48 legal pi jan 10:layout 1 - pensions insight pensionsinsight / january 2010 48 p ension schemes...

LEGAL

PensionsInsight / January 2010www.pensions-insight.co.uk

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Pension schemes looking tomake structural changes totheir schemes, such as closure

to future accrual or moving membersfrom defined benefit (DB) to definedcontribution (DC), can find that thewording of their scheme rules is amajor obstacle to change, particularlywhere the trust deed was establishedmany decades ago.

Trustees and employers need totread extremely carefully through themaze when making scheme changesif they are to avoid costly mistakes.Lawyers and consultants say theycannot emphasise enough the needfor trustees and sponsors to check thewording of trust deeds, scheme rulesand employees’ contracts ofemployment before even thinkingabout making any changes.

Section 67Trustees and sponsoring employersalso need to be aware of section 67of the Pensions Act 1995, whichprevents schemes from makingamendments in respect to pensionbenefits already accrued before thedate of the change.

Helen Baker of law firm Sackerssays: “It means that members shouldbe no worse off than if they were adeferred member leaving the schemeat that date.”

There are exceptions, however,whereby certain changes can be made.‘Regulated modifications’ can bemade with the member’s consent oran actuarial equivalence test, whereas‘protected modifications’ are onlypossible with the member’s consent.

The existence and use ofamendment powers is a potentialminefield for trustees and sponsors.The recent IMG Pension Plancase (ruling on 19 November 2009)concerned changes made to thescheme in 1992, which were intendedto change DB benefits to DC benefits,for both past and future service.

The case was brought by theindependent trustee, HR Trustees,to obtain clarification as to the validityof the changes made to members’benefits before its appointment andwas neutral as to the outcome of

the proceedings.The IMG Pension

Plan was establishedby deed in 1977 witha restrictive power ofamendment, which the court ruledcould not be removed by asubsequent amendment madein 1981. The restriction in theoriginal amendment power protectedfinal salary linkage. The IMG rulingfollowed the Courage Group’sPension Scheme case in 1986, wherethe court ruled that benefits accruedup to the date of the amendmenthad to be protected by reference to themember’s final pensionable salary onleaving the scheme.

Terms of employmentIn the IMG case, the court alsoruled that extrinsic contracts (that is,employment contracts) could not beused to get around the restriction inthe amendment power.

Changing employment contractsto effect pension benefit changes hasbeen a popular device, following theSouth West Trains case in 1998. Thisallowed train drivers’ pension benefitsto be changed by collective bargaining

Employers trying to amend their pensionbenefits can find themselves lost inthe wording of the scheme rulesfinds Pamela Atherton

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[ ]Regulatedmodifications can bemade with the member’sconsent or an actuarialequivalence test

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procedures, even though the changesdid not accord with the benefits dueunder the rules of the scheme. Thecase meant that the trustee couldexecute an amending deed to giveeffect to contractually-agreedchanges.

“The IMG decision is likely to havegreatest impact in relation to extrinsiccontracts, which have increasinglybeen used as a way to get aroundawkward rules in schemes,” saysJane Samsworth of law firm Lovells,

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If it would, then a rule changewould be needed in advance.

“Unfortunately, the cessation ofaccrual can sometimes be somethingthe employer does which ‘lands’ onthe trustees, only for the trustees tothen find that they are forced to windup and put the section 75 debt on theemployer,” says Steve Delo of PANGovernance. “In my experience,employers often give inadequateattention to the technical consequencesof these sorts of actions.”

Another means of avoidinginadvertently triggering employerdebt is by setting up a DC sectionwith the same trust and maintainingactive members that way. Dependingon how a deed is structured, this canbe an effective tool.

However, Delo is aware of therebeing cases where employers andtrustees who – on deciding a fewyears later to move from trust-basedDC to contract-based DC in aneffort to cut costs – have ceased DBaccrual under the trust, forgetting thereason it was there in the first placeand thus accidentally triggeringwind-up and section 75 debt.

Delo says: “Continuity ofknowledge amongst advisers andtrustees is vital to avoid this sortof technical disaster.” JohnCockerton, a consulting actuary atWatson Wyatt agrees. “Section 75is an incredibly complex piece oflegislation, so sponsors need totake utmost care when makingany change to final salarypension schemes,” he says.

Delo suggests that trusteesand sponsors may wish to considera documentation audit, lookingat the precise terms of all thevarious trust documents that, incombination, govern the scheme.“Understanding the balance ofpowers between trustees andemployer is essential,” he says.Carrying out an audit ofthis type should enableanyone associated withthe scheme to spotpotential pitfalls beforethey affect majordecisions. ■

January 2010 / PensionsInsightwww.pensions-insight.co.uk

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which acted for HRTrustees. “The decisionwill significantly limit theuse of this approach.”

The IMG ruling alsodecided that, under section 91 of thePensions Act 1995, anti-alienationprovisions meant that settlementagreements with members thatresulted in the surrender of part of amember’s pension rights wereunenforceable.

This is expected to cause difficultiesfor trustees and employers. Samsworthsays: “Unless there is a decision asto what a member’s rights actuallyare, it will not be known whethera settlement agreement willbe enforceable.”[ ]Trustees and

employers need tocheck their schemerules to see if a closureto accrual would triggera wind-up

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Section 75 debtAnother piece of legislation trusteesand employers need to be aware ofwhen making changes to pensionsarrangements is section 75 of thePensions Act 1995. It ensures, inconjunction with supplementaryregulation, that when a DB schemeis wound up its sponsor is liable tofully fund it such that all members’benefits can be bought out in fullwith an insurance company (thatis, on an annuity buyout basis).

However, there is a potentialpitfall that trustees and employersneed to be aware of in relation tosection 75. If a sponsor decides tocut pension costs by closing its DBscheme to future accrual andreplacing it with a DC scheme, itcan unwittingly trigger section 75debt. In this situation trustees andemployers need to check theirscheme rules to see if a closure toaccrual would trigger a wind-up.

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