In our December 2011 update, we reported that leave had been granted for an appeal to the Supreme Court.
We now understand that the Supreme Court has taken the appeal, and a three-day hearing has been listed to start on 14 May 2013.
R (FDA and others) v Secretary of State for Work and Pensions and another  - Unions' appeal against public sector pension switch to CPI fails
On 20 March 2012, the Court of Appeal (CA) dismissed an appeal against the High Court's rejection of a challenge to the government's decision to use the Consumer Prices Index (CPI) instead of Retail Prices Index (RPI) as the basis on which public service pensions are annually adjusted to take account of inflation.
Two grounds of appeal were put to the CA:
- the Social Security Administration Act 1992 does not allow the Secretary of State (SoS) to use CPI. The CA rejected this argument holding that the Act gives the SoS discretion to select the method used, provided he acts rationally and takes all appropriate (and no inappropriate) matters into account; and
- by taking account of the impact of the decision on the national economy, the SoS had taken into account an irrelevant consideration. The CA also rejected this argument holding that the SoS was entitled to take the state of the national economy into account when selecting the applicable index provided that this was done in a proportionate manner.
The CA also went on to state that even if taking account of the state of the national economy had been unlawful, the facts of this case made it clear that the decision to use CPI would still have been made by the SoS, even if he had put out of his mind any consideration of the benefit to the national economy of that decision.
Uniq plc - High Court approves scheme of arrangement in pension debt-for-equity swap
In our update for April 2011, we reported that a ground-breaking scheme of arrangement, in which Norton Rose LLP advised, had been approved by the High Court. The innovative restructuring of the pension liabilities of Uniq plc, allowed the company to dispose of its defined benefit pension liabilities in the first pension debt-for-equity swap of a listed company in the UK.
TPR has now published a formal report detailing its involvement in the Uniq deficit-for-equity swap. A restructuring exercise was undertaken by the trustee of the Uniq plc pension scheme and its sponsoring employers, in conjunction with TPR and the PPF. As a result of the restructuring exercise, employer insolvency and PPF entry were avoided.
TPR’s report is prepared under section 89 of the Pensions Act 2004, which allows it to publish details about “the consideration given by it to the exercise of its functions” if it thinks this appropriate in a particular case. In addition to a step-by-step explanation of the restructuring, the report remarks that the restructuring is "a good illustration of a trustee and sponsoring employer working closely and collaboratively with the Regulator and the PPF" to achieve the best possible outcome for members, in a situation where the employer covenant was so weak there was "little or no reasonable chance of paying the benefits promised with acceptable levels of risk".
View the report.
Danks & Others v Qinetiq Holdings Ltd & Another  - High Court: trustees’ decision to switch to CPI not a “detrimental modification”
A decision by the trustees of the QinetiQ pension scheme to switch the basis for calculating pension indexation and revaluation would not be a "detrimental modification" under section 67 of the Pensions Act 1995 (PA 1995), as the scheme rules allow the use of the retail prices index (RPI) "or any other suitable cost-of-living index selected by the Trustees".
The trustees asked the High Court to confirm whether the selection of an index other than RPI would, or might, affect members' subsisting rights (as defined by section 67A(6) of the PA 1995) in relation to increases to pensions in payment and the revaluation of deferred pensions. In addition, the trustees asked whether they could use their power to apply different indices either for different purposes or in relation to different periods of a member's service.
Vos J confirmed that:
- in respect of pensions in payment, the member only had a right to a future increase, at a rate that the trustees had the power to change provided they "adhere to the requirements for the exercise of such a fiduciary power". The right to an increase was not an entitlement or an accrued right until the calculation had been done;
- a deferred member did not have the right to have his pension revalued at a set rate until the normal pension date, when the calculation was done. The fact that RPI was the "default rate" when pensionable service was accrued could not affect the index used for revaluation; and
- "Index" could refer to RPI in respect of some periods of pensionable service and the consumer prices index (CPI) in respect of other periods. The trustees' decision could be reversed or altered at any time before the calculation was carried out.
This decision shows that the courts are willing to adopt a commercial and purposive approach in the interpretation of scheme rules. The decision will have an immediate impact for the scheme in question, as funding negotiations between the trustees and the employer have now been concluded and the decision to switch from RPI to CPI has had a significant impact on the scheme's funding position.
View the judgment.
High Court rules s75 debt should be calculated using date of insolvency of employer - Bestrustees Plc v Kaupthing Singer & Friedlander
In a case concerning the pension scheme of Icelandic bank Kaupthing Singer & Friedlander (KSF), the High Court has held that pension scheme liabilities calculated in accordance with section 75 of the Pensions Act 1995 (the section 75 debt), should be calculated at the date of the sponsoring employer’s insolvency and not at the later date of finalising the claim.
The independent trustee of the KSF scheme had asked the court to rule on whether the applicable date for the calculation of annuity costs was the date of insolvency or the date the debt was certified, since the difference in the price of annuities between these two dates was £66 million.
The decision has been welcomed as sensible, since problems would arise if the date for estimating pension annuity rates differed from the date when both the scheme’s assets and the level of benefits to be provided become fixed (the insolvency date). Common practice by actuaries has been to certify the section 75 debt using annuity rates at the insolvency date.
View the judgment.
Blight and others v Brewster  - Judgment debts may be enforced against pension funds
The High Court has granted an order to assist the enforcement of a judgment debt against part of the debtor's pension fund. The order has the effect of requiring the debtor to exercise his right to withdraw a lump sum from his pension fund. The court also granted a third party debt order to take effect when the right has been exercised.
The court followed a recent Privy Council decision concerning the court's jurisdiction to grant injunctions and appoint receivers under section 37 of the Senior Courts Act 1981 (Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd and others (Cayman Islands)  ). This jurisdiction can be developed incrementally to apply existing principles to new situations. The overriding consideration is the demands of justice.
The judgment reflects the view that debtors should not be allowed to hide their assets in pension funds when they have a right to withdraw monies needed to pay their creditors. The High Court considered that it should exercise its discretion in this case to, in effect, release certain funds held in a pension scheme for the benefit of the judgment creditor. While the appointment of a receiver might have achieved a similar result for the claimant, the court held that this could have resulted in disproportionate trouble and expense.
The position in bankruptcy
This decision provides a contrast with the position in bankruptcy cases where pension funds are afforded special statutory protection. In this case, the judge rejected the defendant’s argument that, because of this protection in bankruptcy, public policy requires pensions to be treated as exceptional when it comes to execution of judgments. Moss QC commented that a bankrupt individual:
- surrenders all of his assets to a trustee in bankruptcy (although there are exceptions for certain assets, including the tools of the debtor’s trade and assets necessary for basic domestic needs); and
- becomes subject to certain disadvantages and restrictions in relation to his financial affairs
and that a judgment debtor could not have the benefits of bankruptcy without its burdens. Where a debtor fails to pay his debts and does not go into bankruptcy, his assets will be susceptible to the enforcement of judgments by individual creditors.
View the judgment.
Possible future developments
Another case currently before the High Court is that of Raithatha v Williamson in which judgment is due imminently. The issue under consideration is whether a bankrupt of scheme pension age, who is still employed and working, should be forced to access pensions savings to pay off creditors where he is entitled to draw benefits but chooses not to.
Pensions Ombudsman - Parizad (82720/2): death benefits - breach of trust in deliberately waiting for end of two-year payment period
A breach of trust occurs if a pension trustee deliberately fails to exercise a discretion to pay a lump-sum death benefit within the 24-month period prescribed in the scheme rules. If the trustee knows that paying the benefit outside this period will attract significant tax charges as an unauthorised payment, a decision to do so is perverse. Instead the trustee should take appropriate steps to pay the benefits in a timely manner and failure to do so amounts to maladministration.
The Pensions Ombudsman upheld a complaint on behalf of a member to whom the trustees initially decided to pay half of a lump-sum death benefit. Due to problems in locating the complainant, the trustees later decided to instead allow the 24-month period to lapse and to pay the money to the member's personal representatives, attracting nearly £22,000 in tax.
The Ombudsman directed the trustees to establish a trust for payment of the death benefit into which they should pay an amount equal to the complainant's untaxed share (£31,375), an option that always had been available under the scheme rules.
View the Determination.
To view update as a pdf.