Introduction
Defined benefit schemes (hereinafter DB schemes) provide members with retirement and death benefits based on formulae set out in the rules of the scheme. Benefits are often based on a member’s salary at retirement age and on his or her pensionable service. The pension benefit under a DB scheme are often for a lump sum up to 1 ½ times final remuneration and for an annual payment up to 2/3 final remuneration. Sums greater than this are not as tax efficient. Very often account is taken of the State pension in calculating a members pensionable salary.
The trustees of a DB scheme must submit an actuarial funding certificate (AFC) to The Pensions Board at least every 3 years, signed by an actuary. The certificate demonstrates that the scheme complies with the funding standard under the Pensions Act, stating whether the scheme is capable of meeting specified liabilities in a statutory order of priority in the event of its being wound up on the date of the certificate.
The Funding Standard ensures that a DB scheme has sufficient funds to secure the pensions rights that members have built up, should the scheme have to be wound up at any stage. To comply with the funding standard, a DB scheme must be able to meet certain liabilities, as set down in the Pensions Act. It is the minimum requirement.
Pensioners are persons over the retirement age and benefiting from pension payments. Active members are members who have not reached retirement age and are still contributing to the scheme – they are usually still in the employment. Deferred members are members who have not reached retirement age and are not longer contributing to the pension – they have usually left the employment.
The problem
Many DB schemes do not meet the funding standard required because of the worldwide market turmoil since 2007. Other causes are increased life expectancy, low bond yields, the increased cost of buying annuities for pensioners and the rate of increase of final salaries. The projected assets do not meet the projected liabilities. As a result many DB schemes have been closed off to new members after a certain date. Trustees are unsure what to do with the scheme going forward and members are unsure what benefits they can expect on reaching normal retirement age. On report indicates that in October 2014 FTSE 100 companies faced a combined deficit of £66bn Sterling.
What happens when the DB scheme does not meet the funding standard
The trustees might amend the trust rules to reduce benefits of active and deferred members. Some trust deeds even allow for benefits of pensioners to be reduced but the trust deed has to clearly allow for this. Whenever the trustees exercise this power they must do so in accordance with their fiduciary duties which might mean they cannot unduly favour one group of beneficiaries over another. Also they need to ensure the amendment is consistent with any surrounding contractual documentation such as any commitments in the employment contract. Amendments might mean increasing the retirement age or changing the way in which final salary is calculated to make it lower. In Merchant Navy Ratings Pension Fund Trustees Limited v Stena Line Limited [2015] EWHC 448 the High Court approved an amendment to the trust rules to the effect that employers formerly contributing in the scheme would have to contribute to deficits and not just employers currently contributing.
If a DB scheme doesn’t meet the funding standard set out by the Pensions Act, the scheme trustees must submit a funding proposal to The Pensions Board explaining how they intend to rectify the scheme’s funding. Typically the funding proposal increases contribution rates and reduces benefits of active and deferred members – a s.50 order is needed to reduce benefits of pensioners. The funding proposal does not require the vote of members – some trustees might hold a vote where the unions are strong. The funding proposal must bring the pension into compliance with the funding standard within 3 years, or such longer period as determined by the pension board being the later of 21/12/23 or 6 years from the commencement of the funding proposal. A recent article outlines that ESB has a funding proposal to address a funding deficit in it’s DB scheme of €1.8 billion by 2013. Another article reports Irish Continental Group Plc reached agreement on a funding proposal with the pensions authority to inject an added €1.5M per annum until 2023 or until the deficit is eliminated if earlier, with additional payments of €0.5m per annum to an escrow account, the balance of which will also be payable to the scheme in certain circumstances. In Greene v. Coady (Unreported, High Court, Charleton J. 4/2/13) the employer made a funding proposal of 10.725m per year for 12 years to bring a DB scheme with a funding deficit of €100m into line by 2020. The court held obiter that this could amount to a contract between the trustees and the employer and could be sued on and could amount to a preferential debt on liquidation. Often a funding proposal necessitates an amendment to the trust deed.
Some trust deeds allow the trustees to serve a contribution demand notice (CDN) on the employer if the funding of the scheme is not sufficient. The trust deed does not always make clear if the employer is liable to make up the difference on a statutory minimum basis (the funding standard), an annuity buy out basis (the most onerous) or a hybrid of these. In some cases the trust deed may not have this detail and it will fall to be determined by the court. In Greene v. Coady the DB scheme had an estimated €129.2m deficit. The trust deed provided that, if the trustees served a CDN on the employer, the employer was liable for the whole amount of the deficit – not all trusts have such a provision. The trustees accepted an offer by the employer of an injection of €23.1m into the DB scheme plus €14m to a defined contribution scheme for active members and liquidating the DB scheme, instead of serving a CDN on the employer. The trustees accountant estimated that serving a CDN could have netted up to €42.5m to the DB scheme. The court held the trustees did not act in breach of duty in adopting this course because they had not acted dishonestly, in bad faith, they took into account relevant considerations and excluded irrelevant considerations and the decision was not one that no reasonable body of trustees would have made. The trustees had taken into account inter alia that the employers operations might close at Shannon if the CDN was served and the employer liquidated and the risk that assets of the employer would move to related companies. The decision was not appealed to the Supreme Court. It is quite common for trustees to serve a CDN on the employer and then negotiate on a settlement in lieu of putting the employer into liquidation. In Holloway v. Damianus BV (Unreported High Court 25/7/14) the court directed the employer to pay €2.23 million to the DB scheme trustees pursuant to a contribution demand issued by the trustees on the wind up of the scheme. The court held that the terms of the trust deed meant that the employer was liable to satisfy any contribution demand notice made in the period after their notice of cessation of contribution was served, and before expiry of that notice. Further, the employer was liable on a hybrid basis as calculated by the trustees, and not merely on a statutory minimum basis – the court pointed to the failure of the defendant to consult with the plaintiff in relation to the figures and found the trustees acted reasonably in arriving at this figure. The HC decision was upheld by the Court of Appeal.
If the funding of the scheme is not sufficient to satisfy the Funding Standard, the Pensions Board can make a “Section 50 order” of it’s own initiative or at the request of the trustees. Under such an order, accrued benefits relating to members’ past service can be reduced. Trustees must have asked the employer for the contributions necessary to sustain the scheme without benefit reductions, and the employer must have declined to pay those contributions. Members must be notified of the proposal and are allowed make submissions in relation to the proposal which submissions must be considered by the trustees. When relevant sections of the Social Welfare and Pensions (Miscellaneous Provisions) Act 2013 are commenced, affected persons will be able to appeal a section 50 order to the High Court. Also, the pensions board will be able to wind-up a pension scheme (s.50.B order) where inter alia a scheme is underfunded but will have to consult with scheme members before making such an order. It was the case that a s.50 order could not affect pensions in payment. The Social Welfare And Pensions (No. 2) Act 2013 now allows a s.50 order for pensions in payment to be reduced in line with the priority order in winding up. The Act allows for pensions in payment of between €12,000 to €60,000 to be reduced by up to 10%, and for pensions in payment of €60,000 or more to be reduced by up to 20%. No pension can be reduced below €12,000, and no pension of €60,000 or more can be reduced below €54,000. Sometimes multipartite negotiations take place between the employer, the trustees, the employees and the pension board often supervised by the Labour Court. In October 2013 Aer Lingus was proposing cuts in benefits of up to 25% under the existing DB scheme and to inject money into a new DB scheme.
Perhaps the last option is the winding up of the pension scheme. It was the case that under The Pensions Act 1990, as amended, pensioners had to be paid off in full before deferred or active members. This could result in pensioners getting 95% of their entitlement with active and deferred members getting nothing. The Social Welfare And Pensions (No. 2) Act 2013 changed the order of priorities effective from 25/12/13.
Where the DB scheme is insolvent and the employer is solvent, the priority is as follows:-
1. AVC’s
2. Wind up expenses
3. Pensions in payment
• 100% of pensions in payment up to €12,000 pa.
• 90% of pensions between €12,000 and €60,000 pa.
• 80% of pensions above €60,000 pa.
4. Active and deferred members up to 50% of entitlement.
5. Any remaining assets used to bring pensioners up to 100%.
6. Any remaining assets used to bring active and deferred members up to 100%.
Where the DB scheme is insolvent and the employer is insolvent, the priority is as follows:-
1. AVC’s
2. Wind up expenses
3. 100% of pensions in payment up to €12,000 pa.
4. The remainder of the scheme assets are apportioned to ensure that all members
receive 50% of their benefits.
5. Where the scheme does not have sufficient assets to do so, the State will
provide the shortfall, using the funds collected from the pension fund levy.
6. Where the scheme has sufficient assets to meet the 50% target, the assets of
the scheme are next prioritised to bring the pensioners back towards 100%
In the event that a scheme does not have sufficient funds to secure 50% of the pensioner, active and deferred members’ benefits (including post-retirement increases) and to top-up pensioner benefits to a maximum of €12,000, the Act provides that the State will, subject to certain criteria, provide the necessary funds to cover the shortfall. This is to provide for Robins v Secretary of State for Work and Pensions set out below.
How to litigate for members who do not get their full DB pension entitlement
Just because a particular member does not get their full entitlement does not mean there is a good claim. However, if an employee can show the trustees or the employer acted in breach of the trust deed or the trust rules or the trustees acted in breach of fiduciary duty or the trustees or employer acted in contravention of a direction from the pensions board, then there might be a good claim. In IBM v. Dalgleish (Unreported High Court 4/4/14) the English High Court found the employer breached it’s duty of good faith to it’s employees by the way it closed the DB scheme to future accrual and introduced new benefit restrictions. The court found that commitments given to members, in previous pension changes in the months and years before the changes the subject matter of the proceedings, gave members a reasonable expectation as the future pension benefits.
A complaint can be made to the pensions ombudsman. It is a requirement to complete any internal dispute resolution (IDR) procedure before such a complaint is made. The pension ombudsman can order inter alia compensation to be paid by the employer or trustee to the claimant which order is without monetary limit and is enforceable in the Circuit Court. By analogy with case-law on the financial services ombudsman litigation, it is likely that a case brought to the pensions ombudsman estops the claimant from later bringing the same complaint before a court by way of plenary proceedings.
Alternative to the ombudsman route, court proceedings might be brought against the trustees or against the employer. For such a claim, the trust deed and rules should be analysed carefully. It is sometimes a requirement in the trust rules to litigate any dispute by arbitration.
If the DB scheme is wound up, members of the DB scheme who do not get their full benefit might take an claim against the State. Article 8 of Directive 2008/94/EC (hereinafter the directive) provides inter alia that member states shall take necessary measures to protect entitlements of members under occupational pension schemes. The directive leaves to the member state to decide what form the protection should take. The directive only applies where there is a double insolvency – where the employer is declared insolvent and the pension scheme is declared insolvent. In Robins v Secretary of State for Work and Pensions C-278/05 the ECJ held that the UK did not adequately protect the interests of employees in accordance with Article 8 of the Insolvency Directive, where an employee would receive less than half of her pension entitlements on wind-up. In Hogan v The Minister for Social and Family Affairs Case C-398/11 the ECJ held that Ireland did not adequately protect the interests of employees in accordance with Article 8, where the plaintiffs were likely to get between 18% and 28% of their full entitlements on one calculation and between 16% and 41% on another calculation. The matter has been returned to the High Court to determine just what percentage the plaintiffs should get. Arising from Hogan, the Minister for Finance introduced an additional 0.15% levy on private pension funds to meet the state liability that is likely to arise as a result of this judgment. In Greene v. Coady the court held the trustees were not in breach of duty in failing to make a CDN thereby create a double insolvency situation and put themselves a position to sue the state – the Hogan v The Minister for Social and Family Affairs decision had not been made when they made their decision. Also, creating a double insolvency situation would have meant closure of operations in Shannon which was a factor that motivated them to accept the employers offer of less than the funding deficit. Since The Social Welfare And Pensions (No. 2) Act 2013, a member who gets less than 50% of their entitlement in a double insolvency situation can make a claim to the State for the balance to bring them up to 50% – there is a question mark over whether this is adequate to implement the Directive.
Lastly workers might threaten industrial action. This is not a litigation route per se but can be effective for stopping the trustees or employer doing what they are entitled to do under the trust deed or have been permitted to do by the pension board. When Marks & Spencer decided to liquidate their DB scheme workers went on strike on 9/12/13 to stop this. The union maintained that the DB scheme had a surplus and the employer argued there was a deficit. Similarly, Shannon Aerospace planned to stop contributing to the DB scheme on 3/2/14, to wind it up and commence contributions to a new DC scheme, but the Labour Court recommend they defer this for two months to negotiate with employees. The employer effectively rejected this and ceased contributions.
I will try to update this article as developments arise.
The content of this article is intended to provide a general guide to the subject matter and is not intended to be a substitute for legal advice. Specialist advice should be sought about your specific circumstances.
Stephen O’Sullivan BL
