In its judgment in the Omega Pharma pensions case (Holloway & Ors v Damianus BV & Ors 2013/6239P), the High Court provided more valuable judicial guidance on contribution demands and the duties and obligations of trustees and employers.  In this e-zine, we review the main lessons from the case.

Background to the Omega Pharma case

The Omega Pharma case concerned an employer contribution demand made by the trustees of the Omega Pharma Ireland Pension and Death Benefits Scheme, a defined benefit scheme, and the basis for calculating the amount claimed by the trustees.

The employer gave the trustees three months’ notice to terminate its liability to contribute to the scheme as required under the trust deed and rules.  The scheme met the statutory minimum funding standard (MFS).  The trust deed provided for employer contributions to be determined by the trustees, after consulting the scheme actuary and the principal employer, as were necessary to support and maintain the fund in order to provide the benefits under the scheme.  The trustees consulted with the scheme actuary who recommended an employer contribution based on a hybrid MFS/annuity buy-out basis and this was adopted by the trustees.  The employer declined to engage in any form of consultation with the trustees subsequent to the issue of its termination notice.  The trustees then sued the employers for €2.23m (the amount ultimately sought by the trustees calculated on the hybrid basis referred to). 

In a judgment delivered on 25 July 2014, Mr Justice Moriarty of the High Court upheld the trustees’ claim against the employers.  In his conclusions, Moriarty J approved and followed the standard of review for trustees’ decisions as set out in the Element Six case:

“Set against this standard of review, the decision of the trustees to issue a contribution demand on 7 December, 2012, does not appear to be one which no reasonable body of trustees would have made….Leaving to one side an actuarial analysis of the computation method, the trustees appear to have been acting in good faith in pursuit of what they believed to be the best interests of the members of the Scheme, in accordance with their fiduciary responsibilities.”

Lessons from the Court’s judgment

• Entitlement to a make contribution demand

The employers argued that under the trust deed and rules it was not open to the trustees to make a contribution demand during the three month notice period.  Moriarty J rejected this argument, holding that on a proper construction of the relevant provisions of the scheme documentation it was open to the trustees to do so within the notice period.

The employers argued that under the trust deed and rules it was not open to the trustees to make a contribution demand during the three month notice period.  Moriarty J rejected this argument, holding that on a proper construction of the relevant provisions of the scheme documentation it was open to the trustees to do so within the notice period.

The employers also argued that there was no justification for the contribution demand as the scheme was solvent on the statutory MFS basis.  Moriarty J rejected this argument, the Court effectively accepting the estimate under the hybrid MFS/annuity buy-out basis as the Court held that the trustees had come to a reasonable decision in the absence of any input from the employer.  In evidence to the Court, the actuarial expert for the employers also accepted on a hypothetical basis that, in the face of failed attempts to create engagement with the employers, he would have taken the same course of action as the trustees and issued a contribution demand.

Trustees should seek expert professional advice on the implications of making or failing to make a contribution demand and should take this advice into consideration when making a decision. 

• Entitlement to seek more than statutory MFS

The central point of dispute between the parties was whether or not, in the context of the scheme’s trust deed and rules, pensions legislation and expert actuarial evidence, the trustees were entitled to claim a contribution amount which was more than statutory MFS.  What was the appropriate method to value the benefit entitlements of the scheme members?  While the scheme actuary was of the view that an annuity buy-out basis alone would be “excessive”, he recommended a combination of annuity buy-out and MFS.  The employers contended that the MFS basis was the appropriate valuation method and that members had no entitlement to amounts above MFS.  The employers also argued that the MFS basis acted as a benchmark that parties should be slow to depart from and that it was not necessary for them to go further than this as the trust deed authorised the trustees to discharge the scheme’s liabilities to active and deferred members on the basis of MFS.  The trustees maintained that they had an obligation to secure the benefits of the scheme members on a wind up and that the MFS basis was not appropriate to do so.  In evidence to the Court, the actuary for the employers stated that the MFS basis was not in his experience automatically applied in the winding up of pension schemes.

Finding that the trustees’ decision to issue a contribution demand could not be regarded as one which no reasonable body of trustees would have made, the Court accepted the amount required by the trustees and did not comment on the appropriateness or otherwise of the method of computation used in the demand.  In effect, the Court accepted the amount calculated under the hybrid MFS/annuity buy-out basis on the basis that the trustees had come to a reasonable decision based on professional actuarial advice and in the absence of any input from the employers.  The judgment offers no further guidance on whether a MFS basis, an annuity buy-out basis or a hybrid basis that uses elements of both is appropriate in any given scenario.

The judgment gives trustees a strong hand in determining how and on what basis to secure the benefits of members on a scheme wind up.  Trustees are entitled to seek more than statutory MFS from an employer on a scheme wind up, subject to and depending on the terms of the scheme documentation.  Whether this could extend to an annuity buy-out basis or a lower hybrid MFS/annuity buy-out basis remains an open question. 

The central point of dispute between the parties was whether or not, in the context of the scheme’s trust deed and rules, pensions legislation and expert actuarial evidence, the trustees were entitled to claim a contribution amount which was more than statutory MFS.  What was the appropriate method to value the benefit entitlements of the scheme members?  While the scheme actuary was of the view that an annuity buy-out basis alone would be “excessive”, he recommended a combination of annuity buy-out and MFS.  The employers contended that the MFS basis was the appropriate valuation method and that members had no entitlement to amounts above MFS.  The employers also argued that the MFS basis acted as a benchmark that parties should be slow to depart from and that it was not necessary for them to go further than this as the trust deed authorised the trustees to discharge the scheme’s liabilities to active and deferred members on the basis of MFS.  The trustees maintained that they had an obligation to secure the benefits of the scheme members on a wind up and that the MFS basis was not appropriate to do so.  In evidence to the Court, the actuary for the employers stated that the MFS basis was not in his experience automatically applied in the winding up of pension schemes.

• Onus on employers to engage with trustees

The scheme rules provided for a process of consultation by the trustees with both the scheme actuary and the employers.  The trustees endeavoured to engage with the employers on a number of occasions but to no avail and the employers effectively stonewalled any attempt by the trustees to engage in a process of determining what employer contributions should be made to the scheme, if any.

The Court was critical of this approach by the employers, Moriarty J concluding that a deliberate decision was made by the employers not to enter into any discussion or negotiation with the trustees, not even making the case at the time for the adequacy of MFS.  The Court said this left the trustees in a vacuum when trying to gauge the reasonability of a valuation basis.

There is an onus on employers to engage with trustees, particularly when there is process for doing so under the scheme rules.  Employers are likely to be at a disadvantage in any subsequent dispute if little or no meaningful engagement has taken place with the trustees.

• Review of trustees’ decision making

As in the Element Six case, a Court will not lightly interfere with a decision of trustees.  The evidence in the Omega Pharma case showed that the trustees had acted in accordance with the scheme rules and in good faith in pursuit of what they believed were the best interests of the scheme members, in accordance with their fiduciary responsibilities.

Trustees should consider all relevant factors (including those outside the trust deed) and ignore all irrelevant factors when making decisions.  The Court will only review those decisions which no reasonable body of trustees could have made.  Otherwise the Court will not reassess it.

Comment

This judgment is important as it again underlines and reinforces some of the core legal principles to be followed by pension scheme trustees.  It also gives further judicial guidance on contribution demands and other relevant issues that arise in practice from time to time.

Trustees, employers and advisers can learn from the lessons in the case when making decisions – particularly when making difficult, and possibly controversial, decisions such as whether or not to make  a contribution demand. 

Key Contacts: Michael Wolfe & Liam Connellan