Recent pensions case: how much should members pay in a “shared cost” DB scheme? – Railways Pension Trustee v Atos [2022] EWHC 3236 (Ch)

Brian Green KC and Edward Sawyer of Wilberforce Chambers recently appeared in Railways Pension Trustee v Atos [2022] EWHC 3236 (Ch), acting for the successful claimant trustee, instructed by Slaughter and May.

Summary:  The case is about a section of the Railways Pension Scheme, an occupational pension scheme established under a statutory instrument, providing benefits on a Defined Benefit “shared cost” basis.  The judgment of the Chancellor of the High Court, Sir Julian Flaux, resolved questions about how the section’s deficit contribution rule operates.  The judgment covers a number of topics of interest to pensions practitioners, including the scope of an actuarial discretion to set deficit contributions, the nature of a power to reduce future benefit accrual, the proper approach to interpretation of a statutory pension scheme, and the effect on scheme funding of a section being unsegregated as between different classes of members.

The facts: The relevant section of the scheme was described in its rules as “shared cost”, under which the normal contribution rule provided for contributions to be paid by the employer and the active members on a 60/40 basis.  The deficit contribution rule provided that if a valuation revealed a shortfall and there were no agreed arrangements between the trustee and the employer to make it good, the shortfall was to be made good by increasing normal contributions “as determined by the Actuary” (up to a cap) and by reducing future service benefits as agreed between the employer and the trustee or, in default of agreement, as “the Actuary shall determine”.  In addition, the section included ex-British Rail employees who enjoyed protection under a statutory instrument made upon rail privatisation, known as the “Protection Order” (incidentally, the same piece of legislation as was considered in the seminal pensions case of South West Trains v Wightman).  The Protection Order included a requirement that the employer should pay contributions “sufficient to make provision” in respect of various specified rights, including accrued and accruing pension rights under the section.

The section was in substantial deficit and the number of active members had fallen to a few dozen.

The arguments: The employer argued that the deficit contributions to be “determined by the Actuary” had to be calculated on the mechanical 60/40 basis (up to the cap) and that the future service benefit reduction, as “the Actuary shall determine”, had to reduce the remaining deficit as much as mathematically possible, which would mean reducing future benefit accrual to zero.  In other words, the small number of active members would have to pay increased contributions for no benefit accrual.  The Chancellor observed that this would in all probability lead to the active members opting-out of active membership, meaning that there would be no actual reduction in the shortfall at all.

The trustee argued that the actuary had a discretion as to by how much to increase contributions and reduce future service benefits, to be exercised having regard to matters such as affordability and collectability of contributions.  This would mean the actuary was not obliged to set contribution increases or benefit reductions in a way likely to cause members to opt-out.  The trustee argued that the Protection Order required the employer to meet any remaining funding shortfall.

The Judge’s conclusions:  The Chancellor accepted the trustee’s arguments, holding that the actuary had a discretion as to the level of contribution increases and benefit reductions, and that the employer was obliged to meet the balance of cost of funding the section under the Protection Order.

Points to note:  Among the points of interest to pensions practitioners are the Chancellor’s analysis of the nature of an actuarial discretion to set deficit contributions or adjust future service benefits, including notably that affordability to employees is a relevant consideration.  The Chancellor said the same conclusion applied to the trustee’s fiduciary powers in respect of contribution increases and benefit reductions.  On the question of pension scheme interpretation, the Chancellor considered that the textual approach in Barnardo’s v Buckinghamshire should be adopted, notwithstanding that the scheme had actually been established by legislation rather than by the usual trust deed between private parties; he also considered that essentially the same approach should be applied to interpretation of the Protection Order.  Thus extraneous materials such as consultation papers and the like did not assist in the task of interpretation.  The Chancellor also accepted that, because the section was not segregated as between the ex-British Rail employees with protected status and the unprotected members, the funding protection arising under the Protection Order extended to all members of the section – since otherwise the funding of protected members’ benefits would be diluted by a proportion of the funding being shared with unprotected members’ benefits.

There is now a pending application by the employer to the Court of Appeal for permission to appeal (see Case Tracker for Civil Appeals).