Pensions update: when is a member in “pensionable service”?
When is a member in “pensionable service”? Is it enough that there is still some linkage to final salary, even though accrual under the scheme has…
When is a member in “pensionable service”? Is it enough that there is still some linkage to final salary, even though accrual under the scheme has ceased?
This issue was considered in the case of G4S Plc v G4S Trustees Ltd & Sok Wah Lee which was heard in June this year.
This case involved a multi-employer, occupational pension scheme which was “sectionalised” into three defined benefit sections. Such a scheme (or section) may be deemed “frozen” if it ceases to have active members. An active member is a member in “pensionable service”, as defined in the Pension Act 1995 as “service in any description or category of employment to which the scheme relates which qualifies the member…for pension or other benefits under the scheme”. Upon termination of benefit accrual for future service under two sections of the scheme, a new class of member was created: employed deferred members.
The employed deferred members retained a link between their past service benefits and their future final salary so that their pensions were calculated by reference to their final salary on the date they left employment or their final salary on the date pensionable service ceased, subject to revaluation. The issue in question was:
Would a scheme member with defined benefit pensionable service, whose scheme had been closed to future pensionable service, but whose past service benefits continued to be linked to future final salary remain, as a result of that link to final salary, in “pensionable service” for the purposes of the Employer Debt Regulations?
In line with the case of Merchant Navy Ratings Pension Fund it was decided that a scheme where members’ benefits continued to be linked to future final salary was to be treated as “frozen” for the purposes of the Occupational Pension Schemes (Employer Debt) Regulations 2005. It was held that the final salary link did not mean that the members were active members in pensionable service. The court in G4S held that it was clear as a matter of construction in the statutory context that where accrual had ceased but final salary linkage remained there was no pensionable service after the closure date as there was no service under which pension benefits continued to accrue.
What does this mean for me?
The G4S ruling will be of particular interest to employer sponsors and trustees of multi-employer schemes in which accrual for an employer has terminated but where final salary linkage for those members has been preserved. It helps to confirm the trigger events for section 75 debts under the Pensions Act 1995 and will be welcomed by employers and trustees alike for bringing greater certainty.
For multi-employer schemes in which pensionable service for all employers has terminated simultaneously but the final salary link has been retained, the case reduces the risk of employer debts being triggered in the future for an individual employer.
The case is also relevant to multi-employer schemes in which pensionable service for one employer has terminated whilst other employers continue to employ active members. Under pensions legislation applicable to multi-employer defined benefit schemes, if a participating employer ceases to have members in pensionable service whilst other employers continue to do so, a section 75 debt will be triggered for the exiting employer.
The G4S case tells us that retention of the final salary link for the exiting employer will not have prevented its section 75 debt from being triggered.
Retaining a final salary linkage has been used in the past by some employers in the belief that it prevented triggering the section 75 exit debts. Those cases should now be reviewed.
Options for managing employer debts
Under pensions legislation, there are a number of ways of managing an employer debt when an employer in a multi-employer scheme ceases to have members in pensionable service. Methods which avoid the need to pay the full section 75 exit debt include:
- Scheme apportionment arrangement;
- Withdrawal arrangement;
- Flexible apportionment arrangement; and
- Since 6 April 2018, employers have the additional option of entering into a deferred debt arrangement. In this case, an employer debt will be effectively suspended for the duration of the agreement.
Some of the permitted arrangements can be implemented after an employer has ceased to have members in pensionable service in the scheme. Therefore, it is possible to avoid the need for an employer to pay a section 75 debt after the circumstances have arisen which would otherwise require it to be paid. This makes it possible for employers and trustees to work together to manage employer liabilities in a way which benefits both the business and the security of all members’ benefits.
Several conditions and requirements apply to the various arrangements and it is important for both employers and trustees to obtain expert advice on their implementation.
For more information on the management of employer liabilities in defined benefit pension schemes please contact Mark Poulston, Head of Pensions.