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Hogan Lovells Success in High Court Pensions Ruling

25 February 2015

25 February 2015 - The High Court issued its judgment today in the case of the Merchant Navy Ratings Pension Fund Trustees Limited vs Stena Line Ltd and Others.  Hogan Lovells acted for one of the defendants in the case.

  • Two key questions have been answered which have wide application and relevance to defined benefit pension schemes:
    can or should trustees take employers' interests into account when making decisions; and
  • is a scheme where accrual of years of service has ceased but benefits are higher for those who remain employed a "frozen scheme" for section 75 employer debt purposes? 

Regarding employers' interests, the Court decided that as long as the primary purpose of securing benefits was furthered and the employer covenant was sufficiently strong to fulfill that purpose, it was reasonable and proper for the trustee to take into account the employers' interests when designing the new regime. 

 
Duncan Buchanan, partner at Hogan Lovells, commented:
"The judgment broadly reflects the guidance by the Pensions Regulator under its new funding code and allows trustees to take account of the interests of the sponsoring employer.  However there is no obligation on trustees to do so and the Judge's statements about the need to focus on the primary purpose of securing benefits and the employer's covenant will mean uncertainty for some schemes."  

The second issue has been hotly debated in the pensions industry for a number of years, but this is the first time a Court has been asked to consider the point. 
The Court found that in order for members to be active members they have to be accruing additional years of service. As active members ceased to accrue any further years of service from May 2001, the MNRPF became a frozen scheme and ceased to have any active members from that date. 

Faye Jarvis, Of Counsel in Hogan Lovells pensions team, commented:
"The Court's decision could have wide ranging implications for schemes that have closed to future accrual but retained, say, a final salary link.

"Trustees which have treated members with a final salary link as active members will need to take legal advice on what the Court's judgment means for their own scheme."

It is not uncommon for pension schemes (particularly ones with a "Courage" power of amendment) when closing to future accrual to retain a final salary link for active members at the closure date – for so long as they remain in employment.  Several issues could arise for such schemes from the Court's decision, including:

  •  in a multi-employer scheme, employers who have ceased to employ any members may have been told to pay a section 75 debt or entered into an apportionment arrangement when in fact no employment cessation event was actually triggered.  Those employers will still be statutory employers with liabilities under section 75;
  • some schemes may have released employers from liability when in fact those employers remain statutory employers;
  • PPF levies may have been incorrectly calculated. 

Background

The MNRPF is a non-sectionalised industry wide defined benefit pension scheme established for the benefit of British Merchant Navy Ratings.  The case concerned an application by the trustee of the MNRPF for the Court's approval to its proposed use of the trustee's unilateral amendment power to introduce a complex new contribution regime.

Around 240 companies had participated in the MNRPF, but, for certain historical reasons, only some 40 of those employers are currently required to pay deficit repair contributions.  Under the new regime all of the employers would be required to pay contributions again to meet the deficit. 

The trustee's decision to introduce the new regime was opposed by a number of the employers and also the members. The members argued that the trustee sought to exercise the amendment power for an improper purpose because it had taken into account certain employer interests when deciding to exercise the power and not targeted those stronger employers who could easily afford to meet the deficit.   

The Court was also asked to determine whether the MNRPF was a frozen scheme for section 75 debt purposes. The MNRPF provided career average pension benefits but it closed to future accrual in 2001. Those members, who were active members immediately before the closure date, continued to be entitled to a higher rate of revaluation on their CARE benefits accrued prior to 2001 for so long as they remained in seagoing employment with an MNRPF employer. 

Under section 75, debts are triggered where an employer ceases to employ active members at a time when another employer continues to employ such members. 

This is known as an employment cessation event.  However for frozen schemes, with no active members, debts do not arise until the employer goes into insolvency or the scheme winds up. Therefore, the trustee needed to determine whether or not members entitled to a higher rate of revaluation were active members.   

ENDS

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