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12 February 2013 0 Comments
Posted in Corporate & Commercial, Opinion

“Play up! and play the game!”

Posted by , Partner

Sir Henry Newbolt’s Victorian poem applied the spirit of a seemingly-lost school cricket match – “An hour to play and the last man in” – to a desperate colonial battle – “The Gatling’s jammed and the Colonel dead”. . . .  Pensions, one hopes, are not quite like that.  But there is still room for fair play in pensions, all the same.

A defined-benefit pension scheme is, in essence, simply a promise from the employer to its employees: Work for us, contribute to our pension scheme, and when you retire we will pay you a proportion of your salary to live on. The employer always reserves the right to stop the scheme, if (as nowadays) it proves too expensive to operate. The employer does not then expect the trustees of the scheme to lay an ambush, and to demand “Your money or your life!” It’s just not cricket.

In the days before 2003, employers could wind their pension schemes up. They did first have to make up the scheme fund to the Minimum Funding Requirement level – but, as everyone knows, that was a very low level. An employer might have to pay £500,000 – not a tiny amount, but a reasonable investment to escape an open-ended liability for the next 50 years. The problem was that even in those days annuities were expensive, and the scheme fund had to be used first to buy annuities for the scheme’s pensioners at 100%. This meant that the amount left would only buy deferred annuities of (say) 60% for the scheme’s remaining active and deferred members.

The Government realised, a little late in the day, that this would be storing up a storm of protest in 15 or 20 years’ time when these members retired and found they did not have enough to live on. The Government therefore suddenly announced in June 2003 that any employer winding up a scheme had to pay the trustees of the scheme enough to buy out all pensions at 100%. Overnight a debt of £500,000 turned into a debt of (say) £30 million.

Most schemes rules allowed the trustees to run the scheme on as a “frozen” scheme, with the pensions being paid only as and when the scheme members retired. This turned the employer’s liability back into the long-term liability the employer (and, indeed, the Government) had always envisaged. Scheme wind-ups duly stopped. But, as with most hurried legislation, the knock-on effects only became apparent later.

When this legislation took effect in 2003 some schemes had rules which gave the trustees the power at any time to decide to trigger the winding-up of a “frozen” scheme. The strict and inflexible pensions legislation would then force the employer to buy annuities for all the scheme members immediately. So although the employer might be on the best of terms with the current trustees, at any time in the scheme members’ lifetimes (which could easily be 50 years or more) the trustees could force the employer into insolvency.

This represents a vast and unjustifiable shift in the balance of power between the employer and the trustees of its pension scheme. What had been before 2003 a simple administrative convenience – because the trustees had no legal power to demand any further money from the employer than the Minimum Funding Requirement – turned into a stark power of life-or-death over the employer. What is 100% certain is that the Government had no intention of introducing such a draconian measure. In fact the Government is probably still blissfully unaware that the problem exists at all.

Because the problem is hidden in the scheme rules and the pensions legislation, it generally only comes to light when the scheme rules need to be amended. This is usually when an overburdened employer wants to stop future pension accrual in the scheme, and makes a proposal to the trustees.

What happens next is where the fair play comes in.

The scheme trustees should accept that they now have powers that were never contemplated by the employer when it set up the scheme, and which the employer would never have agreed to. These powers were acquired by accident as a consequence of hurried legislation intended to stop scheme wind-ups, not to facilitate unilateral wind-ups by a party which does not have to meet any of the catastrophic cost of its action.

A reasonable board of trustees should allow the employer to restore the balance of power to the pre-2003 level. The employer should be given a power of veto over any use of the trustees power to wind the scheme up.

What actually happens in practice is that the trustees’ legal advisors advise the trustees that the power should not be surrendered, or at any rate not without a very considerable concession from the employer. This proves, inevitably, unacceptable to the employer.

So how is this stand-off to be resolved? The only logical conclusion you can reach is that as the Government has got us into this mess, the Government should get us out of it. Legislation should be passed to give a veto to the employer where the trustees have acquired, purely by operation of law, an unfettered power to wind up the scheme.

Will it ever happen? I am appealing to the Umpire (that is, Mr Webb). Watch this space…..

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