A new case means good news for employers with a pension scheme surplus
Does the Inner Court of the Court of Session’s decision in the abrdn case open the door fully to pension scheme resulting trusts?
Penny Cogher, Pensions Partner, discusses a recent Scottish case, with her Scottish colleague, Michael White:
This is a Scottish case that was decided by the highest court in Scotland, the Inner Court of the Court of Session (Petition of abrdn (SLSPS) Pension Trustee Company Limited [2023] CSIH 31 P290/23). The petitioner was the Trustee of abrdn SLSPS (formerly known as the Standard Life Staff Pension Scheme) – a defined benefit and defined contribution occupational pension scheme set up in 1937. This meant its rules were subject to very old tax rules and restrictions.
The Trustee’s questions to the Court related to the defined benefit section.
The Trustee had agreed with the Scheme’s sponsoring Employer, abrdn, a de-risking strategy, through a buy-in and then a buy-out of members’ benefits, together with an augmentation of members’ benefits that used part of the surplus to convert a discretionary increase into guaranteed CPI linked increase. However, at the end of the Scheme’s winding up, once all benefits had been secured and Scheme expenses paid, the Scheme would then be left with a surplus.
The Scheme’s rules were silent on what happened to that surplus on the winding up and there was a prohibition in the amendment power to change the rules to allow a refund to the Employer of any contributions. The prohibition applied unless the Principal Employer was in winding up. The parties agreed they did not understand how the proviso was meant to work but they agreed it was unhelpful.
The Trustee and the Employer wanted to know from the Court whether the Trustee could:
- Agree to the de-risking process, together with the augmentation, and whether to do so was within the Trustee’s fiduciary duties.
- Pay the surplus to the Employer on a resulting trust at the end of the Scheme’s winding up, and if so, how this worked in practice.
Two important points to note are:
- The Trustee had explained its proposals to Scheme members, and no one had objected or questioned the approach, and
- The Trustee wasn’t asking the Court to exercise the Trustee’s discretions. Rather, the Trustee was asking the Court to approve the process that the Trustee had adopted.
The Court agreed the Trustee could secure members’ benefits through the buy-in as the purpose of the Scheme is to provide pensions for members on retirement. This purpose is then completed on the buy-out. These actions would be in accordance with the Trustee’s fiduciary duties. The Court further decided that the Trustee’s decisions and actions fell within a band of reasonable decisions or “modes of arriving at decisions” and they were not open to challenge in respect of such decisions. It noted the Trustee and Employer had negotiated the member augmentation between themselves and to give each member their own separate uplift, based for example on the contributions the member had paid, was not practical.
Comment: We think it is helpful to have the Court of Session clarifying the Trustee’s position as regards buy ins and buy outs, as there has been some discussion that buying out benefits is not within the normal purpose of a pension scheme. It is interesting that the Court takes care not to exercise the Trustee’s discretion itself but approves the decision-making process that the Trustee has gone through.
The Court agreed with the Trustee that the Employer is entitled to have the benefit of the surplus on a resulting trust basis. Its reasons were:
- The Scheme was largely non-contributory for Scheme members, and they had received value for their contributions anyway which had been paid to enhance their pension rights.
- The Employers had funded the Scheme’s deficit and in doing so had “not abandoned their right to surplus”.
Comment: We think the Court’s analysis on the above two points is extremely helpful to employers who often argue this but struggle to back up these arguments with case law.
The Court decided that the resulting trust would only occur once the Scheme’s winding up had been completed and all Scheme expenses paid. Under common law, all current and former employers should benefit from the surplus that arose under the resulting trust as they had all contributed to it over time. However, the Scheme rules limited the scope of the resulting trust so only an Employer who was participating in the Scheme immediately before the date when the Scheme ceased to have members in pensionable employment would benefit from the surplus from the resulting trust.
Comment: We think the Court’s analysis on how the resulting trust works in practice is very useful, including how to determine which employer/s should actually receive the money.
Lord Tyre stated:
“The essence of the emergence of a resulting trust is that the purpose of the trust has been fulfilled, leaving a surplus of funds in the hands of the trustee which is not required for the trust purposes. In those circumstances the trustee becomes entitled to have the unused funds returned to him. On the basis of the facts set out in the petition and confirmed by the reporter, that is the position in relation to any surplus remaining in the hands of the petitioner after provision has been made for all of its liabilities to members and others, and for the expenses of completing the winding up of the fund.”
He concluded: “It was not the purpose of the employers’ contributions to produce the surplus that has now arisen as a consequence of the investment policies adopted by the petitioner. The employers have not abandoned their entitlement as a matter of law to any such surplus. It is therefore the employers alone in whose favour the resulting trust operates.”
Is this judgment likely to be appealed?
While the judgment could be referred to the UK Supreme Court, we think this is unlikely as the Petitioner, the Trustee, and the Respondent, the Employer, are both in agreement about the judgment.
Effect of this judgment on Pension Schemes in England & Wales
The decision of the Inner House of the Court of Session is not binding on English law, and we note the trust definition used in the decision relates to Scots law principles and sources not English. However future court cases in England may well rely on this judgment (as with any non-English judgment) as ‘persuasive’ though not necessarily binding if the types of points considered in this judgment arise again in the future. That said, to the extent that this judgment relied on English cases as authorities, where there was no direct Scottish authority (for example the Court of Appeal’s decision in Edge v Pensions Ombudsman, the Privy Council’s decision in Air Jamaica and the decision in Davis v Richardson & Wallington) then it seems likely that these cases will increase in importance. These broader English cases consider key questions such as how trustees should go about exercising their discretion on use of surplus, how resulting trusts apply in relation to pension schemes and who owns the surplus.
As scheme surpluses increase, we expect further legal questions to arise about their use and who benefits from them. If you would like more expert information in this area, please contact the authors, Penny Cogher and Michael White, or your usual contact at Irwin Mitchell LLP.
This is an interesting development, although, perhaps reassuringly, it confirms what pension lawyers have always thought: that if the scheme rules are silent, any surplus reverts to the employer on a resulting trust at the end of a buy-out and winding up. (Penny Cogher)”
