The United Kingdom Determinations Panel of the Pensions Regulator has recently exercised its rarely used power under section 67G of the Pensions Act 1995 to declare a deed amending the rules of a pension plan void in its entirety.

Background

The DCT Civil Engineering Staff Pension Fund was a small pension plan with only 11 members and assets of around £1 million.  In 2010, the former trustees of the Fund mistakenly executed a deed that replaced the existing rules of the Fund in their entirety with a new set of rules.

The Fund had always been administered on the basis that it was a defined benefit pension plan.  The effect of the 2010 changes was to convert members’ accrued benefits from DB to defined contribution benefits.  The Fund actuary had written to the former trustees warning them that the proposed new rules purported to change the basis of the accrued benefits from DB to DC.  The actuary also pointed out that it would be very difficult to make this change without obtaining individual members’ consent.  It appeared that, by an oversight, the former trustees overlooked the actuary’s advice and the deed was executed.  However, all parties continued to administer the Fund as a DB pension plan.

The sponsoring employer went into administration in January 2014 and an independent trustee was appointed as the sole trustee of the plan.

Implications

If the 2010 deed was valid, Plan members might not be eligible for compensation from the Pension Protection Fund and would receive significantly lower benefits from the Fund than the compensation they would otherwise receive from the PPF.  The independent trustee, therefore, wrote to the Regulator to ask for an order declaring that the 2010 deed was void in its entirety.

Legal considerations

Section 67 of the Pensions Act 1995 gives the Regulator power to make an order under section 67G declaring a regulated modification void to the extent specified in the order as from the time when the regulated modification would otherwise have taken effect, unless certain requirements have been complied with at the time the amendment was made.  In other words, in certain circumstances, the Regulator may declare that a purported amendment is void and of no effect as from the date the amendment was originally made.

A regulated modification is defined in section 67A as being either a “protected modification” or a “detrimental modification”.  A protected modification is, in effect, a modification of an occupational pension plan which would or might have the effect of converting benefits accrued prior to the date of the amendment into DC benefits.  A protected modification can only be made with the consent of the individual members.  If members’ consent is not obtained, the modification is voidable.

Conclusions

The Panel concluded that:

• Section 67 applied to the Fund.

• Since the effect of the 2010 deed was to convert DB benefits into DC benefits, it constituted a protected modification.

• The Panel had the power to issue an order declaring the 2010 deed either wholly or partly void.

• There was no evidence that the trustees had obtained members’ consent to the changes made by the 2010 deed.

• Furthermore, it appeared that the trustees had not intended to change the nature of the members’ benefits.

• It was in the members’ interests to make the order declaring the 2010 deed void.

The Regulator has published a report in which it comments that the Panel will take various factors into account when deciding whether to declare an amendment void.  In particular, the Panel will consider the impact on members’ benefits.  In this case, the 2010 deed had a serious impact on the value of members’ benefits.  The Panel, therefore, considered it appropriate to act to protect members’ benefits in this case “even though the scheme concerned involved only a small number of members”.  This is positive in demonstrating that, in appropriate cases, the Regulator will take action in favour of those very small pension plans to which, in normal circumstances, we would not expect the Regulator to pay great attention.

It is, however, worth noting that the Regulator’s report points out that, rather than the Panel exercising its power, the independent trustee could have applied to the court for an order for rectification.  In this case, an application for rectification would have been disproportionate and would have increased the cost to the PPF of accepting the Fund.  Does this suggest that the Panel would have been more reluctant to exercise its power in the case of a larger or better funded pension plan where it did not have to take account of the interests of the PPF?