High Court holds that Trustees can take into consideration the interests of employers

The High Court has today handed down the judgment in one of the most significant pensions cases in the last 12 months. The case has clarified the widely held view that trustees of pension scheme must act in the best interests of the members of the scheme in all decisions they make. The judgment has consigned that approach to history and substituted instead an approach of acting in accordance with the purpose for which the scheme was created. As this was held to be the wider purpose of providing pension benefits to members of the scheme, the court concluded that provided that purpose was being furthered, the Trustees could also take into account the interests of employers.

During a four week trial at the end of last year before Mrs Justice Asplin, the Trustee of the Merchant Navy Ratings Pension Fund (the “Trustee” and the “Fund” respectively) sought the Court’s decision on two issues:

1. Whether it could introduce a new contribution regime designed to gather in contributions from over 200 employers with the objective of eliminating a deficit in the Fund, estimated at between £362 - £575 million (the “New Regime”).
2. Questions of law relating to the status of the Fund under legislation which governs the statutory liability of certain employers to make deficit contributions in particular circumstances (principally under s.75 of the Pensions Act 1995 and the subsequent Regulations). These questions became known as the “open/frozen issues”.

The Propriety of the New Deficit Contribution Regime

In relation to the propriety of the introduction of the New Regime, Burges Salmon acted for the representative of the 30,000 members of the Fund and instructed barristers Paul Newman QC and Emily Campbell of Wilberforce Chambers. Along with one of the employer defendants, P&O Ferries Ltd, the members of the Fund opposed the Trustee’s application.

On behalf of the members, it was argued that the Trustee had acted outside its powers in that the proposed deficit recover regime included giving credit for contributions paid by a group of 40 employers since 2001. The Trustee wished to do so in order to eliminate, so far as possible, the inequality that had arisen between employers as a result of some having made very significant contributions between 2001 and 2012 and others having paid nothing. This inequality produced a cross-subsidy effect between employers whereby some employers were, in effect, paying the pension contributions in respect of other employers’ members.

The members argued that giving credit for these past payments (as against future payments that would otherwise be due) was solely in the interests of the employers in question and was of no benefit at all to members. The members also argued that whilst many aspects of the new regime were positive for members, some were not, and that those aspects demonstrated that the Trustee had approached the matter with a mindset of wishing to be favourable to the employers. On this point the members argued that the Trustee could and should have proposed a new regime which was better for members than the one it put before the Court.

The legal argument underpinning these points was that trustees of occupational pension schemes must, at all times, act in the best interests of the members of the scheme and that only where acting in the interests of the employers also happens to be in the best interests of members, can Trustees do so. The members argued that this principle (the “best interests principle”) is a long established principle of trusts law which had been sidestepped by the Trustees in their desire to act in the interests of the employers.

The Judge held in favour of the Trustee on both issues:

1. The Judge held the Trustee is entitled to introduce the new regime and thereby give credit for all past deficit contributions made by employers between 2001 and 2012. The Judge ruled that the “best interests” principle is not a standalone principle. As long as the primary purpose of providing pensions was being furthered, the Judge believed that it was permissible for the Trustees to consider the employers’ interests. The paramount consideration for the Trustee is therefore advancing the purpose of the trust which is a more general consideration than acting in the best interests of members.
2. The continued provision of enhanced revaluation following closure of the scheme to accrual does not amount to “service in any description or category of employment to which the scheme relates....'.

The MNRPF is one of a handful of large industry wide schemes and has been the subject of previous Court proceedings in recent years. Due to the large deficit and the number of members in the Fund, it was important for the members to challenge the Trustee’s application.

This judgment will now result in trustees coming under increasing pressure from employers to take their interests into account in the decisions they make – principally in relation to funding decisions. Trustees can no longer simply rely on the argument that they are obliged to act in the best interests of members.

The judgment also provides practitioners with much needed guidance in relation to the “open/frozen” issues and has clarified this complex area of pensions law which has remained in doubt for perhaps too long.

Find out more about Burges Salmon's Pensions and Incentives team.