Trustees have to tread carefully when considering changes to their scheme, says James Bingham from law firm Sackers.
The case was heard in late 2016 and judgment is due in the coming weeks. It is expected to focus heavily on how trustees take decisions.
RPI/CPI and proper purpose
Following the government’s announcement in 2010 that public sector pensions would receive increases in line with the consumer price index rather than the retail price index, many sponsoring employers of private sector schemes have sought to follow suit and asked trustees to make a similar switch.
An employer will no doubt present a convincing rationale for why a change of inflation index is necessary. The trustees must scrutinise its reasons in detail
Trustees find themselves between a rock and a hard place. Employers are pushing to reduce costs, but trustees are aware that agreeing to a change to indexation may cause unrest among the membership. The issue will remain a live one in coming months and years, not least if the Barnardo’s case on the subject proceeds to the Supreme Court.
When faced with such a proposal, trustees must establish whether a switch can be made under the scheme rules; and if so, should they agree to the change.
If the rules would allow a switch to be made, in considering whether they should make the change, the trustees must keep in mind the purpose of the pension scheme.
It is well-established (through Edge v Pensions Ombudsman [2000] 603; Re Merchant Navy Ratings Pension Fund [2015] EWHC 448) that the purpose of a defined benefit pension scheme is to provide the benefits to members that are set out under the scheme rules. Trustees must also take steps to ensure the scheme’s assets and liabilities are appropriately balanced in order to provide the benefits in the future.
Balancing competing interests
Trustees are frequently informed that their duty involves ‘acting in the best interests of the members of the scheme’. This is undoubtedly true, but such a simple phrase hides a number of difficulties.
The trustees’ role is to balance the interests of the relevant parties in order to meet the purpose of the scheme and provide benefits to members in retirement. While it is clear that trustees may take the interests of the sponsoring employer into account, the employer’s position does not determine their decision.
An employer will no doubt present a convincing rationale for why a change is necessary. The trustees must scrutinise its reasons in detail and assess the merits or otherwise of the employer’s stance. This will involve questioning the employer and obtaining actuarial and covenant input.
Having obtained all necessary information regarding the employer’s rationale for a change, trustees must then consider the proposal from the members’ perspective. Questions might include:
What would the members gain as a result of this change?
Will agreeing to the change provide greater security for benefits in the future?
What is likely to happen if the trustees do not agree to the change?
What have members been told about the position?
Trustees may wish to consider the protections they have under the scheme rules, and any insurance, in case their decisions are challenged.
The future
Trustee decision-making is not easy. The BA decision may provide some additional guidance to help, but it seems likely that the trustees’ role will continue to involve treading a delicate path between competing interests and pressures, from the employer on one side and members on the other.
What to consider before moving members to a new scheme
A recent legal case raises interesting questions about what steps can – or should – be taken in distressed situations to save pension schemes.
However, trustees will not be alone, as employers will also remain under the spotlight.
A Court of Appeal hearing has just concluded in relation to the long-running IBM litigation on the extent of the employer’s duties to pension scheme members.
Judgment can be expected later in the year, and it will be interesting to see what light the Court of Appeal will shed on this complex area for employers.
Trustees need to be alive to their employer’s duty in this regard to ensure that, in considering any employer proposal, they are satisfied the employer is acting appropriately.
James Bingham is a senior associate at law firm Sackers
