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In a recently published High Court case[1], the judge was asked to consider whether, when issuing a certificate in respect of a bulk transfer without member consent, the actuary could compare the security of members’ benefits before and after the transfer.

As part of a restructuring exercise, the employer of a defined benefit pension scheme proposed the bulk transfer of the scheme’s assets and liabilities to a mirror image scheme.  The receiving scheme would provide identical benefits, with the exception of pension increases, which would be at the lower, statutory levels. Due to the commercial sensitivities surrounding the restructuring, it was proposed to make the bulk transfer without consent, and so an actuarial Transformations TAS certificate was required, in which the actuary was required to confirm that the transfer credits to be provided under the receiving scheme were ‘broadly, no less favourable’ than the rights to be transferred.

It was likely that the employer would become insolvent if the transfer did not go ahead, which would result in the scheme entering the Pension Protection Fund (PPF) and members potentially receiving lower levels of benefits. If the transfer proceeded, benefits were expected to exceed PPF compensation levels and the receiving scheme would benefit from additional funding and a parent company guarantee. The trustees, having considered the matter thoroughly and taken advice, were of the view that they could agree to the transfer. They sought confirmation from the Court that the actuary could take the comparative security of benefits into account in signing the certificate.

Security of benefits – a question for the actuary or only for the trustees?

The key issue for the Court was phrased as follows:

‘Does the comparison require the actuary to form a view of the ability of each scheme respectively to pay those benefits and to take that into account when comparing the benefits?’

The trustees submitted that although the ‘headline’ benefits in the receiving scheme were lower than the members would receive in the Scheme (which might prevent the actuary from certifying that the benefits were “broadly no less favourable” in the receiving scheme), the actuary could provide the certificate if the comparative security of benefits were to be included in his consideration.

Decision

Legislation governs the issue of the actuary’s certificate in respect of a bulk transfer. It contains no express reference to security of benefits. The judge considered whether a requirement for the actuary to take security into account could be implied.

She said that if security of benefits were part of the certification process, “there would be little left for the trustees to determine, the bulk of the discretion having been already exercised by the actuary who owes no fiduciary duties to the members…” The judge noted that trustees were better placed to assess the matter of security of benefits because the actuary might not be privy to highly commercially sensitive information, meaning he would not have sufficient background to be able to make such an assessment.

With some reluctance, the judge decided that security of benefits was not a factor which should be taken into account by the actuary when considering whether benefits in the receiving scheme were broadly no less favourable than those payable by the current scheme. In her view, if it had been intended that such a factor be taken into account, the legislation would have made this clear.

There was also no scope for a different interpretation which would include security to be considered where the transferring scheme was being wound up. To apply a different test in a winding up situation would also create anomalies in timing based upon whether the certification occurred in a scheme after winding up had been triggered.

A positive decision?

The case confirms that a Transformations TAS certificate is more of a tick box exercise rather than the giving of the actuary’s opinion. The issue of the certificate is not a recommendation or authorisation that the transfer should go ahead. That is a decision for the trustees to make;  it is they who should take into account such factors as the comparative security of benefits.

Whether this decision is viewed as positive or negative will depend on the circumstances in which an employer and trustees find themselves. It protects members against the possibility of employers pushing through a bulk transfer without consent into a scheme where benefits could be lower. It may also protect the PPF, which may end up admitting the scheme at a later date, but with increased liabilities. However in the difficult (and sensitive) financial circumstances of this case, where the trustees had acted appropriately, taken advice and considered the issues in detail and were comfortable with the proposed transfer, the Court’s decision appears to have prevented a sensibly thought out restructuring from taking place.

 

[1] Pollock v Reed [2015] EWHC 3685

 

This post was edited by Rachel Stevens. For more information, email blogs@gateleyplc.com.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.