Headway Plc v Eastearly Ltd

When calculating the employer debt for an underfunded occupational pension scheme under section 75, a scheme provision limiting liabilities by reference to available assets must be disregarded. A trustee may therefore structure a buy-out so that an initial annuity purchase discharges liabilities only to the extent of benefits actually secured, if that is the effect of the scheme rules.

Section 19 of the Pension Schemes Act 1993 and regulation 5 of the Occupational Pension Schemes (Discharge of Liability) Regulations 1997 permit guaranteed minimum pensions to be secured in part. They do not confer a free-standing trustee power outside the scheme. Where the scheme itself requires full GMP protection, a non-consensual partial buy-out of affected members is barred; but a consensual or properly truncated arrangement may proceed.

Headway Plc appealed from the Chancellor’s decision concerning the winding up of its staff pension scheme. The scheme was in deficit, although the employer was solvent. Eastearly Ltd, the sole trustee, proposed completing a preliminary buy-out using the scheme’s existing assets, calculating and recovering the resulting section 75 debt, and then using that debt to buy further annuities.

The employer contended that the initial buy-out should be treated as discharging liabilities by value, which would prevent an increased section 75 debt. It also argued that the arrangement was unlawful because some members’ guaranteed minimum pensions could not initially be bought out in full. The central questions were whether the arrangement enhanced the statutory debt and whether it could lawfully be implemented, in full or in truncated form.

Disposition

1. Appeal dismissed. Lord Neuberger, with whom Stanley Burnton and Aikens LJJ agreed, substantially affirmed the Chancellor’s conclusion.

2. Under proviso D to rule 12(j), an annuity purchase without the member’s consent discharged the trustee only in respect of the benefit secured by that annuity. It was therefore a benefit-for-benefit discharge. Proviso F to clause 21(b) would otherwise scale benefits down by reference to available assets, producing a value-for-value result on winding up.

3. For the calculation of the section 75 debt, however, section 75(6) of the Pensions Act 1995 required that asset-linked limitation to be disregarded. The arrangement could consequently leave a residual scheme liability after the first buy-out and increase the debt recoverable from the employer.

4. Section 19 of the Pension Schemes Act 1993, properly read with regulation 5 of the Occupational Pension Schemes (Discharge of Liability) Regulations 1997, permitted GMPs to be bought out in part. The contrary construction would conflict with the statutory wording, related provisions and the statutory purpose. Sections 19 and 81 nevertheless did not give trustees an independent power to buy out benefits outside their scheme rules.

5. The scheme’s provisos E and F required full GMP protection for a non-consensual policy purchase. Accordingly, the full arrangement could proceed if every high-GMP member consented. Otherwise, a truncated arrangement for low-GMP members and consenting high-GMP members was lawful. The calculation of the section 75 debt and the subsequent distribution of assets were distinct exercises; the latter remained governed by the scheme and section 73 of the Pensions Act 1995.

• Court of Appeal (Civil Division): Headway’s appeal from the Chancellor was dismissed in [2009] EWCA Civ 793. The court substantially affirmed the decision below.
• Court of Appeal (Civil Division): The court subsequently refused Headway permission to appeal to the House of Lords or Supreme Court.
• High Court, Chancery Division: The Chancellor decided the issues concerning the proposed pension-scheme winding-up arrangement. A citation for that decision is not stated in the judgment.