What to consider before moving members to a new scheme

Pollock v Reed, which concerned the Halcrow Pension Scheme, has a £600m solvency deficit. HPS’s sponsor, Halcrow Group, is “heavily balance sheet insolvent”, but has been able to continue as a going concern through the financial support of its US parent, CH2M.

CH2M is no longer prepared to support Halcrow to the same extent. Therefore Halcrow faces insolvency unless it can reduce its scheme funding burden. 

The risk for members is a ‘double haircut’ – having their headline benefits reduced in the receiving scheme, only to see them reduced again if the scheme subsequently enters the PPF

The court was asked to bless a proposal to transfer members into a new scheme paying reduced – but at least Pension Protection Fund-level – benefits. For the transfer to happen without member consent (which was important to preserve confidentiality and keep Halcrow trading) the scheme actuary would have to certify that benefits in the new scheme were “broadly, no less favourable” than those in the old scheme. 

Since the headline benefits under the new scheme were clearly lower, the only way the actuary could give this certificate was if he could take into account the greater security of the benefits under the new scheme. Asplin J decided, “with some reluctance”, that he could not.

Risk of falling into the PPF

Had the judge found differently, what if the new scheme had subsequently failed? This question will be relevant wherever members transfer to a scheme with reduced benefits to avoid tipping into the PPF.

The risk for members is a ‘double haircut’ – ie having their headline benefits reduced in the receiving scheme, only to see them reduced again if the scheme subsequently enters the PPF. 

For the PPF, a key concern would be ‘priority drift’ if more deferred members have become pensioners (with a higher level of PPF protection) since the date the original scheme would have entered the PPF. 

Moreover, the funding level of the receiving scheme might have deteriorated since the transfer, resulting in the PPF taking a greater hit. Would the PPF then argue (following ITS v Hope) that the transfer was an example of trustees unlawfully ‘gaming’ the PPF?

Despite these risks there is a compelling argument in favour of solutions of this kind, particularly if the likelihood of the new scheme ultimately falling into the PPF is remote. 

Benefit is needed to meet moral hazard test

And what of the Pensions Regulator? Does it view the withdrawal of financial support by a parent company, which has no legal obligation to fund the pension scheme of its subsidiary, as a ‘moral hazard’ that could justify use of its powers? 

One of the statutory preconditions to the regulator exercising its moral hazard powers is that the exercise would be “reasonable”. Crucially this means reasonable in the regulator’s opinion. A key consideration is whether the regulator’s target derived a benefit from the scheme’s employers.

Commentators tend to focus on financial benefits. In the Halcrow scheme case, it seems the scheme derived significantly more financial benefit from the US parent than vice versa. 

However, the regulator has made clear that it views ‘benefit’ more widely, as including, for example, cash flow arrangements, tax advantages, associations, names and knowledge. 

Given the subjectivity of the reasonableness test, provided the regulator can identify some form of benefit – however indirect – that a parent company has derived from a scheme employer, there must be a risk that it will consider the test met. 

That said, there are other statutory hurdles for the regulator to get over before it could exercise its powers, which is far from straightforward and without which no enforcement action could be taken, even where the regulator might consider it reasonable.

The Halcrow Pension Scheme case highlights the need for careful due diligence before buying a UK company with pension liabilities. An overseas buyer in particular may be surprised at the reach of the regulator’s powers.

However, potential moral hazard targets based overseas may take some comfort from the jurisdictional issues encountered by the regulator when trying to enforce its demands outside the UK.

So, has the court avoided setting a dangerous precedent for pension scheme members? Had the case been decided otherwise, it seems likely that some employers would be tempted to use improved security of benefits as a justification for reducing them without consulting members, using the without-consent transfer route.

If the alternative is to let employers go under and schemes enter the PPF, the real danger could lie in doing nothing. 

Julia Chirnside is a senior associate at law firm Eversheds