In the case of Arcadia Group Pension Trust Ltd v Smith, the High Court made an order to confirm that the scheme trustee of the Arcadia Group Pension Scheme (the "Staff Scheme") would be acting within the scope of the scheme's amendment power in amending the Staff Scheme's rules to allow it to merge with the Executive Scheme.  The court also gave approval to the Staff Scheme trustee exercising its new power to effect the merger notwithstanding that the Staff Scheme was in surplus, and the Executive Scheme was in deficit.

Background

The Principal Employer of both schemes was Arcadia Group Limited ("Arcadia"), which had gone into liquidation in 2022.  The two schemes were described as "sister schemes".  This is not a legal term but was used to refer to the way that the two schemes had been operated in tandem with each other.  In particular:

• whilst each scheme had its own corporate trustee, the composition of the board of directors for the two trustees was almost identical;
• the trustees adopted a common approach to the management of the two schemes, with most meetings of the directors of the corporate trustees being joint meetings;
• the schemes took a joint approach to investment and funding.  One aggregate pension contribution from Arcadia was negotiated and then apportioned between the two schemes by the trustees who sought, based on actuarial advice, to achieve parity between the two schemes; and
• both schemes had been closed to new members in 2005 and to future accrual in 2010.

Following regulatory action against a number of individuals in connection with the schemes, an individual had committed to pay £100 million to the two schemes without a split between the schemes being determined.  The whole of this sum was subsequently paid to the Staff Scheme because it was understood to be much less well funded than the Executive Scheme when the payment was made.

In 2023 the trustee of the Staff Scheme purchased a buy-in policy securing Staff Scheme benefits in full.  The trustee of the Executive Scheme completed a buy-in on the same date but was only able to secure 87% of the value of the scheme's liabilities.  Both buy-ins permitted benefits secured to be increased if the schemes received additional funds.

The unexpected reversal of the schemes' respective funding levels was due to a combination of variables, including the market volatility caused by the 2022 mini-budget and the "shape" of the Staff Scheme benefits being priced more favourably than the "shape" of the Executive Scheme benefits.

The terms of the Staff Scheme rules

The rules of the Staff Scheme included a broad amendment power which vested in the trustee alone when the Principal Employer went into liquidation.

The Staff Scheme's trust deed provided that the main object of the scheme was "to provide Scale Benefits for, and in respect of, those persons who are at any time Members".  "Scale Benefits" were defined as meaning the standard benefits under the rules.  The definition expressly excluded any additional benefits which might in future be granted by means of augmentation or amendment.  The trust deed permitted the trustee to augment benefits on winding-up of the scheme if it had a surplus.  

The Staff Scheme's rules had been amended in 2010 to prohibit the trustees from accepting any transfers into the scheme.  Thus, in the absence of an amendment to the Staff Scheme's rules, it would not have been possible for there to be a merger with the Executive Scheme by transferring the Executive Scheme's assets and liabilities into the Staff Scheme.

The court's decision

The court held that the staff scheme trustee would be acting within its powers to amend the scheme rules to allow the merger.  It also gave its approval to the trustee exercising its new power in order to effect the merger.

Key factors in the court's decision were:

• the power of amendment was intended to be both wide and flexible and was expressly preserved for use by the trustee in the course of winding up the scheme, and there was no reason to consider that it was intended to have a more limited scope when exercised solely by the trustee;
• previous case law had made clear that the purpose of the trust was of central importance.  In the case of the Staff Scheme, the object of the Scheme as stated in its trust deed contemplated a changing group of members, with new members being admitted.  The one main object of the Scheme, as set out in its trust deed was the provision of Scale Benefits for members, and the definition of Scale Benefits expressly excluded benefits by way of augmentation;
• the main object of the Staff Scheme of providing Scale Benefits could be achieved notwithstanding the merger;
• in the absence of express prevision to the contrary, there was no overriding principle that a power in a trust had to be exercised in the interests of some or all of the beneficiaries;
• the close relationship between the Staff Scheme and the Executive Scheme, and the shared objective of the trustees to achieve a surplus in both schemes; and
• the fact that there was a surplus in the Staff Scheme and a deficit in the Executive Scheme was an unintended consequence of forces outside the control of the trustees.

Our thoughts

On an initial reading, it may seem surprising that a trustee is acting properly in facilitating a merger which will dilute the funding of its pension scheme and bring no advantage to members.  However, some  key factors in this case were that (a) there was history of the funding of the two schemes effectively being treated as a single exercise in which the aim was to achieve parity in funding; (b) the discrepancy in the funding positions of the two schemes was an accidental consequence of factors which the trustees had not foreseen; and (c) the scheme's main object was limited specifically to providing "Scale Benefits" under the scheme rather than benefits more generally.

A key takeaway for trustees generally is that the court made clear that there is no overriding principle that a trustee must exercise all powers in the interests of some or all of the beneficiaries.  The object of the trust is key.  In this case the main object of the Staff Scheme was expressly to provide Scale Benefits rather than benefits generally.  The judgment underlines that, in the absence of any express provision to that effect in the rules, a trustee is not obliged to use surplus on winding-up to augment the benefits, even if it has a discretion to do so.