Pilots Case: Charting a Course to Clearer Water?

Introduction

The highly anticipated judgment in the Pilots1 case was handed down today. It concerns the Pilots National Pension Fund (PNPF), a UK industry-wide pension scheme for marine pilots. The PNPF is approximately £300m in deficit.

The Trustees asked the High Court for guidance as to who is liable for contributing to make up the deficit. Sackers2 acted for the Port of London Authority, one of the participating employers, which is responsible for pilotage services on the Thames estuary.

Key points

The Pilots case is one of the most high profile pensions cases in recent years.
Running to nearly 200 pages, Mr Justice Warren’s comprehensive judgment is a technical tour-de-force.
The case brings some clarity to the key areas of employer debt and scheme funding.

Employer Debt

When a company exits an underfunded multi-employer DB scheme, its share of any deficit generally becomes a debt due to the trustees (the employer debt).

Prior to April 2008, a debt calculation was triggered in relation to an employer who ceased to employ persons “in the description of employment to which the scheme relates” when at least one other employer did employ such persons (this is called the “employment-cessation event” or ECE).

This ambiguous phrase has been the subject of much debate in the industry in recent years. Should it be interpreted narrowly to encompass only active members, or more broadly also to include other employees such as deferred and pensioner members?

After carefully reasoned analysis, Warren J formed the view that only ceasing to employ both active members and those eligible to join the scheme would trigger an ECE in relation to the employer, resulting in a debt becoming payable to the PNPF.3 This is the case even though trustees may not know who may be eligible to join without further enquiry.

This clarification does not alter the principle that when a scheme is closed to future accrual by all employers at the same time there is no ECE trigger.4

In April 2008, the ambiguity in the employer debt legislation was resolved and a debt is now triggered only when a company ceases to employ active members.

Scheme Funding

The Pilots case also covers a number of key questions surrounding the statutory funding regime under the Pensions Act 2004. This requires trustees of a DB scheme to ensure that it has “sufficient and appropriate” assets to cover its liabilities.

The employers required to contribute to the scheme under the statutory funding regime should dovetail with those required to pay an employer debt. The previously accepted view5 was that statutory requirements only applied to employers with active members. Warren J’s reasoning focused on avoiding a possible “funding gap” – which could open up when an employer ceased to employ actives but was not yet required to pay an employer debt because it still employed eligible employees.
Warren J also found that it was open to the Trustees to use the PNPF’s own contribution rule to demand greater contributions than would be required under the statutory funding regime (and also potentially from a wider class of employers), and in doing so approved his own views in theBritish Vita6case.

Impact

The comprehensive judgment deals with a vast array of issues, many of them specific to the PNPF. Subject to the possibility of an appeal, the Trustees now have a legal framework to start addressing the scheme’s deficit.

1 Pilots National Pension Fund v Taylor (High Court, 28 June 2010)

2 To read more, please see our press release
3 The decision in Cemex UK Marine Limited v MNOPF Trustees Limited (High Court, 2009) had previously taken a broader interpretation of the phrase
4 This is because in order to trigger an ECE another employer must continue to participate
5 Based on the decision in Hearn v Dobson (High Court, 17 July 2008)
6 British Vita Unlimited v (1) British Vita Pension Fund Trustees Limited (2) British Vita SE & D Pension Fund Trustees Limited (High Court, April 2007)