High Court resolves Merchant Navy ill-health pensions conundrum

The trustee identified issues in 2018 arising from changes made to ill-health early retirement benefits in 1991, when several thousand members — of a scheme total of more than 25,000 — saw payments reduced and suspended; and in October 1993, from when no further IHER pensions were provided to members leaving service.

The trustee of the £1bn scheme referred the case to the High Court after discovering that these changes may not have been in accord with the scheme’s historic deed and rules. Advised by Linklaters, the trustee remained neutral in the case, and asked the court to clarify a number of points to do with the legality of the changes introduced in the 1990s.

Among other questions, it sought the court’s opinion on whether it had been right to reduce ill-health payments after 1991, based on a member’s age and on how serious the disability arising from their ill-health. 

The trustee welcomes the certainty that this settlement brings for members and employers and that it avoids the need for further time and cost for the case to go to a full trial

John Oldland, MNRPF trustee

It also sought clarity on whether it had been right to review IHER pensions that came into force in November 1989 with a view to reducing or suspending them, whether it was allowed to stop IHER payments for members retiring after October 1993, and on whether, were members to apply for additional IHER benefits, any time limits applied to their claims. 

Further questions arose regarding members in receipt of IHER benefits between 1986 and 1988, where the scheme added the projected amount by which a deferred pension would have been revalued during the period to normal pension age, and whether the trustee was required to treat pre-1978 credits as part of the pension, tested at retirement age, to ensure it was not less than the statutory guaranteed minimum.

Settlement proposed

In forming its prospective settlement, the trustee identified three categories of members affected by the changes. The first covered members whose benefits were reduced or suspended following a review from March 1991 onwards, the second covered those whose payments were reduced with reference to the degree of their ill-health, and the third covered members who had been in service long enough to have qualified for IHER payments had they not been stopped in October 1993.

The trustee then set out the method by which it would calculate compensation payments for qualifying members. According to a letter sent to scheme members, for “past lost benefits” a lump sum for arrears would be paid with an interest rate 1 per cent above the Bank of England’s base rate, while for members (or their spouses) currently receiving payments, those payments would be increased.

The settlement proposed different percentages depending on to which category an individual member belonged, reflecting in part the different legal strengths of their various claims.

Those in the first category could see a percentage increase of between 13.5 and 74 per cent, those in the second category between 37 and 91 per cent, and those in the third category between 35 and 50 per cent.

In its letter, the trustee explained that it already possessed most, if not all, of the records necessary to make recompense to the first two categories of members, but the situation for members in the third category posed difficulties.

“The trustee does not know at this stage which members fall into category C, as it does not know which members left service because they were permanently unfit for sea service,” the letter said.

To address this, Mercer, the administrator of the scheme, will write to “all relevant persons” for whom they have addressed to explain the claims process. Any claim will have to be reviewed to establish whether the member left employment due to being permanently unfit for sea service.

The question of pre-1978 credits was more complex, and potentially involved overpayments to members, since they were paid on top of a member’s guaranteed minimum pension. In these cases, the settlement proposed writing off the overpayment, thereby ensuring members would not see payments reduced in future.

In all respects, the trustee cautioned that the administration of the settlement is a complicated matter and constitutes “a major administrative project”. The letter explained that it is not, therefore, in a position "to give dates for payment under the settlement to those in the various categories”.

“Please be assured that the trustee will give the implementation of the settlement high priority and implement it without delay,” it said to members.

The trustee added, however, that any increased payments as a result of the settlement were not likely to incur the tax penalties normally applied to unauthorised payments.

Court gives the green light

The High Court was originally due to rule on the case in October last year, but the process was delayed when further issues were identified stemming from “mis-alignments” between benefits in payment and the scheme’s deed and rules.

Finally, on February 24, the court ruled in favour of an amended version of the settlement, under which the original plans for compensation were retained, with the trustee able to adjust the position subsequently to account for any new issues once they are resolved.

John Oldland, independent chair of the trustee of the Merchant Navy Ratings Pension Fund, said: “The trustee welcomes the certainty that this settlement brings for members and employers and that it avoids the need for further time and cost for the case to go to a full trial.

“The trustee has done all it can to facilitate the long settlement process to reach the point where the settlement can now be implemented. The trustee, in conjunction with its advisers, will now be working very hard to ensure payments under the settlement are paid to affected members in the shortest possible timeframe.”