The Pensions Regulator has stepped in to undo changes to a scheme’s rules that would have left members in danger of missing out on PPF compensation
In 2010, trustees of the DCT Civil Engineering Staff Pension Fund changed the scheme’s rules following a legal review.
The updated rules mistakenly changed accrued benefits from defined contribution to defined benefit, although all parties continued to treat the fund as a DB scheme.
The error came to light after the scheme’s sponsor went bust in 2014. The 11-member scheme was in deficit and entered Pension Protection Fund assessment, although the 2010 error meant it was uncertain whether members were covered.
Independent Trustee Services was appointed to act as sole trustee and applied to TPR to overturn the rule change.
The trustee argued that the change was a breach of section 67 of the 1995 Pensions Act which prevents schemes making changes that reduce the value of accrued rights.
The modification had a serious impact on reducing members’ accrued benefits
After investigating the case the watchdog confirmed the rule change was a “voidable modification” and its Determinations Panel declared the relevant deed void.
Following the decision in May this year, the £1.1m scheme completed PPF assessment and entered the lifeboat fund, which had approved the decision to undo the scheme’s rule changes.
What does it mean for trustees?
TPR executive director for frontline regulation Nicola Parish (pictured) said this case showed that the regulator would use its powers to protect schemes, regardless of the number of members.
“The modification of the scheme rules had a serious impact on reducing members’ accrued benefits, and so we considered it appropriate to act to protect them,” she said.
By using our power, we’ve enabled members to benefit from PPF protection
“By using our power to declare changes to the scheme rules void, we’ve enabled members to benefit from PPF protection, which will be higher than they would have received if the amended DC scheme rules had been allowed to stand.”
This is the first time the regulator has publically used its powers in this way, and trustees now have an alternative to lengthy and expensive court cases to rectify past mistakes.
If it looks like you’ve breached section 67 inadvertently, then this is a cost effective option
Arc Pensions Law senior associate Anna Copestake said: “If something comes out of the woodwork and it looks like you’ve breached section 67 inadvertently, then this is a more cost effective and time effective option for trustees than plodding off to court.”
The PPF has now assumed the assets and liabilities of the DCT scheme and members are now eligible for compensation.
More widely, this case will potentially help trustees that identify drafting errors in their rules when they begin winding a scheme up after a sponsor insolvency or ahead of a buyout.
It is only a route that will be available if there has been a breach of section 67
But Copestake said: “It is only a route that will be available if there has been a breach of section 67 – if there has been an amendment that has detrimentally affected accrued rights and they haven’t followed all the processes.”
Schemes that want to rectify mistakes that do not fall foul of section 67 will still have to go through the courts.