The Pensions Regulator has used its voidable modification powers to move a scheme attached to an insolvent employer into the Pension Protection Fund, it reported this week.
A voidable modification is a regulated change to a scheme that the regulator can declare void with a decision from its determination panel. It is one of its lesser-known powers, which the regulator admitted is rarely used.
The unusual case involves the DCT Civil Engineering Staff Pension Plan, a defined benefit scheme. In August 2010 a draft deed purported to change the existing rules and for benefits to start being calculated on a defined contribution basis.
The smaller the scheme, the more creative the solution. It has to be proportional
Peter Murphy, Sackers
The report stated the change “was despite the scheme actuary informing the trustees that accrued defined benefits could not be changed from DB to DC without member consent or the relevant actuarial equivalence requirements being met”.
It also said enquiries indicated the trustees had not intended to change the benefits, “and the apparent change to member benefits was simply a mistake”. It continued to be treated as having a DB benefit structure by all parties.
Sponsor insolvency
The sponsoring employer went into administration in January 2014. The scheme had a deficit on the PPF basis, but there was uncertainty as to the type of benefit provided.
The joint administrators appointed Independent Trustee Services as the sole trustee of the scheme. ITS subsequently applied to the regulator to treat the 2010 deed as a ‘voidable modification’, and therefore no longer in force. This allowed the scheme to enter the PPF, protecting members' benefits.
The PPF said in a statement: “We have always been of the view that in the specific circumstances of this case this was an eligible scheme and members were protected by the PPF. We do however welcome the additional certainty that the regulator was able to provide.”
“It’s a slightly odd case – it sounds like the trustees fundamentally changed the benefit structure but didn’t quite understand what had happened,” said Tim Smith, senior associate at law firm Eversheds. “If trustees are making changes, they need to understand what those are, and what the implications are.”
Creative solutions
Peter Murphy, partner at law firm Sackers, said the move showed a desire to use creative solutions when addressing problems facing schemes.
“People are trying to think more creatively about mistakes that have been made in the past,” he said. “The smaller the scheme, the more creative the solution. It has to be proportional.”
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While he acknowledged not all scheme problems could be solved with a voidable modification, Murphy said the case was not reflective of a wider lack in understanding of pensions.
“The fact is that it’s a very technical landscape that pensions sit in, and mistakes happen from time to time. The industry is doing all it can to improve governance of pension schemes and the knowledge and understanding of trustees.”
