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Courtroom drama

Written by Nick Martindale
January 2014

Nick Martindale provides an overview of the biggest legal cases affecting pensions

Last year saw a number of legal cases with implications for pension schemes, some of which have been resolved and some remain ongoing. One of the most significant was that involving the five ITV companies that are seeking to appeal a decision by The Pensions Regulator’s determinations panel to issue financial support directions (FSDs) requiring them to meet the £62 million deficit in the Box Clever pension scheme, after the organisation – a joint venture between Radio Rentals and Granada – went into administration in 2003.

The Upper Tribunal, which hears such appeals, has rejected an initial application to have parts of the regulator’s case struck out, paving the way for a full hearing. “The targets asked the tribunal to strike out several parts of The Pension Regulator’s case that they believed were not in dispute,” says Mackrell Turner Garrett solicitor Donna Martin. “However the tribunal rejected this on the basis that the regulator is entitled to advance its case based on facts and circumstances within the scope of the allegations made in their warning notice.”

More generally, the case raises important issues around the nature and scope of FSDs, says Dentons UKMEA partner Elmer Doonan. “In particular, ITV plc was not formed until 2004 after Box Clever went into administration but had a FSD imposed on it,” he says. “If the determinations panel decision is upheld, it will lead to concerns that companies that have been associated with the sponsoring employer of a defined benefit pension scheme could always be at risk of being tainted with pensions liabilities under an FSD.”

The issue of FSDs was also brought into focus in relation to the Lehman Brothers pension scheme, where six Lehman companies appealed to the Upper Tribunal over the regulator’s decision to impose them, and trustees cross-appealed over a decision not to on a further 38. The Upper Tribunal is likely to hear both the appeals and cross-appeal this year, raising issues about how FSDs should be applied between holding companies and their subsidiaries, suggests Doonan.

The stakes have been raised further by a ruling in December in the related Storm Funding case, which decided that where the regulator has issued contribution notices for non-compliance against more than one party, there should be no overall cap on the amount it can claim. “The decision means that where the buyout debt in a scheme increases after the issuing of FSDs, as has happened with the Lehman scheme, the regulator may be able to recover an amount that reflects that increase,” says CMS partner in the pensions practice group in London Dominic Harris.

The case involving Olympic Airlines – the failed Greek operation – also brought into focus the issue of subsidiary organisations, when it was deemed that the insolvency proceedings for the airline did not constitute a “qualifying event” for the UK scheme to gain entry into the Pension Protection Fund (PPF), despite paying its levy for years, as it no longer had a UK presence by the time insolvency proceedings were started.

“The trustees tried to bring secondary insolvency proceedings in the UK,” says Gateley partner and member of the pensions team Michael Collins. “This failed because the Court of Appeal held that, by the time proceedings were initiated, the UK branch’s only remaining function was to assist in the wind-up of the company. The legislative gap highlights that while UK-based pension schemes with a foreign employer are legally responsible for paying the PPF levy, they may be left with the prospect of receiving no PPF protection for their members.”

Closer to home, the recent High Court ruling involving Procter & Gamble around the transfer of employees’ deferred ‘Beckmann and Martin’ rights, such as early retirement, from one employer to another following TUPE transfers has provided a degree of clarity over some of the uncertainties created by the rulings of the European Court of Justice in the Beckmann and Martin cases of 2002 and 2003, says King & Wood Mallesons SJ Berwin head of pensions Wyn Derbyshire. “When the decision was first announced, many pensions commentators were cautious, as it seemed likely that the case would be appealed,” she says. “However, reports during the summer of 2013 that the case has settled mean that, for the moment at least, the grey area surrounding the implications of the original cases has been reduced.”

The dispute over indexation changes at the British Airways (BA) pension scheme also rumbled on during 2013, pitting pensioners against the airline company, which argues inflation protection for its own scheme should be able to move from RPI to CPI in line with other civil service pension schemes. “This case relates to whether the scheme, established when BA was state-owned and so subject to the switch to CPI for public sector schemes, overrides promises made to members,” says law firm Taylor Wessing partner Rosalind Connor.

November 2013 saw the first judgement in favour of the pensioners, when BA was ordered to pay Ian Fullalove compensation of £1,200, although law company Reed Smith senior associate William Sutton says this is likely to be a “blip” as a result of a procedural error. “All indications are that BA will be continuing to fight these cases strongly,” he says. “The prevailing trend in similar cases, and especially those in front of the Pensions Ombudsman, has been that members have not been able to successfully argue that an RPI link should be maintained to their benefits. Our expectation is that this will continue to be the finding in the vast majority of cases, although the BA pensioners are pointing to a deal reached in 1984, which is the atypical extra factor in this case.”

The ongoing class action against BP in the US in relation to the Deepwater Horizon oil spillage and the effect of this disaster on its share price also remains live, with potentially significant implications for pension schemes and large listed companies that could be held responsible for losses to investors caused by their mismanagement.

“Earlier, the US Supreme Court had ruled that investors who had not purchased BP shares on a US stock exchange could not bring a claim under US Federal securities law,” says Collins. “However, the US District Court in Southern Texas has ruled that UK common law can be applied to claims by investors who bought shares on the London Stock Exchange, opening up the possibility for UK pension scheme investors to seek recovery of their losses. The decision could possibly spark a wave of legal action from those who have experienced significant losses.”

Back in the UK, in July the Supreme Court rejected the argument in the Futter v Futter case that trustees could set aside decisions they had made simply because they had overlooked relevant factors in making them, decreeing that a decision could only be challenged if they had acted in breach of their fiduciary duties; something that could have significant implications for advisers, suggests Harris. “Crucially the court said that where trustees had taken advice they would not be in breach of those duties,” he says. “If trustees cannot unwind such decisions, they are increasingly likely to seek redress from advisers instead. It must be arguable that this risks prompting an abundance of adviser caution, which could inhibit trustees in achieving creative or pragmatic solutions for their members.”

The coming year could finally see a conclusion to the long-running battle around IBM’s UK pension scheme, concerning amendments introduced in 2009 to reduce liabilities. “The changes affected benefits for about 4,500 workers and closed the defined benefits section of the plan to future accrual for most employees,” says Irwin Mitchell pensions partner Nigel Bolton. “Scheme members have brought a claim that the changes breach the employer’s duty of good faith; that employers will not conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee, without reasonable and proper cause.”

Early comments from the judge suggest the ruling may reformulate the concept of the duty, says Connor. “This will have far-reaching effects as to the relationship between the employer and the trustees in negotiation, and the potential for members to claim against the employer if they feel they have behaved unfairly,” he suggests.

Nick Martindale is a freelance journalist

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