Court approves scheme merger, notwithstanding reduced scope for benefit uplifts

The High Court has blessed a proposal to merge two schemes of Arcadia Group Limited, the failed retailer associated with Sir Philip Green.

The schemes are in winding-up. One is underfunded and the other overfunded. The trustee of the overfunded scheme sought the Court's approval, mindful of the fact that the proposed merger would reduce the surplus which could be used to augment benefits for existing members.

Background

Aracadia sponsored two defined benefit pension schemes: a Staff Scheme and an Executive Scheme. Although separate, the two had always been operated as "sister schemes", eg with a view to them being funded on a common basis.

In 2019, Arcadia was the subject of a company voluntary arrangement. The schemes entered PPF assessment, but were subsequently "rescued" via a package of measures involving cash payments by Lady Green, new funding agreements, and security over assets.

In 2020 Arcadia entered administration. The schemes re-entered PPF assessment, and section 75 debts were triggered against Arcadia. Arcadia later went into liquidation.

The Staff Scheme had been thought to be less well-funded than the Executive Scheme. As a result, the bulk of the available funding and recoveries had been directed at the Staff Scheme rather than the Executive Scheme.

However, the relative funding positions changed following the 2022 mini-Budget. The Staff Scheme proved be better-funded than the Executive Scheme. This was evident when buy-ins were completed in 2023. The Staff Scheme buy-in covered 100% of liabilities. The Executive Scheme buy-in covered only 87%.

Both schemes exited PPF assessment, on the basis that they could secure benefits in excess of PPF compensation, and began winding-up. Although there was some uncertainty as to section 75 recoveries, it was expected that:

• the Executive Scheme would be underfunded; but
• the Staff Scheme would have a surplus; and
• if the schemes were merged, some surplus would remain, even allowing for the underfunding on the Executive side.

The trustees decided in principle to proceed with a merger, by means of a bulk transfer from the Executive Scheme to the Staff Scheme.

The Staff Scheme trustee sought approval from the Court, although in the event the trustee's claim was not opposed by the representative beneficiary.

Terms of the Staff Scheme

Under the Staff Scheme's trust deed and rules:

• The object of the scheme was to provide "Scale Benefits" for people who were at any time members. "Scale Benefits" meant benefits to which members were entitled on the scale specified in the rules. The definition expressly excluded any additional benefits which might be provided by augmentation.
• On winding-up, the trustee had discretion to use any surplus to augment benefits for members. Any remaining surplus was to be refunded.
• The trustee was not permitted to accept transfers-in. A provision to that effect had been added in 2010, when the scheme was closed to accrual.
• The amendment power was exercisable by Arcadia with the trustee's consent, but (a) could be exercised by the trustee unilaterally if Arcadia was in liquidation, and (b) remained exercisable until the scheme was wound up.

The Court's decision

The Court considered three matters in turn.

1. Was an amendment to enable the merger within the scope of the amendment power?

The trustee proposed to amend the trust deed and rules, so as to give itself power to accept a bulk transfer from the Executive Scheme.

On the face of it, the proposed amendment was within the scope of the amendment power. The question was whether the power was subject to an implied fetter, when the scheme was in winding-up and/or when Arcadia was in liquidation.

The Court held that there was no such fetter. It might be unusual to amend so as to enable a merger during winding-up, but that was by-the-bye. The amendment power was intended to be wide and flexible, and there was no principled basis on which a fetter should be implied.

2. Would the proposed amendment be a proper exercise of the trustee's powers?

The question arose, in particular, because adding new members to the Staff Scheme would reduce the surplus which could be used to augment benefits for existing members.

The Court held that the amendment did not undermine the main purpose of the Staff Scheme, observing that (critically) there was no overriding principle that all powers must be exercised in the interests of beneficiaries. Key considerations were:

• The unrestricted nature of the amendment power. Having amended the scheme in 2010 to exclude new members and mergers, there as no fetter on the power being exercised to reverse that amendment if circumstances warranted.
• The manner in which the object of the scheme was defined (see above), and the fact that Scale Benefits could be delivered in accordance with that object even if the merger proceeded.
• The close relationship between the two schemes. In using surplus for Executive Scheme members, the trustee would be providing benefits which the employer had intended those members to receive, albeit under a different scheme.
• The shared objectives of the schemes' respective trustees, and the fact that the different funding positions had arisen through forces beyond their control.

3. Had the trustee's in-principle decision as to the merger been properly reached?

The key questions were (a) whether conflicts of interest had been appropriately managed, and (b) whether the trustee had considered the relevant factors, and had ignored the irrelevant.

The in-principle decision had been made by a single trustee director, Ms W, who did not have a conflict of interest in relation to the Executive Scheme. All other directors, who did have such conflicts, had recused themselves.

Ms W had considered the purpose of the Staff Scheme; the trustee's discretion to use surplus to augment benefits; the reduction in surplus which would result from the merger; the circumstances in which the surplus had arisen; and what was fair and equitable. As to the last, given that the schemes has been operated with a view to achieving equality of funding, there was a "strong moral obligation" to effect a merger, and it was entirely proper to take that into account.

The Court was satisfied that the trustee had considered the relevant factors, and had reached a decision which was objectively justifiable. There was no indication that irrelevant factors had been taken into account.

Outcome

The Court confirmed that the proposed amendment was within the scope and purpose of the amendment power, and approved the exercise of the amendment power and the in-principle decision to effect a merger.

Comment

The merger was, if anything, contrary to the interests of the Staff Scheme's existing members. But, with an eye to the Scheme's purpose and surrounding circumstances, the Court concluded that the trustee could properly proceed.

The case demonstrates that the role of trustees is not simply to act in the best interests of members. Purpose is key. Trustees must understand why their powers have been conferred, and must use those powers to further the objects of the scheme.