Originally published 12 November 2009
Keywords: Pension Protection Fund, PPF, Independent Trustee Services Limited, Ilford, employment benefits
The High Court has ruled in Independent Trustee Services Limited v Hope & others that a proposed arrangement which would have "selected against" the Pension Protection Fund would not be a proper exercise of a trustee's powers.
The Ilford scheme had a substantial deficit and an employer which was effectively insolvent. The scheme was likely in due course to enter a PPF assessment period. If the scheme fell into the PPF, the compensation which members would receive would be lower than their entitlements under the scheme. The members hardest-hit would be those below normal pension age at the start of the assessment period, who would receive only 90% of their entitlements and would be subject to the PPF annual cap, currently £28,742.
In a bid to minimise the adverse impact on members, the trustee came up with a creative proposal. Prior to the start of the PPF assessment period, the trustee would arrange a substantial buy-out of benefits, using a power in the scheme's rules:
- All benefits would be bought out for those members who were below normal pension age (and so would be hardest-hit under PPF rules)
- There would be a partial buy-out for those members over normal pension age, to cover the expected shortfall between PPF compensation and their scheme entitlements.
The buy-out would improve the position of members, but would worsen the position of the PPF. The PPF would have to take on significant liabilities but most of the scheme's assets would have been consumed by the buy-out.
The trustee was advised by a QC that it could not properly implement the proposal. However, certain members in the "hardest-hit" category (backed by a different QC) argued otherwise. The trustee therefore asked the Court for directions on the exercise of the buy-out power.
The Court's decision
The Court ruled that the proposed buy-out went beyond the purposes for which the buy-out power was intended, and therefore could not properly be effected. The trustees had submitted that the purpose of the buy-out was to "secure for members as high a proportion as is possible of the benefits that they were promised under the scheme". The judge said that this might have been the reason behind the proposal, but it was not the purpose. The purpose was to apply a disproportionately large, and therefore unfair, share of the scheme assets in the purchase of buy-out policies. A "share of fund" limit was implicit in the buy-out provision, and the proposed buy-out would have breached that limit.
The Court further ruled that the availability of compensation under the PPF was not a relevant factor for the trustee to take into account when exercising the buy-out power. For the trustee to take account of the PPF safety net in this context would be contrary to public policy. The judge did however acknowledge that, in certain contexts, it might be appropriate (or even necessary) for trustees to have regard to the safety net.
The judge made some non-binding comments about whether the PPF compensation rules could be squared with the EU Insolvency Directive, which requires member states to provide protection for pensions where an employer becomes insolvent. The judge said that a cap on compensation was not inherently inconsistent with the Directive. There was however a question as to whether the level at which the PPF cap had been pitched would, in all circumstances, comply with the Directive.
The judge indicated with some force that it will not normally be appropriate for trustees to make decisions in reliance upon the existence of the PPF safety net. For example, the safety net would not justify trustees in choosing a high-risk investment which they would not otherwise choose.
The judge's comments about the implied "share of fund" limit in the buy-out provision may be relevant where trustees are contemplating a buy-out or buy-in. It may well be possible to conclude that there is no such limit in the context of a buy-in, not least because (unlike a buy-out policy) a buy-in policy will be an asset of the scheme.
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