A victory for common sense

Angela Dimsdale Gill, Matthew Bullen & Adam Baradon welcome judicial clarity on pension scheme funding

PNPF Trust Company Ltd v Taylor and others went to trial in January and was widely expected to clarify the effect of two key pieces of legislation governing the funding of occupational pension schemes. This month’s judgment has lived up to those expectations and confirmed that statutory rules should underpin, not override, pension scheme rules.

The PNPF is an industry-wide pension scheme for marine pilots. It has almost 2,000 members drawn from the likes of the Port of London Authority, the Port of Tyne Authority and the Milford Haven Port Authority. Like manyension schemes, the scheme currently faces a significant deficit. It is the trustee’s duty to try to fill this deficit, and there are 53 bodies which might be liable to contribute.

The PNPF trustee’s power to make up the deficit in the scheme was a matter of some doubt—the legislation governing this area was considered to be unclear and has changed over time, plus there was significant doubt about how it interacted with the scheme’s rules. The trustee’s powers under the scheme’s rules were also the subject of debate, not least because the scheme is highly unusual in having self-employed members in addition to the (usual) employed members.

The trustee did not, strictly speaking, “sue” anyone—the idea was that everyone involved needed answers and had an interest in working together to obtain them. Representation of all those involved was therefore achieved by the nomination of seven “Representative Parties”, who were appointed to argue the different views that could be put on each issue. 

The legislation

An employer has a legislative duty to fund a pension scheme by periodic payments under the Scheme Specific Funding regime set out in the Pensions Act 2004. That obligation is intended by Parliament to cease when the employer leaves the scheme, at which point it becomes liable to pay a one-off lump sum to the scheme (called a “s 75 debt”, after the section establishing the obligation in the Pensions Act 1995)—a payment to cover the employer’s share of any deficit in the scheme.

The Scheme Specific Funding regime and s 75 together constitute the “twin-axis” of the legislative funding mechanism laid down by Parliament to ensure, so far as possible, that pension scheme liabilities are met. As such, the crucial questions for all pension schemes are: when does the Scheme Specific Funding obligation cease, and when is the employer debt triggered? That tells us whether the employer has an ongoing duty to fund the scheme by making periodic contributions, or whether he has finished with that obligation and has acquired instead a potentially massive lump sum obligation.

Many people used to think that a s 75 debt was triggered (and Scheme Specific Funding obligations ceased) when an employer ceased to employ “active” members (roughly, members who continue to be employed and to accrue benefits in a scheme).  But there were competing views; for example, some commentators believed that continuing to employ someone who was merely eligible to join the scheme, but who had not yet done so, would be sufficient to prevent the employer from triggering his liability to pay the lump sum debt to the scheme. 

It was made clear by recent legislation, which took effect from 6 April 2008, that the “active member test” was the correct one (at least in respect of s 75, but see below for an unwelcome complication).  After that date an employer will trigger a debt if he has no further employees who are actually members of the scheme “clocking up” benefits. 

The new legislation does not apply, however, to events that took place prior to that date and the position on that period was cast into some confusion by the recent case of Cemex UK Marine Ltd v MNOPF Trustees Ltd decided last November. 

In the PNPF judgment Mr Justice Warren explained that an employer owes obligations under the “Scheme Specific Funding” provisions until it ceases to employ anyone who is either an active member of or eligible to join the relevant pension scheme, whether or not they are able to join only with the trustees’ consent (see [2009] EWHC 1693 (Ch),  [2009] All ER (D) 119 (Jul)).

In response to the all-important question of when an employer triggers a debt to the scheme under s 75 (prior to 6 April 2008) Mr Justice Warren found that the same test applies. He also went on to find that the Scheme Specific Funding regime underpins a scheme’s rules, providing trustees with a means to achieve the statutory funding objective if the rules of the scheme are otherwise inadequate to do so. Where the rules of a scheme provide for greater contributions than might be sought under the Scheme Specific Funding regime, trustees are generally able to demand those higher contributions.

A complication

The decision does add a complication in respect of events occurring after 6 April 2008, when the s 75 legislation was amended by the government. The new legislation has made it quite clear that since that date a s 75 debt has been triggered when the employer ceases to employ active members. The problem is that employers sometimes cease to employ active members even though they continue to employ people eligible to become members. That means that it is now in principle possible for employers to trigger a s 75 debt without leaving behind their ongoing Scheme Specific Funding obligations.

Angela Dimsdale Gill, head of pensions litigation, Matthew Bullen, senior associate, & Adam Baradon, associate barrister, led the Hogan Lovells team which designed and brought the proceedings on behalf of the PNPF Trust Company Limited.
Website: www.hoganlovells.com
 

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