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Worried About Your Employer’s Pension Deficit? The Courts Have Your Back!

Thousands of hard-working people have to worry about their security in old age due to the enormous deficits afflicting some corporate pension schemes. However, one case has vividly shown that regulators are working on the issue under the close supervision of the High Court.

A group of companies had a solvency deficit of about £600 million in its occupational pension scheme, of which there were over 3,000 members. The group was heavily balance sheet insolvent and its American parent company had signalled an intention to cease financially supporting it in a manner which would enable it to maintain its contributions to the scheme at an acceptable level.

The trustees of the scheme proposed to transfer its assets and liabilities en bloc to a new scheme. Members’ benefits under that scheme would be in some respects less generous than before. However, the trustees argued that, if the transaction did not go through, the group would go into administration, forcing members to rely on compensation provided by the Pension Protection Fund (PPF).

In seeking the Court’s blessing for the transaction, the trustees argued that benefits payable under the new scheme would be more secure than they had been under its predecessor and would in many cases be better, and in all cases equal, to the levels of PPF compensation available. The parent company would guarantee the group’s payment obligations up to a maximum of £120 million and contributions of £5.5 million per annum would be made in a bid to repair the deficit.

In refusing to sanction the proposals, however, the Court noted that benefits enjoyed by members under the new scheme had to be broadly no less favourable than those they received under the old one. The improved security of payments under the new scheme was not a factor which had to be taken into account by the scheme’s actuary when carrying out that comparative exercise. In the light of that ruling, the transaction was not pursued.