Case law & regulatory focus

High Court decision on extent to which Trustee should consider the PPF
A recent decision by the High Court in England (ITS Limited v Hope & others) is extremely relevant for trustees in examining the extent to which they must consider the existence of the PPF.

18 November 2009

High Court decision on extent to which Trustee should consider the PPF
A recent decision by the High Court in England (ITS Limited v Hope & others) is extremely relevant for trustees in examining the extent to which they must consider the existence of the PPF.

Facts:- The case related to an underfunded scheme where it was widely anticipated that the employer would go into liquidation and the scheme would subsequently enter the PPF (provided it was accepted). A group of former senior executives had taken unreduced early retirement pensions in 2000/2001 in exchange for compromising certain contractual rights. This group of former senior executives faced being significantly worse off in the event of the scheme entering the PPF as the compensation cap would mean their benefits being reduced. This group formed a pressure group and asked the Trustee to buy-out their benefits in full, given that the PPF would then have to provide compensation for the remaining members. The PPF would, however, receive depleted scheme assets following any buy-out exercise and would bear the burden of the extra cost involved.

Faced with this request, the Trustee of the scheme sought the direction of the High Court on a number of matters, including:-

  • Would it be an "improper purpose" for the Trustee to use the power in the deed and rules to buy-out the executives' benefits in this way? 
  • Is the existence of the PPF a factor that the Trustee is entitled to take into account when exercising this power?

Decision:- The proposal was found by the Court to be objectionable, improper and one which treated PPF compensation as an asset of the Scheme. The Court considered that it would "apply a disproportionately large, and therefore unfair, share of the Scheme assets in the purchase of buy-out policies".

With regard to the question of whether the existence of PPF compensation is a factor that the Trustee could take into account in exercising the buy-out power, the Court held that the PPF is a fund of last resort and that the proposal was "a blatant attempt to undermine or circumvent the policy of the PPF legislation". It further held that when exercising its buy-out power, "the prospective availability of compensation under the PPF, if and when the Scheme enters the PPF, is not a relevant factor for the Trustee to take into account".

The Court chose not to widen the scope of the judgement beyond the type of buy-out scenario highlighted in this case and acknowledged that in certain contexts the existence of the PPF will be a legitimate matter for trustees to consider. (It seems clear, for example, that trustees will need to consider the PPF if considering whether a particular course of action would render the scheme ineligible for entry into the PPF.) The judge added that provided his conclusion in this case was soundly based, however, he would anticipate that a similar approach would be taken in the future if any trustees tried to take advantage of the PPF in order to justify acting in a way which would otherwise be improper.

Transatlantic Agreement - regulation of pension schemes
There has been an interesting development on the international stage for sponsoring employers of UK defined benefit schemes particularly where there are any US companies within their group company structure or where corporate transactions with US companies are anticipated in the future.

The UK Pensions Regulator and the PPF have entered into a Memorandum of Understanding (MoU) with their counterpart in the USA - the American Pension Benefit Guaranty Corporation. The MoU has arisen following numerous meetings between the three parties since the creation of all three organisations and aims to facilitate co-operation between the authorities. Although not legally binding, the MoU establishes a mechanism for the authorities to exchange information at their discretion. The Chair of the PPF stated “this agreement sends a clear signal that there is a high level of co-operation between the various national institutions charged with protecting retirement incomes in an era when many sponsoring employers have a global presence”.

Room for improvement in DC pre-retirement literature
Between June and September of this year, the Pensions Regulator contacted a random sample of 97 trust-based occupational schemes providing defined contribution benefits and obtained examples of scheme retirement literature that has been issued. This literature was assessed for both compliance with the legislative disclosure of information requirements and also against the Regulator’s “good practice” guidelines.

The Regulator has now compiled the details of this survey into a report entitled “A review of retirement information for DC Members” and urges everyone involved in running a DC scheme to read the report. Key findings include:-

  • When benchmarked against good practice, more than 50% of schemes had some scope for improvement in the standards of retirement information sent to members; 
  • Many schemes could improve the way members’ options are presented to encourage them to make an active decision on how to use the proceeds of their retirement fund; 
  • 30% of schemes had at least one breach of retirement disclosure regulations, 6% of which constituted a material breach; and 
  • Some trustees displayed a lack of awareness of their scheme retirement process and requirements.

It is obviously crucial that any literature issued to members nearing retirement is of a high standard and meets the statutory disclosure requirements. In addition, trustees of occupational DC schemes have a responsibility for the oversight of their scheme retirement processes. The Regulator has made it clear that a well-governed scheme will review its retirement processes and literature on a regular basis to ensure it remains fit for purpose. Any schemes requiring any assistance with either a review of scheme literature or trustee training should contact us for advice.