Pension Scheme Trustees and Employer Insolvency: Trustee power to wind-up a scheme employer?
In the case, involving the Biwater Retirement and Security Scheme (Scheme), there were certain winding up powers, including on principal employer notice or on the trustees determining to terminate the scheme at any time during the insolvency of the principal employer. Insolvency was defined to cover matters such as liquidation, provisional liquidation, administration receivership, administrative receivership and voluntary arrangements.
The scheme was relatively poorly funded with a £30 million deficit as against assets of £70 million. Additionally, there was around £8.5 million of unpaid contributions which were due to the Scheme. These included deficit recovery contributions, expenses, insurance and exceptional contributions. Although it seems that the company and the trustees had agreed a deferral of deficit recovery contributions to March 2021, which would have been under the coronavirus easements, the total amount of unpaid debt was relatively large and was steadily increasing.
In the Judgment, the overall financial position of the Scheme was considered and particularly the position of the Scheme employer and other creditors. Although the trustees benefited from certain priority debts, these were limited in amount and were only available for the trustees to call on in certain circumstances (none of which looked likely to materialise).
Another key aspect of the case was the trustees’ concern regarding lack of information being provided by the employer to the trustees, the PPF and the Pensions Regulator, together with breach of a negative pledge which potentially resulted in other creditors being preferred over the scheme.
The Judge recognised that the trustees were in a difficult and unenviable position, as the employer had failed to pay what it owed and there were signs that it would not do so or be able to do so.
The concepts of scheme drift and PPF drift were considered in the case. Scheme drift was helpfully defined in the Judgment as a situation where scheme assets are less than the liabilities and the proportionate level of funding is worsening over time, particularly as payment of administration expenses causes the funding level to continue to fall. The Judge recognised that scheme drift could be improved through the injection of funds or through investment returns, but in this case, neither were available as an option. The amount unpaid from the company was continuing to increase, and additionally the trustees had to adopt a fairly cautious investment strategy because of the weak position of the scheme employer. This meant that the opportunity to improve scheme drift through improving investment returns was not available to them.
The Judge noted that the consequence of scheme drift would be that members who were in receipt of benefits would be receiving those benefits potentially at the expense of those whose benefits would be received at a later date. His view was that the latter category were not being treated fairly or equitably.
The case also considered the concept of PPF drift which was described as occurring where the number of pensioners increased as assets were reducing. The Court looked at existing authorities on whether the trustees ought to take the position of the PPF into account when exercising a fiduciary power. Those historic cases considered what is sometimes known as "gaming" of the PPF, particularly the ITS case, the Granada case and the Axminster case. Both the latter cases recognised that there was no single answer to the question whether the PPF is a relevant consideration: it depended on the context and purpose of the power and the factual circumstances.
In this case, the trustees said that they would make the decision to petition the court to wind up the employers irrespective of the position of the PPF position, and the Judge was content with that, noting only that the trustees could not have (and did not) use the existence of the PPF to justify failing to take steps to prevent the Scheme deficit (and drift) increasing further.
The Court’s reasoning
The Judge recognised the trustees' unenviable position given the consequence of winding the companies up and noted their view that they had no alternative course of action to protect the interests of members.
The Judge also recognised that the role of the Court was not to set out the decision that the Court would take but instead to consider whether the trustees' decision was within their power to make and did not infringe their duties to act as ordinary, reasonable and prudent trustees might act, ignoring irrelevant, improper or irrational factors. In doing so, the Judge was satisfied that the trustees had considered following factors:
- the financial circumstances facing the scheme including the debts owed to it and the likelihood of the scheme employers making good on those debts
- the consequences for members of the continuation of the scheme without it winding up compared to the risk of scheme drift and continued erosion of the scheme assets
- the trustees' duty to call in and protect scheme assets
- the trustees' duty to protect the interests of beneficiaries namely the scheme members
- advice which had been obtained by the trustees including advice from restructuring experts, advice from the scheme actuary and legal advice.
This is a relatively unusual case and the trustees had reached a point where they had no option but to force the employer into insolvency. The case highlights the importance of the trustees monitoring any position where the employer’s financial position is precarious. Trustees should be aware that in some situations, last resort options such as these may need to be exercised.
Trustees sometimes have power in scheme rules to terminate the scheme on the insolvency of the scheme, or the scheme rules may give them a power to terminate the scheme if the scheme is in a poor financial position; the wording varies. When looking at these types of power, trustees should be mindful of the need to consider carefully the wording used in the rules and to ensure that any decision to exercise these powers is taken on advice. Exercise of these powers will feel like something of a last resort for trustees in circumstances where they consider they have no other choice available to them. We sometimes describe these as ‘exocet’ powers as there is no prospect of turning back from such decisions. That said, the trustees should be aware of their wider obligations to scheme members as set out in the Biwater Judgment.
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