Independent Trustee Services Ltd v Hope (High Court) – 10 November 2009

The Trustee of the Ilford Pension Scheme (the Scheme) asked the High Court whether it was permissible to buy annuities for certain members of the Scheme before the Scheme entered the PPF. But the High Court concluded that the Scheme was not permitted to “select against” the PPF by buying annuities only for certain members – relying on the PPF to pick up the cost of providing a larger proportion of benefits for the rest of the members.

Background

A group of former senior managers took early retirement from the Scheme before their employer (the Ilford group of companies) went into administrative receivership. Given a substantial deficit in the Scheme, it is inevitable that the Scheme will be wound up shortly with the result that it will enter the PPF. The senior managers will have their pensions cut when the Scheme enters the PPF. This is because PPF compensation is only 90% of a capped amount, not the full value of any pension (excluding future increases) unless the member has reached the pension scheme’s normal
retirement age. The other members will be better off when the Scheme enters the PPF.

The Proposal

The Trustees were asked to consider purchasing annuities for this group (and top-ups for other members affected by the compensation cap) outside the Scheme, using the bulk of the Scheme’s assets. Combined with the compensation that the PPF would pay, if it assumed responsibility for the Scheme, the proposal was that members will receive benefits equal to those that they would receive under the Scheme, if it were fully funded. But as Henderson J said in summing up, “the vice
of the present proposal …is that the bulk of the Scheme’s assets will be spent in the purchase of annuities, but there will not be a corresponding reduction in the Scheme’s liabilities”, meaning the PPF would end up footing a much larger bill for compensation.

Therefore, the question for the court was whether the Trustees were permitted to take into account the existence of the PPF when making the decision to purchase annuities.

Decision

The judge concluded that the Trustee should not be allowed to purchase the annuities for two main reasons:

• the proposed purchase of the annuities would be an “improper use” of the power contained in the Scheme’s Trust Deed and Rules to buy-out benefits, because it ignored the limitation implicit within the power that the benefits purchased would be a fair share of the assets of the Scheme; and
• the floodgates argument put forward by the PPF and the Pensions Regulator, that approval of the present proposal would in all probability soon lead to a proliferation of schemes designed to take advantage of or “game” the PPF.

Therefore, the Trustees’ application to allow the proposal to purchase benefits for certain members before the Scheme enters the PPF was rejected.