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OPDU Report 24 - May 2008 Advisory Service Forum The last 12 months have seen a number of noteworthy court decisions. Given the substantial increase in the cost to employers of funding defined benefit schemes over the last few years, and the fact that many schemes now have significant deficits, it is unsurprising that the funding of pension schemes has been the subject of several of these decisions. Other important cases have covered discrimination, drafting errors in scheme documents and the binding nature of announcements to members. Some of the most significant of these decisions are summarised in this article. British Vita -v- British Vita Pension Fund Trustees [2007] 27 PBLR This case raised the question of how the new scheme funding require-ments under Part 3 of the Pensions Act 2004 (which came into force on 30 December 2005) impact on the contribution rules of defined benefit occupational pension schemes. The question arose in the context of two schemes, in relation to both of which British Vita was the principal employer. Until 14 June 2005, British Vita was listed on the London Stock Exchange and was a cons-tituent company of the FTSE 250 index. On that day, British Vita was acquired by a private equity firm and was later re-registered as an unlimited company. On 28 July 2006, the trustees of the two schemes demanded payment of £40.6 million and £9 million respectively. These demands were made pursuant to the powers vested in the trustees under the schemes’ contribution rules. British Vita refused to meet the demands and the trustees threatened proceedings to recover the amounts. British Vita subsequently initiated proceedings challenging the validity of the demands. One of the grounds on which British Vita challenged the validity of the demands was that, as a result of the coming into force of the provisions of Part 3 of the Pensions Act 2004, the trustees were, by the time the demands were made, no longer able to exercise the powers conferred on them by the respective contribution rules of the schemes. The High Court rejected British Vita’s argument that Part 3 provides a complete code for the making of contributions to a pension scheme. Warren J considered the implications of Section 306 of the Pensions Act 2004, which provides that the provisions of Part 3 will, to the extent that there is any conflict, override the provisions of the scheme, concluding that, until the first schedule of contributions under the new scheme funding regime is in place, there can be no conflict between the legislation and a scheme’s contribution rule. Given that the demands were made before the schemes’ first schedules of contributions were in place, the High Court decided that the demands were not invalidated by Part 3. No decision was made on the question of whether, had a schedule of contributions been in place when the demands were made, Part 3 would have rendered the demands invalid. The High Court’s decision was appealed, but the case was settled before the Court of Appeal heard the appeal. Lindorfer -v- Council of the European Union [2007] 54 PBLR In this case, the European Court of Justice (the “ECJ”) considered whether the use of different actuarial factors for men and women amounts to sex discrimination. Ms Lindorfer was an Austrian national who worked in Austria and contributed to a pension scheme for over 13 years. On entering the Council’s service, she requested the transfer to the Council’s pension scheme of the pension rights she had acquired under the Austrian pension scheme. In calculating the number of years of pensionable service to be credited to Ms Lindorfer in the Council’s pension scheme, actuarial factors were used which vary according to sex to take account of women’s longer life expectancy. Ms Lindorfer brought an action before the Court of First Instance claiming that the distinction according to sex is contrary to the principle of equal treatment. The Court of First Instance dismissed the action and Ms Lindorfer appealed to the ECJ. The ECJ noted that, where rules are laid down for the transfer to a scheme of pension rights acquired in another scheme, those rules must comply with the principle of equal treatment. Such rules should not therefore treat members differently, unless the difference in treatment can be objectively justified. The Council argued that the use of factors which vary according to sex in order to calculate the number of additional years of pensionable service to be credited was objectively justified by the need to ensure sound financial management of the Council’s pension scheme. The ECJ concluded that such an argument cannot be invoked to support the need for higher actuarial values for women, noting that the identical level of contributions does not adversely affect such management. In addition, the fact that the same equilibrium can be attained with “unisex” actuarial factors is also shown by the fact that, subsequently to the events giving rise to the case, the Council decided to use such factors. The ECJ consequently decided that the Court of First Instance was wrong in holding that Ms Lindorfer had not suffered discrimination on account of her sex. The use of different actuarial factors between the sexes is a long-standing practice of defined benefit pension schemes in the UK. This case there-fore has some potential significance. However, as the use of different actuarial factors between the sexes is expressly permitted in relation to UK pension schemes by Section 64 of the Pensions Act 1995 and Regulation 15 of the Occupational Pension Schemes (Equal Treatment) Regul-ations 1995, we believe that current practice will not be affected by the decision. This view is supported by the Advocate-General’s preliminary Opinion in the case, which suggests that it is possible for legislation in Member States to make exceptions to the general principles. Wright -v- MGN Pension Trustees Limited [2007] 56 PBLR Mr Wright worked for the Mirror Group until his redundancy in 1993, at which time he was 47 years old. He then became a deferred member of the scheme. His normal retirement age was 65. At age 60, Mr Wright asked to be allowed to take his pension early without actuarial reduction. The relevant rule provided that a member entitled to a deferred pension may, if the principal company and the trustees agreed, choose to receive his deferred pension at any time after reaching age 50, but actuarially reduced to take account of early payment, unless (in certain circumstances) the employer agrees otherwise. Mr Wright contended that the employer gave its agreement in an announcement issued jointly with the trustees, which stated that deferred pensioners in Mr Wright’s circumstances “will be permitted to draw an immediate pension” and that “the pension will be calculated without actuarial reduction”. The announcement also included the following statement: “It is still a condition for any pension to be paid before normal retirement date (except on grounds of ill-health or disability) that both MGN and the trustees consent. Those consents will automatically be given in the circumstances described above unless there are special reasons for with-holding consent”. The High Court agreed with Mr Wright that the employer gave its agreement to his early retirement on an unreduced pension in the announcement. The decision was appealed. Lloyd LJ, delivering the judgment of the Court of Appeal, concluded as follows: “It seems to me plain that this announcement is the statement of a policy as regards the giving of consent in the future, but is not in itself a consent for the purposes of the early retirement of any member... this is a document which is a statement of policy and attitude on the part of the trustees and the principal company. It is not a proper reading of it to take it as giving consent in advance, in cases where an ad hoc individual consent is required, in particular circumstances, under particular relevant provisions of the rule. It does indeed state that for someone in Mr Wright’s position the pension will be calculated with-out actuarial reduction; but in my judgment it does not bind the principal company or the trustees to this in a given case in advance”. Allied Domecq (Holdings) Limited -v- Allied Domecq First Pension Trust Limited and another [2007] 59 PBLR This was another case concerning the interpretation of the new scheme funding requirements under Part 3 of the Pensions Act 2004. For most schemes, the legislation requires the employer and trustees to agree each of: (a) the methods and assumptions to be used in calculating the scheme’s technical provisions; (b) the state-ment of funding principles; (c) the recovery plan; and (d) the schedule of contributions. However, the legislation is modified in the following two situations. Firstly, where the trustees have the power under the scheme rules to set the contribution rate without the agreement of the employer (and no one else has the power to reduce or suspend contributions), the trustees are required only to consult with the employer. Secondly, where the actuary has the power under the scheme rules to set the contribution rate without the agreement of the employer, the trustees and employer must agree the various matters in the normal way, but an “actuarial underpin” applies. This requires the actuary to certify that the contribution rate shown in the schedule of contributions is not lower than the contribution rate he would have provided for if he had the responsibility for preparing or revising the schedule of contributions, the statement of funding principles and the recovery plan. The issue in the case was whether Allied Domeq’s two pension schemes
were subject to the actuarial under-pin. If so, based on agreed
evidence, although the overall amount of the contributions to be
paid during the period of the recovery plan would be the same, the The relevant rule in both schemes provided as follows: “the Participating Companies shall collectively pay such amount by lump sum and/or periodic payments (to be certified by the Actuary) as... will in the opinion of the Actuary restore the solvency of the Fund; such amount to be paid by the Participating Companies in such proportions as the Actuary shall certify and within such period as the Trustees may, on the advice of the Actuary, agree with the Principal Company”. Allied Domeq argued that the role played by the Principal Company under the rule amounted to the need for company agreement and, hence, the actuarial underpin did not apply. Blackburne J concluded that the first part of the rule deals with the determination of the collective contribution rate, whereas the second part of the rule deals with the apportionment of the collective contribution rate between the participating companies. The trustees and the Principal Company have no role until the second stage is reached. Accordingly, the collective contribution rate, which is the rate in issue, is determined by the actuary alone. From this it follows that the actuarial underpin applies to both schemes. This conclusion suggests that the courts will be willing to apply a practical, rather than overly literal, interpretation of the application of scheme specific funding requirements to particular formulations of scheme rules. Smithson and others -v- Hamilton [2007] EWHC 2900 (Ch) This case related to drafting errors in scheme documents. The rule
in question provided that: (a) a deferred member who has reached age
60 can take an immediate pension; (b) he does not need either
employer or trustee consent to do so; and (c) the pension is not
subject to an actuarial reduction. The trustees and particip-ating
employers claimed that the last part of the rule, which permitted a
deferred member to take his pension early without actuarial
reduction, was a mistake. However, they did not seek rectification
(presumably because there was insufficient evidence to meet the high
standard of proof required to support such an application) and
instead sought to rely on two alternative remedies: (b) The rule in Hastings-Bass applies to things done by the trustees. The adoption of the Definitive Deed and Rules containing the rule in question was essentially an act of the employer and not of the trustees. (c) The rule in Hastings-Bass does not apply to all things done by
trustees: it applies to things done by trustees in respect of which
they have a fiduciary duty or responsibility to the members. The
trustees had no obligation to identify an error which was
disadvantageous to the employer but advantageous to the members. The Smithson case provides a reminder that the courts will not readily overturn the clear provisions of pension scheme rules. The appropriate method of revision is to apply for rectification, a process which requires the production of very clear evidence to the effect that the documentation does not reflect the intention of the parties. Alitalia-Linee Aeree Italiane SPA -v- Rotunno and others [2008] All ER (D) 130 (Feb) This was another case relating to the extent of an employer’s
liability to fund its pension scheme. The relevant scheme rule in
this case provided as follows: “Each of the Employers shall make
such contributions to the Fund at a rate determined from time to
time by the Trustees acting on the advice of the Actuary after
consultation with the Principal Employer to secure the benefits
under the Scheme in respect of Members in or formerly in its
Service”. The question raised by the proceedings concerned the
meaning of the words “to secure the benefits under the Scheme”. The
trustees of the scheme argued that these words mean that the
liabilities of the scheme must be valued on the buy-out basis (that
is, by reference to the cost of buying annuities and deferred
annuities from an insurance company) for the purpose of setting the
rate of Alitalia’s contributions. Alitalia argued that the rule does
not prescribe any particular funding basis and that the choice of an
appropriate basis will depend on all the Henderson J considered that Alitalia’s construction of the rule was to be preferred. He concluded that the funding objective under the rule is not to guarantee the members’ benefits in all circumstances and still less to do so on the assumption (which may be wholly unrealistic) that a winding-up is always imminent, or even that it is likely to occur in the foreseeable future. The objective is rather to safeguard or protect the members’ benefits by adopting what-ever funding method is best suited to the changing circumstances of the scheme. According to Henderson J, it is impossible to be dogmatic in advance about what this method will be, and no particular method is prescribed, either expressly or implicitly, by the rule. The appropriate method will be that which the trustees, in the light of the actuary’s advice and their consultation with Alitalia, consider best suited to achieve the stated objective. This is again evidence of the application of the courts’ pragmatic approach to interpretation and is consistent with the decision in Pinsent Curtis -v- Capital Cranfield Trustees [2005] 44 PBLR Claire Barker |
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