Judgment provides clarity on maxim that trustees must act in best interests of beneficiaries, says Mayer Brown’s Philippa James and Stuart Pickford
Few cases go to the heart of trustees’ duties, but, in Merchant Navy Ratings Pension Fund Trustees Ltd v Stena Line Ltd and others, the UK High Court has given important guidance on whether trustees can take into account the interests of the scheme’s sponsoring employers as well as the interests of the beneficiaries.
The case saw a ruling allowing the Merchant Navy Ratings Pension Fund (MNRPF) to implement a new deficit contribution regime, going back to former sponsors for assistance in removing the deficit – despite the fact around 210 companies had not contributed since the fund closed in 2001.
It also ruled 40 sponsors that had made deficit contributions from 2001 onwards could be given some respite, shifting the burden onto those employers who had not.
The maxim that trustees must “act in the best interests of the beneficiaries” reflects a long-standing principle that can trace its roots back to 19th century cases concerning private family trusts. But what does it mean in the pensions context? Does it mean trustees must disregard the interests of the employers upon whose shoulders responsibility for funding the scheme ultimately rests?
The High Court has held that this duty is not free-standing but has to be viewed in the context of the purpose of the scheme – namely to ensure members get their promised benefits. Provided trustees exercise their powers to further that purpose, it is legitimate to take into account their sponsoring employers’ interests, should they decide this is the right thing to do. In this case, the judge held that it was appropriate for the trustee to take into account the relative burdens on different types of employer when designing a new regime for collecting deficit contributions.
Although it might be argued this will make decision-making that much harder, in practice, most trustees are likely already to consider the employer’s position when making certain types of decision that directly impact the employer – for example, in relation to funding and investment. The judge’s decision, therefore, gives trustees useful guidance on the relationship between the interests of the members, whose pension benefits the scheme is established to provide, and those of the sponsoring employers responsible for funding those benefits.
The second part of the case dealt with whether a scheme might remain “open” once accrual of years of pensionable service had ceased, but members who remained in employment received some other benefit compared with members who had left service – a point of great importance to the wider pensions industry and that has been debated for many years without being determined.
Although the judge was deciding the question in the context of a rule providing enhanced revaluation for members who remained in employment, her reasoning appears to apply equally to schemes that have closed to accrual but retained a final salary link. Essentially, the judge considered that the question comes down to whether members are accruing additional years of pensionable service. If they are not, then the scheme is frozen – irrespective of any additional benefits members may enjoy by virtue of still being employed. This would include a final salary link.
The ruling gives schemes a framework for deciding whether they are open or frozen. There will be significant implications for schemes that have treated themselves as open but should now be considered as frozen. In particular, such schemes will need to re-assess who their statutory employers are.
Philippa James and Stuart Pickford are partners at law firm Mayer Brown and acted on behalf of the MNRPF trustee