Pensions Trustee Update | Summer 2016: Case law and regulatory developments

Published on 9th Aug 2016

In this article we review a number of recent case law and Pensions Ombudsman decisions with implications for trustees and pension schemes, and highlight TPR’s 2016 Annual Funding Statement and the publication of its prosecutions policy.

Hampshire v the PPF: can PPF compensation be below 50%? Reference to CJEU

The Court of Appeal has referred to the European Court of Justice (CJEU) a decision concerning the minimum level of compensation that the Pensions Protection Fund (PPF) must provide. A member whose pension was reduced by 67% by the application of the PPF compensation cap following the insolvency of his employer has complained. Previous CJEU decisions indicate that the minimum level of compensation must be 50%. However, the exact form of this minimum continues to be disputed and this decision highlights this issue. See our update for further details.

MF Global UK Ltd (In Special Administration): pension responsibilities within a group with a service company

This Court of Appeal (CA) decision is of interest in the context of determining where pension liabilities lie within a group of companies. In particular, where there is a service company that seconds employees out to other group companies, whether contractual liabilities relating to the pension can be imputed in the absence of a written contract in this situation.

In this case the MF Global group included a service company, MF Global UK Services Ltd (MFG Services) that seconded employees, mainly to one other group company, MF Global UK Ltd (MFG UK). MFG Services was also principal employer to a DB pension scheme that the seconded employees belonged to. Both MFG Services and MFG UK were wholly owned subsidiaries of a holding company (MFG Holdings).

When MFG Services and MFG UK went into administration, a section 75 debt was triggered in the pension scheme leading to a dispute as to which company was liable to fund this. There was a contractual agreement in place between MFG Holdings and MFG Services, but nothing between MFG Services and MFG UK. MFG UK paid all of the staff costs for the seconded employees, including pension contributions and deficit repair payments. The CA has held that in this case there was an implied contract between MFG Services and MFG UK, and that this required MFG UK to pay the section 75 debt.

This conclusion is specific to the facts in this case but will be of use when considering similar situations. For more detail on this case, concentrating on the contractual aspects, see our previous update.

Shannan v Viavi Solutions UK Ltd: confusion over historic changes

This High Court decision concerned a scheme where various discrepancies in the historic scheme documents were discovered, leading to confusion over past changes to the scheme rules and how they should be implemented going forward. One example of the uncertainty was a lack of clarity as to which company was the principal employer to the scheme during different periods, leading to doubt as to whether certain documents which purported to have been executed by the principal employer were valid. The case also considered a deed of rectification, and whether certain aspects of that deed could have effect retrospectively.

This case emphasises the need to ensure that the identity of the principal employer to the scheme is clear at all times, that all the required parties execute documents, and that any retrospective action in a scheme is only taken if it can be done so validly, and properly documented.

Prometric Ltd v John Cunliffe: employee claims verbal guarantee of DB benefits

In a decision that employers will find comforting, the CA has struck out an employee’s claim that he had an express contractual agreement to continued membership of a DB pension scheme resulting from a conversation he had with an HR executive some years earlier, in 2000. The CA stated that “On subjects as complex as pensions, businessmen do not enter into oral agreements; and if they do, they certainly confirm them in writing“.

Pollock v Reed: actuarial certificate on a bulk transfer without consent – can the actuary take into account security of benefits?

This decision is relevant to trustees or employers dealing with a proposed restructuring where a pension scheme is in a distress scenario with an employer on the verge of insolvency.

The case concerned the Halcrow Pension Scheme (HPS). The scheme was in severe deficit, the principal employer was unable to fund the deficit and the parent company was unwilling to support the scheme. It was therefore likely that the employer would become insolvent and the scheme would enter the PPF. To avoid this, a structure was proposed whereby the members would be bulk transferred without consent into a second scheme, HS2, in which their benefits would be at least as good as those provided by the PPF, and in some cases better, but they would lose some aspects of their pension increases that they were entitled to in HPS.

To make the bulk transfer without consent, an actuarial certificate was needed, which had to certify that members’ credits in the receiving scheme would be broadly no less favourable than the rights to be transferred. The key issue in the case was whether the actuary could take into account the greater security of members’ benefits in HS2, the receiving scheme, in making the judgment required as to whether the benefits would be broadly no less favourable. The judge held, “with some reluctance“, that the actuary could not do so. Alternative restructuring methods are now being pursued for the scheme.

Mr N: Pensions Ombudsman decision concerning member complaint about buy-in, PIE and buy-out

Buy-ins, pension increase exchanges (PIEs) and buy-outs are all popular methods of liability management within DB pension schemes. However, there is little case law exploring the difficulties these can throw up. A recent Pensions Ombudsman decision addressing complaints by a member of a scheme where these methods had been implemented is therefore of interest.

Mr N complained that:

  • members should have been consulted over the buy-in;
  • he had been excluded from the PIE offer;
  • control and financing of the scheme had been transferred to the insurer; and
  • use of members’ personal data in arranging the buy-in was not allowed under the Data Protection Act and was a misuse of that data. 

The Ombudsman dismissed all of these complaints. It found that the choice to do the buy-in was a discretion available to the trustees as an investment decision, and that the trustees had exercised that discretion correctly in relation to the buy-in, as well as the PIE and buy-out. The Ombudsman did not comment specifically on the data protection issue raised by the member, but given his dismissal of the claim overall, it can be assumed he did not consider there had been a misuse of members’ data. This decision is reassuring for trustees, but nevertheless demonstrates the need for careful communication with members when these exercises are undertaken, so that members understand and accept the decisions that have been made.

TPR 2016 annual funding statement and new prosecution policy

The Pensions Regulator (TPR) has issued its annual funding statement for 2016. It uses this to highlight some of the key principles from the DB funding code and to provide guidance for schemes undertaking 2016 valuations. The statement specifically applies to valuations with effective dates from 22 September 2015 to 21 September 2016. TPR highlights that an Integrated Risk Management (IRM) approach is key, along with a clear assessment and understanding of the employer covenant. Trustees also need to be aware of impending cash flow and liquidity issues and start to plan for them. The statement further considers the following key issues for schemes carrying out 2016 valuations:

  • market volatility and valuation dates;
  • investment returns;
  • affordability and managing deficits;
  • managing risks; and
  • recent developments in valuation assumptions.

TPR has also finalised its Prosecution Policy. It has power to prosecute for a number of criminal offences concerned specifically with workplace pensions, and this policy sets out how TPR will use these prosecution powers. The criminal offences that it can prosecute under are set out in an annex to the policy and include failure to comply with automatic enrolment duties, various failures to comply with an investigation by TPR into automatic enrolment or scheme regulation, acting as a trustee while prohibited, suspended or disqualified and exceeding permitted levels of employer-related investment. TPR will apply its risk-based approach to prosecution decisions and consider each case on its particular facts. The policy sets out its approach in further detail.


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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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