Pensions case law focus

Case law focus
In this issue of our Pensions Bulletin, we focus on two cases of interest, one relating to Financial Support Directions (FSDs) and the other to scheme specific funding.

Sea Containers – (Regulator issues FSDs)

• The Pensions Regulator announced on 6 February 2008 that Sea Containers Limited has withdrawn its appeal to the Pensions Regulator Tribunal against a decision in June 2007 of the Determinations Panel to issue two FSDs on the company.
• FSDs require financial support from within a group of companies to be put in place for an underfunded scheme where the Regulator concludes that the sponsoring employer is either a service company or is insufficiently resourced.
• The FSDs apply to two pension schemes relating to Sea Containers' UK subsidiary known as Sea Containers Services Limited.  (Note: the Pensions Regulator Determinations Panel is the decision making body of the Regulator – if the Regulator considers it appropriate to exercise its anti-avoidance powers, it is required to provide submissions to the Determinations Panel.  The Determinations Panel then decides whether use of these powers is appropriate and if it deems that it is, a Determination Notice is issued explaining the reasons for the decision.)
• The withdrawal of the appeal means that the Determinations Panel has been able to issue two FSDs on Sea Containers Limited.  Sea Containers Limited will now be compelled to provide a form of financial support to the two schemes within 30 days of the FSDs being issued.
• This case will almost certainly be seen as an important "win" for the Regulator, particularly given the complexities of this particular case.  Sea Containers Limited is a Bermuda based US domiciled parent company, which has filed for Chapter 11 bankruptcy protection with the US Securities and Exchange Commission.   It has also been reported that the company's bond holders are a group of hedge funds who are seeking $380m.
•  According to a press release on Sea Containers' website, the two UK pension schemes (with total membership of nearly 1500 members) are estimated to be $200m in deficit on a Pensions Act 2004 section 75 basis.   Sea Containers Limited have not confirmed how much money they will put into the schemes but have stated that the company has agreed with the pension scheme trustees to create an additional reserve of $69m for potential pension scheme liabilities in respect of age-related equalisation changes.

 Allied Domecq (Holdings) Ltd v Allied Domecq First Pension Trust Ltd & Another– (scheme funding/contribution rules)

• This case relates to the issue of scheme specific funding and how this operates alongside existing scheme contribution rules.  The Court had to consider the interaction between the provisions of the Pensions Act 2004 (and Regulations under that Act) providing that the sponsoring employer has a right to agree the employer contribution rates set out in the schedule of contributions with the trustees and, in contrast, the scheme rules which provided that the actuary had power to set employer contributions (without employer consent).  In this case Allied Domecq, as the principal employer of two pension schemes, sought clarity on the role of the employer in setting contributions.
• The Court held that where the scheme rules require the actuary to determine the employer contribution rates without the agreement of the employer, the actuary must include in his certificate of adequacy of contributions for funding, a statement that the contribution rates agreed between the employer and the trustees (as per the new statutory funding regime) are not lower than the contribution rate he (the actuary) would have set if he had responsibility for setting the contributions.  The trustees or managers must then take account of the actuary's recommendations. The Court referred, in this case, to the existence of a “requirement for the actuarial underpin”.
• This case is of key importance in that it highlights that prior to commencement of a scheme specific valuation, employers, trustees and the actuary must ensure they understand their respective roles in that process in terms of interaction between the scheme rules and statute.

If you require any further advice on the implications of these cases to your particular circumstances, please contact one of the following Partners:-

Andrew Holehouse
Louisa Knox
Edwin Mustard

21/02/2008