UK - The UK high court has attacked a proposal by trustees of an underfunded scheme to buy out certain member benefits in full, ahead of entering the assessment period of the Pension Protection Fund (PPF), as a "blatant attempt" to undermine PPF legislation.
The verdict in the case between Independent Trustee Services (ITS) Vs Hope and Others warned if the proposal had been approved it could have led to a flurry of similar proposals from other pension funds, who were looking to take advantage of, or "game", the PPF. The judge argued this could have resulted in increased levies, reductions in benefit levels or jeopardised the pension lifeboat's continued existence.
The case centred around a group of senior management who took early retirement in 2000/01 from the Ilford Pension scheme. The sponsoring employer photography firm Ilford Ltd went into administrative receivership in August 2004, leaving the scheme with a funding deficit in 2007 of £45m and assets of just over £170m.
Should this scheme enter the PPF these members could face a reduction in their pension of up to 50% from current levels because they are below the scheme's normal retirement age as well as being subject to a cap of 90% of their pension entitlements or up to £31,936.32.
The members therefore approached the trustees - ITS - to buy out their benefits in full before the scheme entered the PPF assessment period. But as this would use a "disproportionately large share of the scheme assets in a way that could not possibly be justified if the PPF did not exist", the trustees sought clarification on whether the proposal is "improper" and whether it should take the existence of the PPF into account when considering buyouts.
The court heard arguments for and against the proposal from all sides, including the PPF and TPR, with the latter warning "similar arguments to those being deployed in the present case, are also being deployed in many other cases of which TPR has become aware, to justify a whole range of schemes and practices which, in the absence of the PPF, would otherwise be wholly indefensible uses of pension scheme resources".
Justice Henderson ruled the proposal was not consistent with policy of the PPF legislation. He concluded that the plan aimed to "minimise, if not eliminate" the assets that will be left to the PPF, while it also treats the availability of PPF compensation as an "advantage to be exploited" and an asset of the scheme rather than as a last resort.
Justice Henderson ruled: "I have no hesitation in holding that the proposal represents a blatant attempt to undermine or circumvent the policy of the PPF legislation. Furthermore, I have little doubt that, if the present proposal were approved, numerous and ever more ingenious attempts to take advantage of the PPF would soon follow, and unless amending legislation were passed to counter the threat, the PPF would find itself under increasing, and possibly fatal, pressure."
He also said the potential availability of PPF compensation "is not a relevant factor for the Trustee to take into account in the exercise of the rule 12.3(b) [buyout] power."
Giles Orton, head of pensions litigation at Eversheds law firm, acting for the members, claimed: "The judge's conclusions limiting buyouts to the share of scheme assets for the members concerned is controversial. It will cause problems for schemes in deficit that do choose to enter into partial buyouts for various valid reasons of risk reduction that have nothing to do with "gaming the PPF".
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