A High Court ruling has approved the merger of collapsed retailer Arcadia’s two pension schemes, citing a “moral obligation” to put them on an equal footing.
The ruling means defined benefit (DB) pension scheme trustees may have more to consider than simply the best interests of their scheme membership, according to law firms.
On 3 February, former High Court Chief Master Matthew Marsh approved a plan to merge Arcadia’s two DB schemes, the Staff Scheme and Executive Scheme.
The two schemes have exited Pension Protection Fund assessment and are in the process of winding up after securing an £850m buy-in with Legal & General in 2023. The Staff Scheme is in surplus, while the Executive Scheme is in deficit. Both schemes have been run on the principle of being funded on a common basis.
Legal approval was sought as the plan required an amendment to the Staff Scheme’s rules to allow for a bulk transfer of Executive Scheme beneficiaries, assets and liabilities into the Staff Scheme. The planned amendments reverse a 2010 modification that blocked the transfer of assets into the Staff Scheme from any other scheme.
“This is a significant decision that will enable us to continue our work to deliver our longstanding objective of treating the Schemes equitably and fairly,” read a message from the trustee board on the Arcadia Pension Schemes’ website.
Merger decision within scheme rules
While the sharing of the Staff Scheme’s surplus with the Executive Scheme might have raised some eyebrows among the former scheme’s membership, the High Court found that the merger did not deprive the Staff Scheme’s members of their entitled benefits.
“Of key importance was that, although the trust deed included a discretion to use scheme surplus to increase benefits, it did not give members a right to any augmentation,” a briefing note by law firm A&O Shearman said.
“The main object of the scheme, set out in the trust deed, was to provide members with the benefits to which they are entitled.”
The High Court decided that amending the scheme rules for allowing the merger sat within the scope of the amendment power. It also held that the amendment did not undermine the main purpose of the scheme, and the merger decision had been properly reached by the trustees.
A ‘moral obligation’
The ruling also acknowledged a moral case for the merger.
“There is no obligation on the part of the claimant [the trustee board] to amend the scheme to enable a merger to take place but there is a strong moral obligation,” Marsh said when handing down the ruling.
“The funding arrangements for the two schemes have been managed with a view to achieving equality between them and it is only as a consequence of unforeseen circumstances that it has not been achieved.”
The decision raises questions over trustees’ fiduciary obligations, and whether they are simply to uphold the best interests of their members.
“The merger was, if anything, contrary to the interests of the Staff Scheme’s existing members,” law firm Herbert Smith Freehills observed in a briefing note. “But, with an eye to the scheme’s purpose and surrounding circumstances, the court concluded that the trustee could properly proceed.”
The law firm said the case demonstrated that “the role of trustees is not simply to act in the best interests of members”.
It stated: “Purpose is key. Trustees must understand why their powers have been conferred, and must use those powers to further the objects of the scheme.”
