An epic journey was concluded at the High Court at the end of February, when the titanic Merchant Navy Ratings case finally reached its destination. Having set sail in 2001, with a £333m deficit in its wake, carrying approximately 30,000 members, 40 current and 200 historic employers (and not to mention a crew full of lawyers!), the case was decided after 18 days of hearings, producing a judgement over 150 pages, 500 paragraphs and 80,000 words long. You could drown in such numbers.
Nautical puns aside (for now), the Merchant Navy judgement had been eagerly awaited. In truth, it all started in 2001 when the courts confirmed that only the 40 current employers had to pay deficit contributions, despite only holding 30% of the total liabilities. Then in 2009 the largest employer, Stena Line – understandably unsatisfied with cross-subsidising the pension liabilities attributable to the historic (competing) employers – succeeded with a case to confirm that the trustee could require historic employers to once again pay contributions.
Using the Court’s validation, the trustee sought to secure member benefits with a change to the Scheme Rules, requiring the historic employers to contribute and consequently make the situation more equitable by removing the cross-subsidy. The new scheme regime was laid before the Court by the trustee, seeking further approval prior to being implemented, which was finally granted a few weeks ago (subject to any appeal of course!).
The case centred on whether the trustee had properly used their powers to put the new regime in place. The trustee had taken into account the interests of the current employers – not just the best interests of the beneficiaries – when devising the changes. Historic employers, irked at having to now pay contributions and that the 40 current employers were allowed to off-set contributions for a period to reflect their sole support for the Scheme (a contribution holiday in effect), argued that the trustee shouldn’t have considered the employers’ interests.
Basically, the question to be answered was: Did the trustee step outside of their primary duty to act in the members’ best interests?
The resounding judgement from the judge, Mrs Justice Asplin, was that the trustee had acted entirely properly. Commending the trustee for being “meticulous” in creating the new regime, Her Ladyship stated that it is entirely “reasonable and proper” for a trustee “to take into account the Employers’ interests”, so long as “the primary purpose of securing the benefits under the Rules is furthered”.
The Court focussed on the need for the trustee to act in accordance with the proper purpose of the Scheme, to secure member benefits. If the trustee judged the cross-subsidy issue or the lack of contributions from historic employers to be relevant and favourable to that primary purpose, then the trustee was entitled to consider those points. Mrs Justice Asplin clearly stated, “there is nothing improper when furthering the purposes of the Scheme by securing the benefits, if an effect is that some Employers may possibly and ultimately pay less.” So long as the trustee keeps the security of members’ benefits as their primary goal, consideration of wider factors or any consequent advantage to scheme employers is entirely appropriate.
Perhaps a common misperception has been that trustees must champion the members’ benefits to the hilt, with the least risky strategy possible being adopted. Well, the Merchant Navy ruling has confirmed in clear terms that “there is nothing in the proper purposes principle which requires the Trustee to adopt the most extreme, most risk free funding regime without reference to any other factors”. The best interests of members cannot be a “paramount, stand-alone” duty and other factors, including the impact on participating employers, can be heeded.
The judgement has therefore given trustees a wider remit to consider factors beyond member benefits, with the purpose of the scheme needing to be clear in their minds.
However, is this not a familiar message? Does the Pensions Regulator’s Code of Practice for DB schemes from last year not contain that exact message? Were trustees not already aware that they could factor in the interests of sponsoring employers when exercising their powers?
From reading the judgement, it is clear that the Code of Practice was mentioned during the trial and it is more than probable that it formed some part of Mrs Justice Asplin’s decision making. Whether or not the Code of Practice carried any weight with the Court, it is clear that this ruling has added judicial weight to the Pensions Regulator’s guidance. If trustees were in any doubt as to the interpretation or the force behind the Code of Practice’s guidance, they won’t be now.
So, to go back to the question posed at the beginning: Is the Merchant Navy judgement answering an S.O.S.?
You’ll probably know that S.O.S. stands for ‘Save Our Souls’. In my view, the Court has answered a plea from the trustee of the Merchant Navy Scheme. The Court responded to the trustee’s mayday by approving the new regime and thereby giving hope of reducing the Scheme’s deficit and perhaps, if not saving their souls, at least saving the members from relying on the PPF.
However, can the judgement be said to answer an S.O.S. for all trustees? This could be just as debateable as the case itself. With this same message having been relayed by the Pension Regulator last year, many trustees may see the Merchant Navy ruling as more of the S.O.S.O. – Same Old, Same Old.
What then does this all mean for trustees of an “ordinary” DB scheme (if such a creature exists!)? The Merchant Navy Scheme is an industry-wide scheme, with over 200 employers, so it could easily be dismissed as holding no relevance to smaller DB schemes (in terms of members, participating employers or liabilities). This would be a misstep in my view.
The Court focussed in on a message that should resonate with all trustees – that the “best interests of the members” principle should not be viewed separately from the “proper purpose of the scheme” principle. For me, the Court has provided some useful clarification for trustees in terms of their duties, anchoring the recent regulatory guidance into firm (and enforceable) case law. The importance of this cannot be overlooked. The strong vindication of this trustee’s actions should provide other trustees with the confidence going forward to take into account a wider degree of considerations when assessing the proper purpose of their schemes.
A by-product may be that participating employers view this as a “green light” for them to apply pressure on trustees and try to have their agenda considered on a par with the interests of members. However, trustees should remember that Merchant Navy does not state that they have to take the interests of employers into account. The Court merely confirmed that a trustee could consider such interests as part of their overall goal of furthering the purpose of the scheme, if they feel it is reasonable to do so.
For trustees and their advisers, Merchant Navy may have clarified what can and cannot be considered, but it will probably not make their task easier on a daily basis. If anything, Judge Asplin’s judgement has served to confirm that the role of a trustee is no longer plain sailing – it is a difficult balancing act, involving a careful, “meticulous”, consideration of the facts. A surer course for trustees may have been set by the judgement, but it will not quell the inherently treacherous waters where the interests of members and employers meet.
 Merchant Navy Ratings Pension Fund Trustees Ltd v Stena Line Ltd & Ors  EWHC 448 (Ch) (25 February 2015)