), which supported the Trustee's decision, also took part in the proceedings.
The court approved the Trustee's decision, noting the "invidious" position the Trustee was in and the advice that the Trustee had sought in reaching its conclusion. As it was clear the Trustee had the power to take steps to put the employers into liquidation, the court was tasked with blessing the decision itself. Here the court held that the decision did not " infringe the trustee's duty to act as ordinary, reasonable and prudent trustees might act, ignoring irrelevant, improper or irrational factors". In particular, case law demonstrates that neither the PPF's interests nor the availability of PPF compensation are "relevant factors" in trustee decision-making. In the instant case, the Trustee did not take account of the PPF in reaching the decision, and concluded that it would make the same decision "irrespective of the PPF, and even if and to the extent that it could take the PPF's existence into account".
It is highly unusual for trustees to consider winding up their sponsoring employer, because of the serious ramifications that follow, and because trustees generally prefer to work with their employers to reach a different outcome if that is at all possible. This demonstrates how extreme the Trustee in this case judged the employer's circumstances to be. However, this could mark the start of a different approach being taken by trustees with a failing employer. The PPF has indicated that it will be issuing guidance for trustee decision-making in these circumstances, which may support a more robust approach.
Pensions Regulator's powers – imposition of contribution notice
The Upper Tribunal has approved the Pensions Regulator's (TPR) issuance of a contribution notice against an individual for the diversion of assets from a pension scheme. The case involved a scheme which had been left with a deficit of £5.85m when the principal employer went into a voluntary liquidation. Before the liquidation, funds were channelled out of the employer's group and into nominee companies for the benefit of one of the targets of the contribution notice and a foundation set up to benefit his wider family. The principal employer had also entered into an agreement waiving its entitlement to a large payment in 2014 which was then diverted via a subsidiary to one of the nominee companies. TPR contended that these funds could otherwise have been used to fund the pension scheme deficit.
The original targets of the notices were an uncle and nephew, who were directors of the companies in question. One of the targets (who had received the benefit of the payments via his nominee companies) settled with TPR, leaving the other (who had not benefitted personally) to challenge his contribution notice, which was in the amount of £1,844,054, being 50% of the 2014 payment plus an uplift for the passage of time.
The Tribunal held:
- the only cap on the amount of a contribution notice is the amount of the employer debt: the actual loss suffered by the scheme is not determinative
- in this case particular weight could be given to certain factors, including the target's involvement in the act (or failure to act) giving rise to the notice, the relationship between the target and the pension scheme and the relationship between the target and the employer.
It is notable that the deficit in the scheme in this case was relatively small, which illustrates that TPR is prepared to act against individuals who fall within scope of its powers even in lower-profile cases.
The importance of understanding your scheme amendment power
A recent judgment focusing on the scope of pension scheme amendment power fetters has been handed down which will be relevant to other schemes with similarly-drafted rules. The case involved the BBC Pension Scheme, which has rules that include a provision to the effect that no alteration may "take effect as regards the Active Members whose interests are certified by the Actuary to be affected thereby" unless certain conditions are met. These conditions include (i) the actuary certifying that the amendment does not "substantially prejudice the interests of such members", the actuary certifying that substantially equivalent benefits are provided, or the affected members approving the amendment by resolution. Under the rules, amendments can be made by the Trustee with the consent of the BBC.
The court was asked two questions, the first relating to the scope of Active Members' "interests". The Judge found that an Active Member's interests would be affected if their position was different after the proposed amendment compared to their position beforehand. This is broader than simply prohibiting changes affecting the Member's accrued rights for example. The result of this was that the power could not be used to amend future service benefits or contribution rates unless one of the conditions (referred to above) was met.
The second question was whether an exercise of the power of amendment to terminate accrual would be an improper use of the power, and the Judge found that as a matter of principle it would not be.
Cases on the scope of amendment power fetters turn on the specific wording in the relevant rules, which vary from scheme to scheme, and over the years the courts have looked at a number of permutations. Those fetters that do amount to an obstacle to making changes to active member benefits fall into two broad categories: "Lloyds Bank" fetters which protect future service benefits, and "Courage" fetters, which protect the member's right to final salary linkage on accrued benefits. Where a scheme's rules contain a fetter which is the same as one that has been subject to a court process, the trustees will have more certainty as to its impact. In other cases, careful interpretation will be required. Trustees in doubt as to the meaning of any restriction in their amendment power should seek legal advice before making changes.
TPR updates its superfunds guidance
TPR has updated its superfunds guidance against the background of the DWP's response to its superfund consultation giving more clarity on what the longer term regulatory regime will be. The key areas covered in the amended guidance include:
- clarity around when TPR thinks it is right for trustees to consider transferring their scheme to a superfund
- signalling a possible change to TPR's attitude towards profit extraction – TPR wishes to engage with industry on this and will issue an update in due course. This will be an important point where third party investors are providing some of the capital buffer to superfunds
- greater clarity on TPR's expectations in the assessment process.
Pensions consolidation has long been in the pipeline, but to date only Clara has been authorised to operate as a superfund, and no schemes have yet transferred to a superfund. The difficulties in producing a regulatory regime that balances the interests of scheme members, superfund investors and other interested parties are clear. This updated guidance and the DWP's consultation response take us a step closer to consolidation by way of superfunds.
