Key takeaways

• The likelihood of similar facts to this case arising for another scheme is probably fairly low. Nevertheless, this case provides helpful confirmation from the Court about the approach which it will take when deciding whether to approve (or “bless”) momentous trustee decisions, which is essentially to check that the trustee is acting within its powers and is acting as a reasonable and prudent trustee. The unusual circumstances were also a factor in the trustee’s decision to seek the court’s “blessing”.
• In this case, the Court was satisfied that a decision by the trustee which, broadly, resulted in “swapping” a contingent right to a potentially bigger surplus (which could be distributed to fewer beneficiaries), in return for gaining control over a surplus immediately (and which could be distributed to more beneficiaries) satisfied the threshold for the Court’s approval.
• This is the second recent judgment in relation to a “blessing” application involving surplus - the trustee’s application in the Arcadia case, which concerned the dilution of the surplus for certain members, was also approved. More details about the Arcadia case can be found here.
• In the current climate, many trustees and employers are discussing surplus strategies and these can throw up some difficult decisions for trustees. The approach of the Court in this case and Arcadia highlights the importance of robust, high quality decision making by trustees and provides further comfort that trustees approach their decisions in the right way, they are unlikely to be vulnerable to future challenge.

In more detail

The claim was brought by the Trustee of the Coca-Coca Company Pension and Life Assurance Scheme ("Scheme"), a defined benefit scheme which, at the time of the claim, had 286 pensioner members, 494 deferred members and five active members.

The majority of benefit liabilities under the Scheme were secured under a buy-in and the Scheme was in surplus in the region of GBP 46 million (this was before any of the additional cashflows which could have flowed into the scheme as a result of the insurance restructuring, which are detailed below).

What was the claim about?

The Trustee asked the Court to “bless” two decisions, which the trustee had made in principle in relation to the Scheme.

• Firstly, a decision to vary the Scheme’s existing buy-in arrangements in return for the Principal Employer putting the scheme into wind-up.
• Secondly, a decision to augment the pension benefits of all Scheme beneficiaries by an equal percentage (which was estimated to be in the region of 27% of their present benefits).

The commercial context, the existing insurance arrangements and the balance of powers under the Scheme

The insurance arrangements for the buy-in were unusual as they involved a captive insurer, which meant that the liabilities were ultimately insured intra-group. The existing buy-in, which covered the bulk of the benefit liabilities, had been entered into several years previously and changes in pricing over the intervening years meant that the same liabilities could now be insured more cheaply.

Under the existing buy-in insurance arrangements, the trustee benefitted from the right to receive a termination payment if the arrangement was terminated. It was estimated that the amount of the “full” termination payment at the time of the claim was in the region of GBP 232 million. The trustee could only trigger such a payment, however, if the Scheme was in wind-up. Under the Scheme’s Rules, the Principal Employer alone had the power to put the scheme into winding-up. Once winding up had been triggered, the trustee had a unilateral power to augment benefits.

The combination of the terms of the insurance arrangements and the balance of powers in the Scheme’s Trust Deed and Rules meant that the Principal Employer was reluctant to put the Scheme into winding up without reaching some kind of agreement with the trustee. If it did, the trustee would become entitled to the full termination payment under the insurance arrangements, which would create additional surplus in the Scheme which the trustee could then use to augment members’ benefits. The trustee would not be required to repay any of the surplus to the employer.

From the trustee’s perspective, securing the employer’s agreement to trigger the winding up was key: without this the trustee was not entitled to any termination payment under the insurance arrangement. Nor was it able to augment benefits without the employer’s consent. It was therefore in both the trustee’s and the Principal Employer’s interests to come to an agreement. They had reached in-principle agreement on broadly the following basis:

• The Principal Employer would trigger the Scheme’s wind up.
• The existing buy-in policy would be terminated and a replacement insurance policy, covering the same liabilities, would be purchased at a lower price (reflecting the prevailing, lower, cost of insuring the liabilities at that time). This would allow regulatory capital to be released from the captive insurer to the employer’s benefit.
• The trustee would augment members’ pension benefits (as noted above the proposal was to uplift the pension benefits of all beneficiaries by approximately 27%).
• The calculations were not set out in full in the judgment, but based on the “full” termination figure of GBP 232 million which was stated as the amount which the trustee would have been entitled to as a termination payment in respect of the existing buy-in policy, once the cost of purchasing the replacement insurance cover had been factored in (GBP 150-160 million), it appears that there would have been an additional GBP 72-82 million which would have flowed into the scheme had the trustee not agreed to reduce the amount of the termination payment to the amount which was required to purchase the replacement insurance.
• Although no additional cash flowed into the Scheme as a result of the insurance arrangements being restructured, the trustee was, as a result of the employer exercising its power to trigger the winding up as part of the overall agreement, able to exercise its right to augment benefits, using the existing GBP 46 million of surplus which was already in the Scheme to do this.

What factors did the trustee weigh up when making it decision?

The key factors which the trustee weighed up when deciding to go ahead with varying the existing buy-in and augmenting benefits was whether they should reach an agreement with the Principal Employer which would enable them to gain control of the existing surplus immediately (i.e., the GBP 46 million which was already in the scheme) – a “bird in the hand”. This approach would also have the effect of crystallising the amount of surplus available. Or should they adopt a wait and see approach?

A wait and see approach could have potentially resulted in a greater amount being returned to the Scheme on termination of the insurance arrangements, but it would have required the Scheme to be in winding-up (either as a consequence of the Principal Employer terminating the Scheme or the Principal Employer suffering an insolvency). A wait and see approach would also have meant that the Scheme would become a form of “tontine” – whereby the pool of beneficiaries who could benefit from any future surplus distribution would get smaller and smaller as members died. The court also noted that the Principal Employer could allow the Scheme to run on until the last beneficiary died, at which point it could then trigger the winding up and receive a return of all the surplus under the concept of a “resulting trust”. The “bird in hand” approach meant that a greater number of beneficiaries would be able to benefit from the uplift now.

What did the Court decide?

The Court approved the trustee taking the two decisions.

As this was a “blessing” application, the Court was not deciding whether or not it would have come to the same decisions as the trustee. Rather, the Court was checking that the trustee was acting lawfully and within its powers, that it had taken into account relevant factors and no irrelevant factors and that it was acting as a reasonable and prudent trustee might act. The Court was satisfied on both counts in this case. The Court noted that “It is a relevant consideration that the employer group can simply wait matters out in a way that members (who have finite lifespans) cannot.” It was relevant that the trustee had also taken steps to ensure that there was no risk of any conflict of interest infecting its decision (the decision had been delegated to two trustee directors who were not members of the scheme and so did not stand to benefit personally).

A representative beneficiary, who was a pensioner member, was appointed to represent the interests of the five active members for whom, although they would also benefit from the augmentation, accrual would cease as a result of wind up being triggered. Their interests were therefore, in one sense, opposed to the package of measures being blessed (although there was scope for further mitigation to be provided, even outside the scheme, for their lost accrual).

The representative beneficiary was separately advised and did not oppose the application, with the Court noting that “the role of the representative beneficiary, on an application of the present kind, is informed and confined, by the nature of the court’s role….and the confined grounds on which a trustee’s exercise of fiduciary duty can legitimately be challenged. Absent realistic grounds for doing so, a representative beneficiary is not obliged by her role to oppose court approval being granted.”

The fact that the representative was not herself an active member was no barrier to her representing their interests. The court noted the rigour with which she had approached her task. Views had also been sought from the active members and no specific concerns had been raised.

You can read the judgment here.