Frozen schemes: "I wanna know what I owe, man"
The judge has handed down her ruling in the High Court case of the Merchant Navy Ratings Pension Fund (MNRPF) v Stena Line Ltd and Others. This ruling could have implications for trustees and sponsoring employers of multi-employer schemes previously believed to be closed, but which retain an enhanced approach to revaluing accrued pensions of members who remain employed by scheme sponsors.
Background
The MNRPF closed to accrual in 2001. Members of the scheme who remained in employment were granted better-than-statutory revaluation of their accrued pension rights (essentially a choice between revaluation in line with national average earnings, or price inflation capped at 7% pa). The case attempted to address two key questions:
- To what extent should trustees take employer interests into account when making decisions? A key issue for trustees involved in funding negotiations, given The Pensions Regulator (TPR)’s updated code of practice on scheme funding.
- Is a scheme that offers enhanced revaluation of this type a 'frozen' scheme? If not, then each time an employer’s last 'active' member leaves, an expensive ‘section 75’ debt could be triggered.
Employers’ interests
The judge’s comments in respect of the first question were fairly unequivocal:
"…as long as the primary purpose of securing the benefits due under the Rules is furthered and the employer covenant is sufficiently strong to fulfil that purpose, it is reasonable and proper … to take into account the employer’s interests”.
This clarification is unlikely to change the way most UK defined benefit (DB) schemes operate. After all, TPR has a new statutory objective “…to minimise any adverse impact on the sustainable growth of an employer” which is reflected in its Code of Practice on Funding DB Schemes and ensures that trustees are able to consider the bigger picture of the sponsoring employer’s commercial interests when negotiating on funding matters.
Nevertheless, whilst reassuring in the wider context of running their schemes that trustees are able to afford some flexibility towards sponsoring employers, it will not be clear to many trustees how their decisions, where potentially favourable to the employer, are 'furthering the primary purpose' of the scheme.
Employers’ responsibilities
The second question is even more intriguing (and not altogether unconnected). The MNRPF is a non-sectionalised arrangement with, historically, over 200 participating employers, some of whom are in direct commercial competition with one another. The Trustees of the MNRPF believe it in the best interests of members to impose deficit repair contributions on all the scheme’s participating employers, including those who no longer have ‘active’ members (ie who are entitled to the enhanced revaluation).
If it had been decided that the MNRPF was not a frozen scheme, then employers without ‘active’ members will have long since ceased to be statutory employers, and therefore not obliged to sign up to the new contribution schedule.
Moreover, when an employer exits a multi-employer arrangement, a section 75 debt is triggered if another employer still employs anyone 'in a category of employment to which the scheme relates'. Therefore, if the MNRPF was not a frozen scheme, then employers who stop employing ‘active’ members in future could be liable for a significant s75 debt.
However, the Court’s ruling was that the MNRPF is indeed a frozen scheme so that the trustees are able to require former employers to contribute to the scheme.
Implications for schemes and employers
The case may yet be heard again in the Court of Appeal – we’ll know more when the warmer weather arrives.
In the meantime, trustees who may be affected will be keeping a watchful eye on developments and should discuss the implications with their advisers.
In particular, whilst in this case ‘active’ members of the MNRPF were offered enhanced revaluation while they remained in employment, the ruling is likely to have implications for closed schemes with benefits that remain linked to members’ salaries.
These schemes should be thinking about whether previous employers who thought they had discharged their obligations through a s75 debt (before the legislation was amended in 2008) may in fact still be statutory employers and therefore on the hook for further deficit repair contributions. This could also have a significant impact on the calculation of schemes’ PPF levies.
In addition, ‘active’ members may in fact be legally entitled to statutory deferred revaluation which will underpin to the salary-related increases already being applied.