The High Court has ruled that a scheme rule restricting amendments that will affect members’ ‘interests’ applies to future service benefits, as well as benefits already accrued: BBC v BBC Pension Trust Limited.

The amendment power in the BBC Pension Scheme is subject to a restriction that no alteration may ‘take effect as regards the Active Members whose interests are certified by the Actuary to be affected thereby’ unless certain conditions are complied with (designed to ensure that the relevant ‘interests’ are not substantially prejudiced). The BBC sought guidance on the effect of this provision in the context of considering ways to mitigate the cost of benefits for future service (although no specific measures were proposed for consideration).

All parties agreed that members’ ‘interests’ covered rights earned by past service, but disagreed on whether or not future service benefits were included. Mr Justice Johnson held that future service benefits were covered, meaning that amendments to prospective benefits could not be made unless the conditions set out in the amendment power were complied with. As a matter of ordinary language, he found nothing in the word ‘interests’ to suggest a division between benefits already earned by past service and those which are yet to be earned in the future; instead, the focus of the restriction was on whether the position of active members would be different under any proposed amendment and, if so, then to provide certain other safeguards. On this basis, a reduction in accrual rate, for example, would affect a member’s interests even though the member might not remain in service until retirement; this construction would give ‘reasonable and practical effect to the scheme’ in the way that it had been intended to work when the scheme rules (including this rather unusual provision) were drafted.

The court was also asked to consider whether a rule change that reduced future service benefits would be an exercise of the amendment power for an improper purpose unless the change was agreed to by active members. The argument here was that benefit redesign is a matter for the employer, and the BBC is constrained by provisions in the BBC Charter which contemplate that terms and conditions of employment are to be settled by negotiation between the BBC and its employees. The judge rejected the idea that this meant that member consent was a precondition to the trustee exercising the amendment power for a proper purpose.

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Upper Tribunal: amount of contribution notices is not limited to loss suffered

The Upper Tribunal (UT) has upheld a decision by the Pensions Regulator (TPR) to issue a contribution notice (CN) for almost GBP2 million to be paid into a pension scheme. This is the first substantive case the Upper Tribunal has heard regarding TPR’s CN power. It has clarified that the amount of a CN is not limited to the loss suffered by the scheme (that is, a CN is not purely compensatory): Shah v The Pensions Regulator.

The ruling followed a Determination Notice issued in June 2020 against two individuals. Both targets referred the decision to the UT, but the case against one of them was settled prior to the hearing. The UT agreed that it was reasonable to order the other individual to pay 50% of the sum that should have been paid into the scheme, plus an uplift to take account of the passage of time since the relevant acts (a series of payments to the sponsor’s parent company and a disposal of assets with the sums received being paid out as dividends) had occurred.

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High Court approves trustee decision to seek wind-up of sponsors

The High Court has approved a trustee decision to issue petitions to wind up the scheme’s two employers (together, Biwater), leading ultimately to the scheme entering the Pension Protection Fund: Brass Trustees v Goldstone and PPF. The trustee sought the Court’s approval for its decision, with the defendants being a solicitor as representative beneficiary and the PPF.

The rules of the scheme included a trustee power to terminate the scheme ‘at any time during the insolvency of the Principal Employer’ – without such an insolvency event, the scheme could only be terminated by the sponsor giving notice or by reason of statute or an order of the Pensions Regulator. The Trustee had taken a decision to issue winding-up petitions, subject to the approval of the court. It submitted that it would have taken the same decision regardless of the existence of the PPF, and that (a) it was not entitled to take the existence of PPF compensation into account in reaching its decision, and (b) that the PPF’s interests were not a relevant consideration when exercising its fiduciary powers to determine whether or not to issue the winding-up petitions.

The scheme had a significant deficit, and outstanding amounts totalling nearly GBP40 million were owed to the scheme by the sponsor. The court noted that the sponsor’s financial position was ‘bleak’ and that it had ‘drip-fed’ information to the trustee, seeking to project its prospects positively, such that the trustee’s evidence probably understated the full extent of the sponsor’s financial problems: ‘it is clear that Biwater has no prospect of meeting its financial obligations to the Scheme’. The scheme was now suffering from both ‘scheme drift’ (the funding level being reduced by benefits being paid out of assets and by the ongoing expense of administering the scheme) and ‘PPF drift’ (the compensation payable by the PPF will be greater the longer it takes a scheme to enter PPF assessment; and in addition scheme assets are being reduced, increasing the shortfall to be met by the PPF).

The representative beneficiary’s role was to represent members and beneficiaries of the scheme whose interests lay in the decision not being approved; however, based on all the available information, she had concluded that there was no realistic alternative and did not oppose the court’s approval of the decision. The PPF strongly supported it, saying that the prospects of Biwater’s survival were ‘illusory’ and would not in any event lead to deficit repair.

The court recognised that the case, and the underlying trustee decision, is highly unusual – the likely implications include job losses and financial impacts on scheme members, but the trustee was in ‘an unenviable – in fact, invidious – position’ leaving it with no alternative but to take steps to protect the interests of members of the scheme as a whole. The court was satisfied that it was appropriate to approve the trustee’s decision.

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Court of Appeal considers SERPS and the contracted-out deduction

The Court of Appeal has given a lengthy ruling on the operation of contracting-out and specifically the rules applying to the deduction of guaranteed minimum pension benefits from state pensions (the ‘contracted-out deduction’ or COD): Robins v Secretary of State for Work and Pensions.

The legal point decided is a narrow one and concerns the rules for people reaching pensionable age before 6 April 2016. Mrs Robins had never been a member of a contracted-out scheme, and she was entitled to a SERPS pension based on her own full contribution record. On her husband’s death, she became entitled to a widow’s GMP based on his contracted-out service and objected to the fact that this was deducted from her SERPS pension (so she was no worse off, but she gained no benefit from the widow’s GMP). The Court ruled that the deduction applied even though the legislation referred to reducing the rates of pension for earners in contracted-out employment (who had paid contributions at reduced rates), which had never been the case for Mrs Robins.

The direct impact of the decision relates to the amount payable to Mrs Robins by way of state pension. The wider interest lies in (a) the analysis of the ‘purpose’ provision in the legislation – the Court accepted that on the face of it, Mrs Robins’ case did not fit precisely within the expressed purpose in the Act, but did not consider that this overrode the words of other operative provisions; and (b) the detailed explanation within the decision of the development and workings of contracting-out and the contracted-out deduction – this is likely to be a useful decision for future reference on related issues.

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TPR blog post on pension industry diversity and inclusion

The Pensions Regulator has published a blog post on diversity and inclusion issues, including a reminder of its recent guidance on practical ways to overcome challenges in achieving diversity. It notes that it expects to develop further guidance in this area and has been seeking to gather data relating to trustees across the industry to provide an evidence base for this, while acknowledging that ‘increasing diversity of trustee boards isn’t going to happen overnight’.

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