Our latest Insight reports on the High Court’s approval of an application to merge two winding-up ‘sister’ schemes to share surplus, considers the DWP response to parliamentary question on impact of section 37 ruling, and provides a round-up of The Pensions Regulator updates.

High Court approves application to allow merger of two ‘sister’ schemes in wind-up to share surplus

The High Court has approved an application to allow a pension scheme in surplus to amend its rules to facilitate a merger with its underfunded ‘sister’ scheme. Both schemes have the same insolvent principal employer and are winding-up.

Background

The Arcadia Group went into administration in November 2020, triggering a Pension Protection Fund (PPF) assessment period for the Arcadia Group Pension Scheme (the Staff Scheme) and the Arcadia Group Senior Executives Pension Scheme (the Executive Scheme). The recoveries received from the administration and scheme funding levels meant that both schemes could exit the PPF assessment period and look to secure members’ benefits outside the PPF through a buy-out with an insurance provider.

It was understood that the funding level of the Staff Scheme was less than that of the Executive Scheme and, to remedy this, a higher proportion of the recoveries and contributions from the insolvency was directed to the Staff Scheme. However, the funding position unexpectedly changed meaning that whilst the Staff Scheme could secure its liabilities in full and would have a surplus, the Executive Scheme would be in deficit.

A merger of the two schemes would allow the Staff Scheme surplus to be shared between the beneficiaries of both schemes. However, the Staff Scheme rules had been amended in 2010 to prevent a transfer of assets from another pension scheme, thus blocking any merger. Consequently, a rule alteration was required to ‘reverse’ the 2010 change. The amendment power of the Staff Scheme was wide with no fetters and, importantly, could be exercised during a winding-up by the trustee.

Because the winding-up was at a ‘late stage’, and as the decision to amend was regarded as an unusual and ‘momentous’ one, the Staff Scheme trustee sought the High Court’s ‘blessing’ to the amendment. In providing its approval, the Court had to look at both; whether the proposed exercise of the amendment power is within the scope and purpose of the trustee’s powers, and whether a proper process was undertaken by the trustee when reaching its decision to amend.

In summary, the High Court approved the trustee’s application and proposed exercise of the alteration power.

Application part 1: Is use of amendment power within scope and purpose of the trustee’s powers?

Scope: The Court noted that there were no express fetters to the Staff Scheme’s broad power of amendment nor any implied fetter which would prevent it being used to permit a merger.

Purpose: The main object of a scheme must be considered when deciding if an exercise of an amendment power is proper. The Staff Scheme’s main object was to provide for members’ Scale Benefits (retirement and death benefits calculated on a scale). Also relevant was that the scheme funds upon winding-up had to be used to provide Basic Entitlements. Crucially, neither included augmented benefits.

When analysing the current power of amendment, which was contained in a 2010 deed and rules, the Court noted that it had been in much the same form since the Staff Scheme was set up. It then went on to look at the 2010 deed and rules as a whole and in context. Context encompassed the history of relevant changes in the scheme including the Staff Scheme closing to future accrual in 2009, that before the 2010 alteration bulk transfers were permitted, and events since 2010.

Scope and purpose – Court decision: The High Court decided that the proposed amendment to facilitate the merger was consistent with both the scope and purpose of the rules. A transfer in and sharing surplus with Executive Scheme beneficiaries would not “undermine the principal purpose” of the Staff Scheme or “deprive any scheme member of a benefit to which there is an entitlement,” rather it would reduce the amount of surplus available for benefit augmentation. The High Court referenced that the interests of current Staff Scheme members did not have to be “considered exclusively.”

It was also important that the Staff and Executive Schemes had a ‘close relationship,’ that there was a joint aim of both schemes being in surplus and the surplus/deficit situation in the schemes was unforeseen and not within the trustees’ control.

Application part 2: Decision-making process when exercising a discretion

The case usefully references the proper decision-making process for trustees when exercising a discretion. This involves obtaining relevant background and taking into account relevant factors but not irrelevant ones. Trustees should act rationally and reasonably.

The judgment also drew out three key points from the Edge v Pensions Ombudsman case on court consideration of a trustee’s distribution of surplus:

  • the court should normally consider how the surplus has arisen and “give weight to those who are the effective source of the surplus”;
  • fundamentally, the trustee should look at what is fair and reasonable in all the circumstances; and
  • exercise of a fiduciary power will often mean that a trustee has to weigh the interests of one cohort of beneficiaries against another beneficiary cohort (for example, current employees or pensioners) or even non-beneficiaries such as the employer.

Ultimately, the Court was satisfied that the trustees had followed a proper decision-making process – it had considered a wide range of factors, and its decision was balanced and objectively justifiable. Furthermore, there was nothing to suggest that irrelevant factors had been taken into account.

Comment

The judgment provides useful guidance for any schemes in a comparable situation, albeit such cases will not happen very often. It also provides a useful reminder of the requirement to consider the scope and purpose of an amendment power when exercising the power and draws out key points regarding distribution of surplus from the landmark Edge case.

DWP responds to parliamentary question on impact of section 37 ruling

A written answer to a parliamentary question on the requirement for rule alterations of contracted-out DB schemes to satisfy section 37 of the Pension Schemes Act 1993 that was tabled on 21 February 2025 has been provided by the Pensions Minister.

The brief answer referenced the discussions between the Department for Work and Pensions and the pensions industry on the impact of the Court of Appeal’s July 2024 decision that rule alterations made to members’ contracted-out rights between 6 April 1997 and 5 April 2016 without written actuarial confirmation required under section 37 are void. The answer notes that the impact will differ depending on scheme circumstances. It goes on to say that the DWP “recognises that [the ruling] could lead to uncertainty and additional costs” and confirms that, although “no final decisions have been made…we are actively considering our next steps and will provide an update in due course.”

All schemes potentially adversely affected by the case would welcome certainty on the Government’s plans for intervention to address the effect of the ruling on relevant amendments that will, without intercession, be rendered void. We hope that confirmation is provided soon – in the meantime, the pensions industry awaits the judgment in a High Court case that is being heard this month during which several areas of uncertainty regarding the precise impact of the July 2024 court decision will be considered.

The Pensions Regulator (TPR) round-up

TPR publishes new data strategy

On 3 March 2025, TPR published its five-year data strategy setting out its future plans for its own data enhancement and its future ‘higher’ expectations for the industry generally, all set against the backdrop of national and artificial intelligence (AI) developments. TPR wishes to draw from the success of Open Banking that has created £4bn in economic benefits and adopt Open Finance methods for the benefit of pensions.

Key points include the following:

  • Keep pace with advancements

TPR will employ skilled data professionals and bridge skill gaps. It also advocates the application of open data standards which aid sharing and use of data from different places.

  • New National Data Library and internal data ‘marketplace’

The Government is setting up a National Data Library, a centralised platform for public sector data that can be accessed by external parties. TPR is going to use a new internal data ‘marketplace’ platform for employees which will also allow its data to be provided to this new Library.

  • Data principles

TPR has established a set of ‘good practice’ data principles which it will use both internally and externally. Key initiatives include a TPR data management function, modernisation of data collection through a move away from data-based entry to Application Programming Interface-based data input. Instead of being automatically submitted, data will be requested as required.

  • New tools to identify trends and risk

The new data approach means TPR will be better able to consider trends and identify risk.

  • Harnessing developments

TPR will be ‘actively encouraging’ the sharing of insights and development of standardised data structures/pension products across the industry.

  • Working group and AI advisory council

TPR will set up a data industry working group and an AI advisory council.

  • Annual report and accounts

TPR will report on data strategy progress in its accounts.

TPR’s DC landscape report highlights shift towards fewer, larger schemes

TPR’s 2024 defined contribution (DC) landscape report for 2024 illustrates how the DC sector is consolidating following a 15% reduction in scheme numbers during 2024 to 920. This is the first time that scheme numbers have dropped below 1,000.

The move is primarily driven by schemes with fewer than 5,000 members and ties up with the recent focus on providing value for money (VfM) for savers and the enhanced VfM requirements for smaller DC schemes. TPR VfM enforcement action has led to over £33,000 in penalties for breaches of the VfM statutory requirements and 17% of DC schemes with which TPR engaged winding up because they did not provide good VfM.

Total DC assets increased from £164bn in 2023 to £205bn in 2024 (a 15% increase). Master trusts now provide 91% of DC memberships (28m) and 81% of the total DC assets (£166bn). During 2024 there were 30.6m DC members (11.1m of these being active and 19.5m deferreds).

PDP confirms completion of connection preparation for three volunteer participants

The Pensions Dashboards Programme (PDP) has confirmed that three of twenty volunteer participants have completed the preparatory stages for connecting to the pensions dashboards ecosystem. This is noted as a ‘significant step’ towards dashboards and means that the three organisations have verified that the system works in a ‘real-world setting.’ The PDP update also confirms that the provider and scheme standards have been approved by the Secretary of State for Work and Pensions.

Expert pensions advice

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