Capturing the Surplus

Lawyers and accountants are forever coming up with schemes to prevent Members of the fund from gaining any benefits from the surplus.

One mechanism is the “spin-off” termination of the scheme. This was the procedure attempted in 1986 when Hanson plc sold its subsidiary Courage to Elders IXL Limited. The Courage superannuation (pension) fund has a surplus of £80 Million. Elders IXL Limited should have become the new Principal Employer, however Hason attempted to substitute Hanson as the Principal Employer in the Trust Deeds of the Courage scheme. Hanson then sought to partially terminate the Courage scheme by setting aside a portion of the fund’s assets for the purpose of securing only the accrued benefits of the subsidiary’s employees. Hanson proposed to keep £70m. of the £80m.surplus for its own benefit.

This case is recorded in Re Courage Group’s Pension Schemes Ryan and other v Imperial Brewing and Leisure Ltd and other [1987] 1 All ER 528.

There were three funds involved:

  • the Courage Retail Managers’ Pension Scheme
  • the Courage Staff Pension Scheme
  • the Courage Employees’ Pension Scheme

These were Deferred Pension Schemed that had both active pensioners and deferred pensioners (ie ex-employees who had left employment but who had yet to reach the pensionable age).

In the case of an event that would cause any surplus in each of these schemes to be crystallised, the Governing Rules of these funds differed.

In the case of the Courage Retail Managers’ Pension Scheme, any surplus was to be applied to augmenting the pensions of the Pensioners of the Scheme.

In the case of the Courage Staff Pensions Scheme and the Courage Employees’ Pension Scheme any surplus was to be paid to the Company.

No repayment to the company was permitted in the case of the Courage Retail Managers’ Scheme.

In the end the plan proposed by Hanson was rejected by the High Court.

Another mechanism to gain access to the surplus is to wind up an existing scheme and replace it with another scheme. By winding up a scheme, liabilities in the form of vested benefits become crystalised at the date of the wind-up and, while further contributions also cease, the assets continue to grow. This makes the surplus even larger.

Hanson plc also attempted this mechanism. In 1986 Hanson closed the pension scheme of a subsidiary, Imperial Tobacco. New employees had to join a new scheme. In 1990 Hanson attempted to persuade members of the old scheme to join the new scheme. The inducement was to improve the indexing rate applied to pensions. The remainder of the Surplus would then revert to Hanson.

The Members of the existing scheme rejected the proposal. This plan again went to the High Court and was again rejected.

Mr Michael Meacher, the opposition spokesman for social security stated:

It is becoming clearer by the day that pension fund surpluses must be used exclusively for the benefit of members and pensioners, that contribution holidays are outlawed unless full inflation-proofing is guaranteed and that scheme members and pensioners have a controlling interest in the management of the fund” {Daily Telegraph, 3 November 1990}.

British Coal at a £1 billion surplus in its pension fund and in 1993 attempted to use half of the surplus to help finance redundancy payments. This plan was also blocked by the High Court.

In another case Hanson adopted a different tactic.

In Imperial Group Pension Trust Ltd and others v Imperial Tobacco Ltd and others [1991] 2 All ER 597 the Trustees of the Imperial Tobacco Pension Fund sought a direction from the Court about proposed alterations to pensions arrangements so that Hanson might gain access to the £130 million surplus in the pension fund.

Under the Rules of the Trust Deed the surplus had to be applied for the benefit of the Members and did not revert to the Company (Employer-Sponsor).

Hanson attempted to close the existing fund and to “encourage” Members to move to a new fund, taking their share of the surplus with them. In the new fund, however, any surplus would revert to the Company.

Lord Browne-Wilkinson that in every contract of employment there is an implied term –

that the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee...”

This is the “Implied obligation of good faith“.

In this case the Employer had ulterior motives in wanting Employees to transfer from the existing pension scheme to a new scheme and so the proposal did not receive the support of the High Court..

In Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 the exercise of a power by a pension fund trustee was held to be a fraud on a power (or the improper use of a power for a collateral purpose). Hillsown plc participated in a pension scheme (the FMC scheme) which had accumulated an actuarial surplus of some £20 million. The scheme contained no power allowing the trustees to repay any surplus to employers participating in the scheme, and the scheme could not be amended to confer such a power. After an agreement had been negotiated between the Trustee of the FMC Fund and the Employer – Hillsdown plc to augment the benefits of the FMC pensioners and to transfer to the Employer  £11 million of the surplus, the Trustees exercised a power under the scheme to transfer the entire fund to another scheme (the HF scheme), the rules of which were changed to al the surplus to be aid to Hilldown. Knox J held that the Trustees of the FMC Fund exercise of the power, transferring the assets to the HF Scheme was a fraud on a power.

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