High Court approves trustee’s “momentous decision” to vary buy-in and distribute surplus

In KO UK Pension Trustees Ltd. v Barber (a 2024 judgment which has only recently become available), the High Court sanctioned a trustee's application for approval of two decisions concerning a DB occupational pension scheme with 286 pensioners, 494 deferred pensioners and five active members.

The trustee of the Coca-Cola Company Pension and Assurance Scheme sought the Court’s approval to vary a termination payment under existing buy-in insurance arrangements to match the cost of the purchase of a new replacement policy, in return for the principal employer giving notice to terminate the scheme. This would be coupled with the exercise of the augmentation power under the scheme rules to increase benefits from the surplus released during winding up, potentially up to 27 per cent for each member.

The scheme's assets had been largely secured through a buy-in insurance agreement, which had been reinsured with a captive reinsurer within the employer's corporate group. The trustee had no unilateral power to trigger winding up or grant augmentations without the principal employer's agreement while the scheme was ongoing.

His Honour Judge Hodge KC was satisfied that the trustee had formed the opinion to act in the way for which approval was sought, both in relation to the variation of the termination payment payable on termination of the existing buy-in, and in exercising the power to make benefit augmentations from the surplus achieved during winding up, by giving all scheme members an equal percentage augmentation, and that the opinion was one which a reasonable body of trustees could properly have arrived at. 

In addition, the judge confirmed that the trustee had taken into account all relevant considerations and ignored irrelevant ones, as well as the opinion not being vitiated by any conflict of interest. The judge was also satisfied that the position of active members had been particularly considered, with due regard to be given to their discrete interests.

The High Court made a representation order appointing the defendant (a former director of the trustee company) to represent beneficiaries whose interests might be served by opposing the application. After receiving legal advice, the application was not opposed. The High Court approved the trustee's decisions, noting they effectively swapped a contingent possibility of greater surplus in the future (which would be shared between fewer beneficiaries) for present augmentations for a larger number of beneficiaries.

Comment

The Court was willing to look at the practical realities of the situation and approve the decisions in principle taken by the trustee. The judgment serves as a useful reminder of the relevant considerations and the Court’s approach.

In particular, the Court was told that the back-to-back insurance arrangements were relatively unusual in the pensions industry. Most of the liabilities were secured by a buy-in policy with a well-known insurer and then reinsured with a “captive insurer” within the Coca-Cola corporate group.  

The assets released from the reinsurance arrangements were then paid to the employer via the scheme as a return of surplus.   While this would be subject to a tax charge, it also enabled a return to the employer of another £46m surplus of assets of the scheme.  

This is an interesting case but the judge noted that the facts are scheme-specific and unusual. It is unlikely to herald the start of wide-scale unwinding of past buy-in policies.