TPR acts to remedy accidental scheme change from defined benefit to defined contribution

The Pensions Regulator exercised a rarely used power to void a Deed which negatively impacted members, enabling them to access compensation from the Pension Protection Fund.

13 October 2016

The Pensions Regulator exercised a rarely used power to void a Deed which negatively impacted members, enabling them to access compensation from the Pension Protection Fund. It has exercised its powers to declare void a Deed that accidentally changed the nature of members’ benefits from defined benefit to defined contribution.  The voiding of the Deed meant that members were entitled to protection under the Pension Protection Fund’s (the “PPF”) remit. The Regulator acted despite the fact that only 11 members and assets of only £1.3m were involved.

Following a legal review in 2010, the Trustees of the DCT Civil Engineering Staff Pension (the “Scheme”) executed a Deed which referred to benefits being calculated on a defined contribution basis.  The Scheme actuary had expressed concerns to the Trustees that such a change could not be effected without member consent, or the relevant actuarial equivalence requirements being met, as required by the Pensions Act 1995 (the “1995 Act”).  

The Scheme’s employer entered administration on 6 January 2014 and the Scheme entered a PPF assessment period. PPF entry is only available to defined benefit schemes, and it was unclear whether the Scheme was eligible for this protection due to the Deed.  After investigation, it became clear that the Trustees had not intended to make the change to the Scheme, as evidenced by the fact that the Scheme continued to be treated as a defined benefit one by all parties after the Deed’s execution.  

The professional Trustee appointed by the administrators to act as sole Trustee submitted an application to the Regulator requesting that it exercise its power under s67G of the 1995 Act to treat the execution of the 2010 Deed as a “voidable modification,” which, broadly, allows the Regulator’s Determination Panel to strike down a modification that detrimentally affects members’ benefits without their consent.

Regulator Action
The Regulator firstly issued a warning notice indicating that they intended to exercise its s67G powers because affected members were subjected to detriment by the Deed, which had been executed despite its non-compliance with the 1995 Act.  The exercise of the voiding power would restore the members to their previous position, and would enable them to access PPF compensation.  The alternative route – rectification of the document by the High Court – would be disproportionate, costly and time consuming. The matter was then referred to the Determination Panel of the Regulator, who supported the Regulator’s recommendation that the Deed should be voided.  

Nicola Parish, the Regulator’s Executive Director for Front Line Regulation said that this case “shows that we will use our powers to protect schemes in appropriate cases, regardless of the number of members.  The modification of the Scheme laws had a serious impact when reducing members’ accrued benefits, and so we considered it appropriate to protect them.  By using our power to declare changes to the Scheme Rules void, we have enabled members to benefit from PPF protection, which will be higher than they would have received if the amended DC Scheme Rules had been allowed to stand.”  

This case highlights a number of pertinent issues.  Firstly, the matter would not have arisen if not for the poor record keeping and administration of the Scheme.  The Trustees had knowingly signed an incorrectly prepared Deed contrary to actuarial advice and without written legal advice. This is a regrettable state of affairs, and one which could have been avoided by taking and following the appropriate advice. The professional Trustee appointed following administration was able to identify and take steps to resolve the issue in under a week, emphasising the importance of Trustee knowledge and understanding. 

Secondly, although the Scheme was relatively small, the Regulator still intervened ensuring that members were not subject to detriment.  The voiding power is one that is rarely used, but the Regulator did not hesitate to utilise it to benefit the small number of affected members, demonstrating that they will act when appropriate.