The High Court recently held that, unless the scheme rules allow it, part of a defined benefit multi-employer pension scheme cannot be segregated for the purposes of the Pension Protection Fund (Multi-employer Schemes) (Modification) Regulations 2005 (the "Regulations") or s.75 of the Pensions Act 1995.
In the case of PS Independent Trustees Ltd v China Shipping (UK) Agency Co. Ltd and Another, the principal employer had entered into insolvency proceedings and had ceased to carry on business. Under the trust deed and rules, the scheme had therefore entered into wind up. Consequently, this triggered payment of a debt by the principal employer under s.75 of the Pensions Act 1995 in relation to the shortfall between the scheme's assets and liabilities.
The principal employer was unable to pay the debt and so, on the basis that it was a non-segregated multi-employer scheme, the trustee sought to recover the debt from the two other participating employers. However, the other participating employers argued that, under the Regulations, the scheme had become legally segregated and, as such, they were not liable to pay the s.75 debt due in respect of another part of the segregated scheme.
The judge decided that the provisions of the Regulations did not segregate the principal employer's assets and liabilities from those of the other participating employers. This is because segregation can only take place where the scheme rules allow for it and, in this case, the scheme rules did not allow the trustees to segregate the scheme in the circumstances. The rules stated that the trustee could segregate the scheme before a winding-up if an associated employer ceased to carry on business. In other words, they provided for the whole scheme to be wound up, and it was held that this was inconsistent with segregation.
The judge also noted that the Regulations could not convert a non-segregated scheme into a segregated scheme. They could only operate to segregate part of a scheme, and the part to be segregated was the assets and liabilities of the insolvent employer.
The case confirms that if a principal employer becomes insolvent, this is likely to trigger each participating employer's s.75 debt (subject to any particular wording in the scheme rules that allows for segregation). The Regulations are intended to give effect to scheme rules, and not to operate contrary to them.
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