Sarjeant & Ors v Rigid Group Ltd

Trustees winding up a pension scheme may ordinarily buy out members’ benefits in stages, including by applying available assets before fixing and recovering the statutory employer debt, if the scheme rules permit that course. Construction is practical and purposive: the court should avoid an over-restrictive interpretation that prevents trustees managing asset realisation and minimising a shortfall. A rule permitting the purchase of insurance policies can therefore permit more than one policy or a later top-up. However, a scheme’s contracting-out provisions may impose a separate restriction. Where those provisions require a receiving policy to provide GMPs equal to the member’s whole accrued GMP entitlement, a first payment securing only part of that entitlement is impermissible without the member’s consent.

The claimants were trustees of two solvent employer-sponsored defined benefit pension schemes in winding up. The schemes had been terminated in 2000 when their liabilities were valued on the minimum funding requirement basis, leaving a substantial gap between the statutory debt payable by the employer and the cost of buying out members’ benefits with insurers.

The trustees sought declarations that the schemes’ rules permitted a staged “Headway” arrangement: an initial partial buyout, followed by fixing and recovering the employer’s statutory debt, and then a further purchase of benefits. The court also had to decide whether the rules permitted a partial buyout of guaranteed minimum pension rights.

1. Partial buyout under the winding-up rules. The claimants succeeded on the principal issue. Rule 21 required the trustees to wind up the schemes by buying insurance policies or annuity contracts, but it did not require the process to be completed in a single transaction. The reference to policies in the plural supported the possibility of multiple policies, including policies for different groups of members or a later top-up.
2. The duty to complete the winding up was not fully performed until the assets had been applied, but that did not prevent the trustees from taking intermediate steps in performance of the duty. The statutory debt under Pensions Act 1995 section 75 was an asset of the scheme for this purpose, even though it was contingent or unquantified until the applicable time was selected. The trustees could therefore apply available assets to a partial buyout, fix the applicable time, recover the debt, and use the proceeds to secure further benefits.
3. The construction adopted gave the rules a reasonable and practical effect. It allowed trustees to manage the realisation of assets over time, respond to market conditions, and minimise the deficiency affecting members. The court rejected the submission that the possibility of a staged arrangement had to have been specifically contemplated when the rules were drafted.
4. GMP benefits. A partial buyout of GMP rights was not permitted without the consent of the member concerned. The contracting-out appendix required a transfer payment including GMP rights to be made only where the receiving annuity policy provided GMPs equal to the member’s accrued GMPs up to the transfer date. That condition required the whole accrued entitlement to be secured by the relevant payment. A later intended payment could not satisfy the precondition for the first payment.
5. The appendix overrode inconsistent provisions in the main scheme rules. The court made no determination whether that GMP restriction necessarily prevented implementation of the proposed arrangement in every respect, because that question had not been argued.