Independent Trustee Services Ltd v Hope & Ors

A pension-scheme trustee may exercise a buy-out power only to apply a fair share of scheme assets in securing substitute benefits. It may not use the power to apply a disproportionately large share of assets for selected members, leaving the Pension Protection Fund to bear the resulting shortfall.

Although the relevance of the PPF depends on the particular power and context, prospective PPF compensation is not a relevant consideration when exercising a comparable buy-out power if taking it into account would circumvent the statutory scheme and undermine the PPF’s fund-of-last-resort function. Any rule amendment purporting to authorise that course would be void. Community-law obligations did not require approval of the proposal.

Independent Trustee Services Ltd, trustee of the Ilford Pension Scheme, sought directions concerning a proposed purchase of annuities before the Scheme entered the Pension Protection Fund. The Scheme was insolvent-employer funded, substantially underfunded and likely to enter the PPF.

The proposal would have used a disproportionate share, potentially all, of the Scheme’s assets to secure enhanced benefits for members whose compensation would otherwise be reduced by the PPF’s 90% limit and cap. The PPF and the Pensions Regulator opposed it. The issues were whether the proposal was within the proper purpose of rule 12.3(b), whether PPF compensation could be taken into account, and whether Community law required a different result.

1. The application was answered in the negative. The Trustee could not properly implement the proposal, and the second question concerning the amount of the fund to be applied therefore did not arise.

2. Rule 12.3(b), read in the context of the Scheme rules, authorised the Trustee to apply an amount fairly representing the relevant benefits in purchasing substitute insurance or annuity benefits. The power was not a dispositive power enabling the Trustee to favour one class of beneficiaries at the expense of others. The actuarial-advice requirement reinforced the fair-share limitation.

3. The proposal’s true purpose was to apply a disproportionately large and therefore unfair share of Scheme assets to selected members, while relying on future PPF compensation for the remaining liabilities. That was an improper purpose, outside the scope of the power.

4. PPF compensation was not a Scheme asset. It became payable only after the Scheme had entered the PPF, its assets had vested in the Board and the trustees had been discharged. The availability of that compensation could not therefore justify treating a disproportionate depletion of Scheme assets as a fair buy-out.

5. As a matter of law, prospective PPF compensation was not a relevant consideration for exercising rule 12.3(b), or a similar power, in circumstances where reliance on it would circumvent the policy of the Pensions Act 2004. The PPF was intended to be a fund of last resort, not an advantage to be exploited. The same conclusion applied as a matter of public policy. A rule amendment purporting to permit or require that consideration would be void.

6. The Court assumed, without deciding, that the level of compensation might engage Article 8 of the Insolvency Directive. The principles of interpretation in Marleasing SA v La Comercial Internacional de Alimentación SA and Pfeiffer v Deutsches Rotes Kreuz, Kreisverband Waldshut eV could not require the Trustee to exploit the PPF or validate an otherwise unlawful proposal.

7. The Court declined to determine the remaining beneficiary-balance and detailed proposal issues. Any observations on them would have been obiter.