The verdict in the MNRPF legal battle will complicate the application of the members' best interest principle, Natasha Browne finds
- The judge granted current employers a break from contributions
- The case highlighted the importance of defining the purpose of a scheme
- Trustees have to think deeper when justifying changes
The trustee of the Merchant Navy Ratings Pension Fund (MNRPF) enjoyed a long-awaited victory after getting High Court approval for its contribution regime last month. At the end of the battle, which had dragged on for almost a decade and a half, it was agreed all 240 employers of the scheme would make payments into the fund.
Only 40 employers with active members in the scheme had been on the hook since 2001, with some ex-sponsors making voluntary contributions until about 2006.
Stena Line, the largest group in the multi-employer scheme, had been making about 60% contributions. In 2009, it began proceedings to establish that the trustee could force former employers to make payments too. By 2011, the Court of Appeal had backed up a High Court ruling agreeing with Stena Line's argument.
Further High Court approval was sought for the contribution regime last November. The case was centred on whether the trustee had acted properly in designing the regime. There was also a question over whether the scheme was open or frozen, which would determine when an employer debt was payable.
Contributions will now be spread across all employers in a way that reflects the value of benefits accrued by their members while in pensionable service. Mrs Justice Asplin ruled that current employers who had been paying contributions could be granted leave of their obligations for a few years.
Burges Salmon partner Justin Briggs explains: "Once this new deficit contribution regime comes in, they will effectively have a contribution holiday. Past contributions will be credited against future contributions they would otherwise have to pay."
A question of cross-subsidy
The issue of who should be on the hook for payments came down to an argument over fairness, especially as some former sponsors are in direct competition with current sponsors.
Briggs says: "It was that cross-subsidy that the trustees believed was unfair. They wanted to eradicate, as far as possible, the cross-subsidy between employers within the scheme."
At the heart of the judgment was the idea that trustees should exercise their powers for the purpose of the scheme. That is a slight shift away from the notion that their primary responsibility is to act in the members' best interests. The majority of the time the function of the scheme is to provide pensions, which means trustees can take a broader view on how to achieve that.
Mayer Brown head of pensions Philippa James says: "It is entirely appropriate for them to consider their sponsoring employers' interests, should they decide that this is the right thing to do. The judgment will give trustees a framework within which to carry out a difficult job in challenging circumstances."
Stuart Pickford, a partner in Mayer Brown's litigation and disputes resolution practice, says trustees do not have to adopt the most risk-free funding regime to ensure benefits are met. They can give reference to other factors too. He adds: "Although the sponsoring employer's interests do not have primacy, they can properly be taken into account.
"The judgment gives trustees useful guidance as to the relationship between the interests of members, whose pension benefits the scheme is established to provide, and those of the sponsoring employers responsible for funding those benefits."
The Pensions Regulator's defined benefit (DB) code of practice came into effect last July. It took into account the watchdog's new statutory objective to minimise the adverse impact of funding plans on the sustainable growth of an employer. So did it play a role in securing the trustee's win?
Briggs says submissions made during the trial cited the code. The trustee argued it was consistent with its approach and the view that there was no standalone best interest principle that trumped all other arguments.
Hogan Lovells of counsel Faye Jarvis adds: "I think it would have caused real friction had the court found in favour of the members' argument that actually what trustees should be doing is maximising employer contributions, and where possible, adopting the least-riskiest approach to meeting the deficit.
"It's helpful because it would have otherwise put the trustee and employers more at odds. But to some extent it doesn't go any further than the code because it's not that the trustees have to take employers' interests into account; it's that they can if they think it's reasonable."
The ruling makes the members' best interests principle slightly more complicated. Briggs explains: "Having identified the proper purpose of the scheme, the trustees will need to enter into a process whereby they weigh up whether what they, or the employer, is proposing is advancing the purposes of the scheme even if it appears to be favourable in some way to the employer.
"It's going to take trustees out of their comfort zone and put them in a more complicated position where they have to do more thinking about what is, and what is not, the right thing to do."
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