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.