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Irish High Court ruling could close door on DB schemes winding up in deficit

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An Irish pension plan has won a €2.2m High Court case, requiring its sponsor to provide funding above and beyond the minimum funding standard (MFS) prior to winding up the scheme.

The ruling, which took into consideration the wording of the scheme’s trust deed, is likely to make it harder for schemes to be wound up in deficit, the Irish Association of Pension Funds (IAPF) said.

The country’s regulatory regime currently has no requirement to address deficits upon wind-up, instead allowing benefits to be cut.

The trustee of the defined benefit scheme for Omega Pharma, subsidiary to the Dutch healthcare firm, in December 2012 requested a further €3.01m contribution from the company after being informed the fund would be wound up.

The requested payment, later revised downward to €2.23m, was not required to meet any actuarial deficit and therefore sought funding above the MFS.

The payment was meant to “secure benefits”, according to court documents, above the standard transfer values agreed as part of the MFS.

The documents noted that the requested payment fell short of being sufficient to fund an annuity buyout for all members, which would have required €5.8m.

Such a funding level would have been “excessive”, according to scheme actuary Maurice Whyms, director of Attain Consulting and a former chairman of the IAPF.

The trustee argued that it had an obligation under the trust deed to secure all accrued benefits, and that the MFS was “not appropriate in the particular circumstances”.

The documents added that, under the deed, the trustee also had a three-month grace period to negotiate with the sponsor once it was notified of a wind-up.

As the firm chose not to engage, it left the trustee “[gauging] reasonability effectively in a vacuum”, according to presiding judge Justice Michael Moriarty.

“Leaving to one side an actuarial analysis of the computation method, the trustees appear to have been acting in good faith in pursuit of what they believed to be the best interests of the members of the [s]cheme, in accordance with their fiduciary duty,” the ruling added.

Justice Moriarty said that, in light of the lack of engagement by the scheme sponsor, he was “satisfied” the trustee should be granted the €2.23m in funding.

A spokeswoman for Omega Pharma could not be reached for comment at the time of publication.

Aisling Kelly, senior consultant at Mercer, noted that the case should concern all sponsors, even if other trust deeds were not as supportive of additional payments as those for the Omega Pharma scheme.

“Effectively, the ruling could prevent an employer from closing and winding up a scheme without ensuring the scheme is fully funded, on a basis that may be in excess of the minimum funding standard,” she said. 

Kelly speculated that Whyms’s approach of negotiating additional contributions below buyout levels was due to the fact no sizeable deferred annuity market exists in Ireland, making a buyout “too costly”.

Jerry Moriarty, chief executive of the IAPF, said the ruling would “definitely make it harder for employers to walk away from a scheme, even when meeting the MFS”.

However, he also underlined that the ruling hinged on the wording of the trust deed, which varies among DB schemes.

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