Vol 7 (2010) - Issue 3

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Relevance of Availability of Pension Protection Fund Entry to Pension Fund Trustees: The Ilford Case

The High Court has ruled in Independent Trustee Services Limited v Hope & others1 that a proposed arrangement which would have 'selected against' the Pension Protection Fund would not be a proper exercise of pension trustee's powers.

Background
The Ilford pension scheme had a substantial deficit and an employer which was effectively insolvent. The scheme was likely in due course to enter a PPF assessment period after the employer had suffered a qualifying insolvency event. If the scheme fell into the PPF, the compensation which members would receive would be lower than their entitlements under the scheme. The members hardest-hit would be those below normal pension age at the start of the assessment period, who would receive only 90% of their entitlements and would be subject to the PPF annual cap, which, as at April 2009, equates to GBP 28,742.69 per annum at age 65.
In a bid to minimise the adverse impact on members, the trustee came up with a creative proposal. Prior to the start of the PPF assessment period, the trustee would arrange a substantial buy-out of benefits, using a power in the scheme's rules to effect the following arrangement:
– all benefits would be bought out for those members who were below normal pension age (and so would be hardest-hit under PPF rules); and
– there would be a partial buy-out for those members over normal pension age, to cover the expected shortfall between PPF compensation and their scheme entitlements. The buy-out would improve the position of members, but would worsen the position of the PPF. The PPF would have to take on significant liabilities but almost all of the scheme's assets would have been consumed by the buy-out.
The trustee was advised by a QC that it could not properly implement the proposal. However, certain members in the 'hardest-hit' category (backed by a different QC) argued otherwise. The trustee therefore asked the Court for directions on the exercise of the buy-out power.

The Court’s decision
In summary, the Court ruled that the proposed buyout went beyond the purposes for which the buy-out power was intended, and therefore could not properly be effected.
The purpose of the buy-out power was to enable the trustee to buy an annuity using an amount of money 'which fairly represented the benefits to which the member [was] entitled under the "scheme"', in other words a 'fair share of the scheme assets'. The fair share limit was implicit in the rules, not as a matter of construction, but because it would be contrary to the purpose of the scheme to empower the trustee to apply a disproportionately large share of the assets in the purchase of benefits which were intended to be in substitution for those available under the scheme. The application of a disproportionately large share of assets for a partial buy-out would ‘in all normal circumstances’ prejudice the remaining members who were not bought out.