UK: Human Capital (Pensions) - Recovery Plans And Employer Contribution Rules: Case Law Developments

Last Updated: 25 January 2008
Article by Jay Doraisamy

In the heady days of last summer we reported on the High Court judgment in the first case which dealt with the new scheme specific funding established by the Pensions Act 2004 (the "Act"), British Vita Unlimited v British Vita Pension Fund Trustees Limited & British Vita SE & D Pension Fund Trustees Limited.

The fundamental issue at stake in British Vita, the interrelationship of the statutory funding régime and scheme contribution rules, has come under scrutiny again as a result of another more recent case, Allied Domecq (Holdings) Limited v Allied Domecq First Pension Trustee Limited and Another. In Allied Domecq it was the scheme actuary, rather than the trustees (as in British Vita), who was held to have the sole power to set employer contributions.

In both cases the Courts had to consider whether the new statutory régime overrides or ousts scheme rules which are at odds with the basic proposition under the Act; that the sponsoring employer has the right to agree to the contribution rates set out in the scheme's schedule of contributions. The Courts held, in both cases, that if anyone other than the employer has the unilateral right to set the contribution rate under the rules, that right survives under scheme specific funding.

In British Vita the employer appealed against the High Court's decision to endorse the trustees' demands for increased contributions of some £49.6 million across the two schemes, demands which were made before the first scheme specific valuations. However, just before the Court of Appeal was due to hear the appeal, the case settled and the employer agreed to pay an undisclosed sum. As a consequence, although the High Court judgment stands, there is no further guidance as to the position if the British Vita trustees had sought to use their scheme powers after the first scheme specific valuations had commenced.

However, the facts and timing of the Allied Domecq case do help to answer this question, since that case was brought following scheme specific valuations which revealed funding deficiencies in the two Allied Domecq schemes of respectively £455m and £252m. Given the sums at stake, it is not surprising that Allied Domecq sought the guidance of the Court as to its rôle and in particular whether the requirement of section 229(1) of the Act, that the trustees must obtain the employer's consent to "any provision of a recovery plan" and "any matter to be included in the schedule of contributions" gave the employer a veto on the framing of the contribution rate. As readers will know, if agreement with the employer is not reached, the Act provides that the Pensions Regulator has a default power to impose a schedule of contributions.

As explained above, under the Allied Domecq schemes' rules, the actuary had the obligation to set a future service contribution rate which would enable the benefits to be paid, but also to determine any past service lump sum required to correct any deficiency in the scheme's "solvency" (a term which incidentally was neither defined in the schemes' rules nor commented on by the Judge).

Most of the judgment in the Allied Domecq case is concerned with the construction of the rules and analysis of the intention of the draftsman. The Judge found in favour of the trustees who were defending the action and also made some fairly telling comments about what he thought the purpose of paragraph 9(5) of Schedule 2 to the Occupational Pension Schemes (Scheme Funding) Regulations 2005 was concerned with. This is the paragraph which requires that "in the case of a scheme under which the rates of contributions payable by the employer are determined by the actuary without the agreement of the employer, section 227(6) of the [Act] shall apply" such that "the actuary's certificate must state that the rates shown in the schedule of contributions are not lower than the rates he would have provided for if he, rather than the trustees or managers of the scheme, had the responsibility for" the schedule of contributions, the statement of funding principles and any recovery plan.

First, the Judge commented that in his view the draftsman of the Regulations was "acknowledging that the... Act is removing from the Scheme something that might be a benefit to the members, namely the fact that the actuary has an unfettered right to set the rate. In those circumstances, the overriding provisions of the Act ie, the general position that the trustees and the employer will set the terms of the recovery plan and the schedule of contributions, are modified in order to re-introduce an element of actuarial scrutiny on the actual level of contributions setting. Paragraph 9 is therefore an acknowledgement that at some point the terms of the Scheme rules ought to influence and modify the overriding statutory regime" (our emphasis).

He went on to point out that, in the context of a negotiation between the trustees and the employer in relation to a valuation, there might be commercial importance where paragraph 9(5) applies so that "the requirement for the actuarial underpin may, as has happened in relation to the 2006 valuation, lead to agreement on a higher or accelerated employer contribution rate".

Conclusions

Squaring the circle is never easy in drafting legislation and it is perhaps not surprising that the Court concluded that the way in which Parliament has introduced the scheme specific funding régime into legislation is imperfect. In one sense, of course, it would be a nonsense to detract from the principle that the funding of each scheme ought to be determined on factors which are specific to it, including the rules which describe the governance of the scheme, especially if that led us back to the position where an arbitrary actuarial standard, such as the minimum funding requirement, was reimposed on defined benefit scheme valuations. We suspect that the draftsmen only really contemplated "scheme specific" in financial and actuarial terms, rather than in legal terms. However, the outcome of the British Vita and Allied Domecq judgments does present obstacles for employers who are saddled with scheme rules which do not give them at least the joint power with trustees to set a contribution rate. This is because, whatever else is clear, the Act will not come to their assistance to give them that power.

Some commentators have suggested that such employers might want to request an additional valuation where either the actuary or the trustees have the power to set the contribution rate ie, one valuation under the scheme rules and one under the scheme specific provisions set out in the Regulations. This seems to us to be extreme (and also quite costly) but it is certainly true that all parties concerned with a valuation will now need to understand exactly how their powers may be exercised before beginning the valuation process. Scheme actuaries charged with exercising such powers – often unwillingly – may be wise to take independent advice on assessing the extent of their quasi-fiduciary duties in the light of the Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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