Impact of Merchant Navy judgment

Introduction

The Merchant Navy case concerned an application by the trustee (the “Trustee”) of the Merchant Navy Ratings Pension Fund (the “Scheme”) for approval of an amendment to the Scheme to introduce a new deficit repair regime under which both current and former participating employers could be made liable to contribute. While many of the matters raised were specific to the particular facts, certain aspects of the judgment will be of general interest to trustees and sponsors of DB occupational pension schemes.

Key points

Trustees may take into account the position and interests of participating employers when exercising their powers under the trust deed and rules.
The Court concluded that members who had a continuing entitlement to an enhanced rate of revaluation, but who were not accruing years of service in relation to the scheme, were not in “pensionable service” for the purposes of section 75 of the Pensions Act 1995.

Background

The Scheme is a non-sectionalised industry wide DB scheme which was established with effect from 6 April 1978 for the benefit of British Merchant Navy “Ratings” (a seafarer employed by a participating employer in a capacity other than an Officer or Master) and their dependants. It has been in serious deficit since the late 1990s. The preliminary results of the 2014 actuarial valuation revealed a deficit, on an ongoing basis, of £325 million.

The deficit contribution regime under the current trust deed and rules has been in place, following Court approval, since 2001 (the “2001 Regime”). The 2001 Regime placed the liability to contribute upon the forty employers which, as at 31 October 1999, employed active members of the Scheme, or persons eligible to join it (the “Current Employers”). The other c. 200 participating employers (the “Historic Employers”) had no obligation to contribute although some had done so voluntarily. This meant the Current Employers bore 100% of the deficit repair contributions despite the fact that only 32.5% of the Scheme’s liabilities are attributable to the employment of members by the Current Employers.

The 2001 Regime involved the closure of the Scheme to new members with effect from 31 May 2001. From the same date, continued employment as a Rating ceased to constitute a basis for accrual of further years’ pensionable service under the Scheme.

One of the Current Employers brought proceedings in relation to the 2001 Regime in 2009. This ultimately resulted in a Court of Appeal decision that the 2001 Regime was not irrevocable and the trustee retained its full power of amendment which was broad enough, at least in principle, to permit the trustee to introduce a different deficit repair regime imposing contribution obligations on Historic Employers, as well as Current Employers.

The Proposal

Following the Court of Appeal’s decision, the Trustee decided to adopt a new deficit repair regime (the “New Regime”). One key aspect of the New Regime was that it would increase the pool of employers from whom deficit contributions could be demanded to include all participating employers, Current or Historic, on the basis that each would be liable for their share of the liabilities (calculated using a particular actuarial method). In addition, it would allow the Trustee to give credit for past contributions, going back to 2001.

The Trustee applied to the Court to approve the amendment to the Scheme to introduce the New Regime.

Key issues

The Court was asked to address several issues. These were divided into:

Propriety issues – whether the proposed amendments were within the scope of and a proper exercise of the Trustee’s power of amendment
Open / Frozen issues – what the status of the Scheme is for the purposes of section 75 of the Pensions Act 1995 (the employer debt legislation).

Propriety issues

Mrs Justice Asplin concluded that it was within the Trustee’s discretion to decide how best to achieve an appropriate contribution model, and a proper use of the amendment power to alter the Scheme to introduce the New Regime.

In particular, she considered that it was legitimate for the Trustee to take into account the employers’ interests both when determining whether to widen the pool of those liable to contribute to the Scheme and when considering whether to seek to reduce the element of cross-subsidy (namely, the Current Employers bearing responsibility for funding the deficit overall).

Open / Frozen issues

A Scheme’s status for the purposes of section 75 of the Pensions Act 1995 determines how and when a statutory debt may be triggered and which employers are “statutory employers” (ie. liable to contribute to the Scheme in respect of any deficit under statute).

Open schemes have active members who are in “pensionable service” under the scheme. The Pensions Act 1995 defines “pensionable service”, in relation to a member of an occupational pension scheme, as “service in any description or category of employment to which the scheme relates which qualifies the member (on the assumption that it continues for the appropriate period) for pension or other benefits under the scheme”. If there are no actives, an employer debt may be triggered or the scheme may be classed as “frozen” for the purposes of section 75.

While no members of the Scheme are accruing years of pensionable service, certain categories of member (including some former employees) are entitled to revaluation of their benefits at a higher rate while they remain in that category. The key question was whether this enhanced revaluation meant that members remained active members for the purposes of section 75.

Having considered various pieces of pensions legislation (including that governing preservation of benefits where a member ceases to be an active member), Mrs Justice Asplin concluded that to be in pensionable service a member needs to be accruing years of service in relation to a scheme. A right to an enhanced rate of revaluation was not sufficient. This meant that, for the purposes of section 75, the Scheme was frozen.

Action points

An issue which is frequently debated on scheme closure is whether retaining a final salary link means that members remain “active members” for the purposes of section 75. Whilst the financial element in question was different, the logic of this decision would strongly suggest that it does not.

Any schemes which may be affected by this judgment should speak to their usual Sackers contact.