In the G4S Plc v G4S Trustees Ltd (2018) High Court case, Mr Justice Nugee answers the long-standing question: is a defined benefit scheme which is closed to future benefit accrual but where deferred members have a continuing right to a final salary link a ‘frozen’ scheme or an ‘open’ scheme under the Occupational Pension Scheme (Employer Debt) Regulations 2005 (the “Regulations”)?
Open of frozen: does it matter?
Whether or not a scheme is ‘open’ or a ‘frozen’ under the Regulations is an important distinction. This is because where a multi-employer scheme with a funding deficit is ‘open’ and one participating employer ceases to employ any ‘active members’ at a time when another employer continues to do so, a statutory debt (which may be a large amount), is triggered on the exiting employer. Whereas, if this happens when the scheme is ‘frozen’ (i.e. it has no ‘active members’), no debt is triggered.
The G4S Pension Scheme is a multi-employer scheme with three separate sections, two of which were closed to future benefit accrual in 2011. Under these closed sections, members have a right to a final salary link (as a result of the so-called ‘Courage restriction’ in the Scheme’s amendment power, which prevents any future changes breaking that link).
G4S plc (the principal employer), argued that deferred members with a final salary link were not ‘active members’ in ‘pensionable service’ for the purposes of the Regulations. A representative member (the second defendant), argued the contrary, while the Trustee (the first defendant), took a neutral position in the court proceedings.
Mr Justice Nugee explained whether or not a person is an ‘active member’ in turn depends on whether s/he is in ‘pensionable service’ under the scheme. This question breaks down into two limbs:
(1) whether the member is in “service in a description or category of employment to which the relevant scheme relates”, and
(2) whether that service “qualifies them for pension or other benefits under the scheme”.
Mr Justice Nugee explained it is the second limb which is problematic and went on to consider in detail the correct interpretation of ‘pensionable service’.
The decision hinged on the definition of ‘pensionable service’ and whether it applies to deferred members with a final salary link. Mr Justice Nugee concluded the “… normal core meaning of pensionable service is … service which earns the employee pension”.
He went on to note it is also a well recognised concept amongst pensions practitioners that the final salary link goes to the calculation of the amount of pension, rather than allowing members to earn more pension benefits.
Mr Justice Nugee concluded that deferred members in a scheme with a final salary link are not to be regarded as being in ‘pensionable service’ and are therefore not ‘active members’. This is because service after closure to future accrual does not qualify them for any further pension. In turn the answer to the specific question asked of the court is: yes, the two closed sections of the G4S Pension Scheme are ‘frozen’ for the purposes of the Regulations.
This case brings helpful clarity to the previously grey area of whether a statutory debt on the exiting employer can be triggered where a scheme is ‘frozen’ but deferred members retain a final salary link. Note, however, that even where a scheme is ‘frozen,’ a debt would still be triggered where the scheme winds up or the employer becomes insolvent in circumstances where there is a funding deficit in the scheme.