The Merchant Navy case helped to clarify the status of former active members when the scheme has closed to future accrual. Its application has been extended determine when to apply the higher of revaluation and a final salary link for schemes with amendment powers which require this. However there are still some outstanding issues.
A reminder of the case
The uncertainty about the status of former active members on the closure of defined benefit pension schemes to further service accrual was brought one step closer to clarification by the decision in the High Court case of Merchant Navy Ratings Pension Fund Trustees Limited v Stena Line Ltd and Others [2015] (MNRPF).
Although it addressed a number of other issues - the case was the first to provide any real legal authority on this issue.
The relevant question considered in MNRPF was whether, in order to be in ‘pensionable service’, it was necessary to continue to accrue years of service or alternatively whether a continued entitlement to an enhanced rate of revaluation was sufficient?
In MNRPF it was decided that in order to be in pensionable service there is a present tense requirement such that a member must continue to accrue “years of service”. This was considered to be the case in relation to not only statutory debt (which was the focus of the judgment) but also with regards to preservation and revaluation.
Implications and application of the judgment a year on
It was therefore recognised within the industry at the time of the judgement that, by analogy, the decision could have wider ramifications for schemes which were closed to future accrual but maintain a salary linkage, through the terms of the scheme’s amendment power.
In our view (which is consistent with the view of most other industry experts), the effect of the decision is that members who were active immediately before a closure to accrual should be treated as deferred and consequently that trustees ought properly to apply revaluation. However, we do not consider that this takes away the salary linkage. But rather there is a very good legal argument for saying that a retained salary link in a closed scheme should be underpinned by statutory revaluation, i.e. members get the greater of the two for such time as they continue in employment with that company
Alternative interpretations
However, depending on the particular circumstances of a scheme, there may be alternative arguments to the application of such an underpin, including where members retain rights in respect of spouses’ benefits which take into account members’ future service. For example, consider a closed scheme which provides death in service benefits based on continued or prospective service up to normal retirement date. In those circumstances, it may be arguable that there is some form of continued “accrual” after the scheme closure date.
It is also worth remembering that, prior to MNRPF, certainly one view within the industry was that employees who had retained a salary link under a closed scheme were still in pensionable service (in some form) and therefore continued to be active members of the scheme. Some trustees may be willing to take the view that the facts of MNRPF were case specific and await a change to primary legislation or a successful member challenge before applying a statutory revaluation underpin. It is certainly an arguable position (although not one which we would necessarily endorse).
Different meanings of “Pensionable Service”
Trustees should also be mindful that “Pensionable Service” may have different meaning under statute and a scheme’s rules: one which derives from law and dictates when statutory revaluation is triggered; and one which is derived solely from scheme rules and which decides from when non statutory revaluation should apply (for example, a fixed level of revaluation for pre-1991 accrual in excess of the GMP). In those circumstances, depending on the definition of “Pensionable Service” under the scheme rules, it might be arguable that the scheme specific, non-statutory fixed revaluation would be triggered at a different (later) date than the date of the scheme closure. This distinction could potentially have cost implications for such a scheme.
Conclusion
Ultimately, the correct approach will vary from scheme to scheme and so trustees and companies wrestling with these issues should contact the expert team at Irwin Mitchell for practical advice tailored to the specific circumstances of their scheme.
For more information or assistance with this (or any other) element of your scheme’s governance, please contact any member of the Irwin Mitchell pensions team.
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