Pensions Casebook - Merchant Navy Ratings Pension Fund

Commentary / Practical Considerations

In this case TPR decided not to use its power to appoint an independent trustee as positive steps were taken by scheme prior to decision.

TPR considered the stability of scheme and the low likelihood of risks materialising in deciding not to appoint a new trustee.

This case highlights the importance of governance reviews and trustees acting on them in order to improve the working of the trustee board. In summary by the existing trustees taking proactive steps to address governance issues, the TPR Panel did not need to act.

Also the four step approach taken by TPR’s Panel in considering this matter is worth noting:

-    To identify the relevant risks, present and future, said to threaten the statutory objectives;

-    To assess the likelihood of those risks materialising and the likely degree of harm to the statutory objectives were the risk to materialise;

-    To assess the countervailing risks and disadvantages of an appointment of a New Trustee;

-    Having carried out those assessments, to decide whether it is reasonable to appoint a New Trustee on the Grounds.

Case summary

(i)         Facts and background

-    The Merchant Navy Ratings Pension Fund (the 'Scheme') is a multi-employer defined benefit occupation pension scheme, with over 25,000 members and assets of over £1 billion (as at 31 March 2017).

-    It is a 'relevant centralised scheme'. As such ordinary regulations requiring member-nominated trustees or directors do not apply to it.

-    Instead, there is a sole corporate trustee (Merchant Navy Ratings Pension Fund Trustees Limited (the 'Trustee')), with provision in the articles of the Trustee for the appointment of shareholders who also make up the board of directors of the Trustee Company (the 'Trustee Board').

The Scheme obtained a report on governance by Mazars. That report included that:

'It is vital not to squander what you have achieved because of poor governance. However, the Board has found it very difficult to work well together since the conclusion of the Court case [i.e. MNRPF v Stena Line]. There has been an unfortunate loss of trust, which is holding the Board back.

Many have commented that this most recent period has been dysfunctional for the Board and tough for individuals to deal with. More than one Board member has expressed the wish to 'now put the past behind us and move on as a Board'.

We agree. It is time to draw a line under the past and move on. If the Board was being designed from scratch now, it would be a largely independent Board – by which we mean a Board whose members bring no inherent conflict of interest – with the required skills and availability for Board and Committee work.

If TPR were to get involved in reviewing the Fund’s governance, given some of the challenges we believe it might seek to appoint an independent trustee firm to run the Fund.'

(ii)        Summary of decision

-    The Panel determined that a New Trustee should not be appointed to the Scheme.

-    There were significant changes in the factual position before the Panel hearing on 27 February 2020.

-    In particular, the complete change in personnel of the Trustee Board since the preparation of the Warning Notice significantly altered the position and meant that many of the concerns had less significance.

(iii)       Key legal principle

-    The Panel had regard to the duties to protect the member benefits and promoting, and improving the understanding of, the good administration of work-based pension schemes.

-    The Panel took the following four-stage approach mentioned above

(iv)       Practical considerations

The proactive steps taken by the Scheme to address governance issues resulted in TPR not being required to appoint an independent trustee to the board.

Analysis

The Merchant Navy Ratings Pension Fund (the 'Scheme') is a multi-employer defined benefit occupation pension scheme, with over 25,000 members and assets of over £1 billion (as at 31 March 2017).

The Scheme was created in the 1970s to provide pensions for those in the Merchant Navy below the rank of officer (i.e. 'ratings'). It is a 'relevant centralised scheme' such that the ordinary regulations requiring member-nominated trustees or directors do not apply to it. Instead, there is a sole corporate trustee (Merchant Navy Ratings Pension Fund Trustees Limited (the 'Trustee')), with provision in the articles of the Trustee for the appointment of a specific number of shareholders who are also the Trustee’s directors and make up the board of directors of the Trustee Company (the 'Trustee Board').

While there is provision for certain independent directors in the articles, directors are also to be nominated (broadly) from the employer group (Employer Directors or 'EDs'), through MNP EG Limited (the 'Employers') and from the membership (Beneficiary Directors or 'BDs'), through nomination by the National Union of Rail Maritime and Transport Workers (the 'RMT'). One of the BDs is to be elected from the pensioner membership (the 'Pensioner Director'). While not material, it should be noted that not all the members are members of the RMT, nor all the employers members of the Employers.

While historically the board had 14 directors with 7 EDs and 7 BDs, by the time of the matters relied upon by the Case Team, the relevant articles provided for a maximum of 12 directors, of which 2 were to be independent, and the remainder split with 5 BDs and 5 EDs. One of the BDs was to be a Pensioner Trustee.

It was a significant factor of the Scheme that a substantial number of matters of Scheme administration required a dual majority, with the following features (the 'Dual Majority'):

1. The independent directors were excluded from voting;
2. An overall majority of the remaining directors was required but
3. Further separate majorities of each of (i) the BDs present, and (ii) the EDs present were required for the motion to pass.

The Dual Majority applied not only to constitutional matters (such as amending the Scheme’s deed and rules or a decision to wind the Scheme up), but also to, for example, the appointment or removal of the Chair or any key advisers (such as the actuary or legal adviser), any strategic decision relating to a buy out, and any decision relating to directors’ remuneration.

The Case Team of the Pensions Regulator (the 'Case Team', more broadly 'TPR') asked the Determinations Panel (the 'Panel') to determine whether an order to appoint a new trustee (the 'New Trustee'):

1. to secure that the trustees as a whole have, or exercise, the necessary knowledge and skill for the proper administration of the Scheme pursuant to section 7(3)(a); and/or
2. otherwise to protect the interests of the generality of the members of the Scheme pursuant to section 7(3)(d) (together, the 'Grounds').

The Panel considered the following:

1. The purpose of the power to appoint a trustee (at least in part) is preventative to prevent risk to the Scheme.
2. Particularly in this case, the question for the Panel was whether the statutory objectives are at risk in the future.
3. Future risks are to be (and indeed can only be) evidenced, and assessed, by reference to past events and material.
4. The Panel needed to make an assessment of (a) were any risk to materialise, the seriousness of harm to the relevant statutory objectives, and (b) the likelihood of any risk materialising. The timescale in which any risk may materialise will usually be a relevant factor to the likelihood of it materialising, but, for instance, where it is very likely or inevitable that a risk will materialise, the fact it is expected to occur in the medium or long term would not lead to the risk being given less weight.
5. The risk-based analysis includes not only the risks of not appointing a New Trustee, but also the countervailing risks (such as loss of knowledge) were an appointment to be made.
6. The Case Team has the burden of proof, but that is to establish that it is reasonable to appoint a New Trustee on the Grounds, having regard to the risks. It is not necessary for the Case Team to establish that it is more likely than not that a given risk sufficient to engage the Grounds will materialise.

The Panel determined that a New Trustee should not be appointed to the Scheme. There were significant changes in the factual position between the time when the Warning Notice was issued, the time when the Warning Notice was referred to the Panel and the time of the hearing before the Panel on 27 February 2020. In particular, the complete change in personnel of the Trustee Board since the preparation of the Warning Notice significantly altered the position and meant that many of the concerns relating to operation of the previous Trustee Board had less significance.