THE NAME Element Six may not be as recognisable as Waterford Crystal or Aer Lingus, but the court ruling over its defined benefit pension scheme contains lessons that other pension scheme trustees and employers must learn from.
A subsidiary of the De Beers diamond group, Element Six’s parent company announced in 2009 the closure of its Shannon plant. However, after a restructuring process which resulted in the loss of approximately 300 jobs, the plant stayed open. The parent company subsequently released a statement committing itself to the long-term future of its operation at Shannon.
Element Six’s pension scheme also faced difficulties and in 2008 it had a funding deficit of €100 million. Following negotiations, it was agreed that the employer would make an annual contribution of €10 million for 12 years to address the shortfall. In the event, the funding proposal went off track and in 2010, the employer advised that funding the pension scheme was not sustainable because the company was in a difficult financial position.
In October 2011, the parent company formally notified the scheme trustees that it would cease the contributions and would offer a contribution of €35.4 million. During subsequent negotiations, the company told the trustees that if they demanded the full deficit, the company would be forced into liquidation with the loss of approximately 350 jobs.
In November 2011 the trustees decided to accept a final contribution of €37.1 million. The trustee board comprised three company trustees and three employee trustees and were split 50/50 in their decision. The chairman of the board, a company trustee and a director of the company, had the casting vote and voted in favour of accepting the offer.
Following this decision, the beneficiaries of the scheme took a case against the trustees, claiming that by accepting the €37.1 million offer, they breached the terms of the trust and by implication failed in their fiduciary duties by not demanding the full deficit of €129.2 million in October 2011.
The beneficiaries also claimed that some of the trustees were conflicted in their duties to the company and the scheme.
In his ruling Justice Peter Charleton said that it was not for the Court to decide what ought to have happened, but rather at whether what did happen was correct. The judge said that it was important to determine whether the trustees’ failure to demand the full contribution could be construed as a default and therefore a breach of trust, as the beneficiaries had claimed.
The judge noted that the trustees had taken legal and actuarial advice when the parent company had threatened closure and they also had received advice about what the scheme’s rights were if liquidation of the company occurred.
The judgment from the Element Six case means that there are a number of lessons to be learnt for both employers and pension scheme trustees.
Firstly, it appears that trustees must now take into account the wider implications of demanding the full deficit (ie danger of the company winding up) .
From a trustee’s perspective, accepting a lower contribution offer may be the ‘best worst’ option, but based on Judge Charleton’s ruling, it is also necessary for all pension scheme trustees to ensure that they receive adequate legal and financial advice and that they are fully informed of what rights and entitlements the scheme and its beneficiaries have in the event of a wind-up.
The Element Six ruling is a stark reminder for pension scheme trustees to ensure that they are meeting their fiduciary duty of care. It is worth noting that one of the case’s main considerations was whether or not the trustees engaged in wilful default by not serving a contribution demand on Element Six’s parent company.
In the context of the Element Six case, potential conflicts of interest were also raised. This, it was claimed, was because the board of trustees was divided equally between company nominees and worker nominees.
In the event, the casting vote for the trustees to accept a lower contribution offer came from the trustee chairman, who was also a company director.
It is understandable that the beneficiaries raised questions about whose interests the trustees represented and whether there were any conflicts that impacted on the decision-making process.
However, in his ruling, the judge noted that the trust deed contained an exemption clause which protected the trustees where conflicts existed. He confirmed that the exemption clause allowed trustees to hold conflicting positions and, provided the trustees were not overwhelmed by those conflicts, they could continue to act without seeking court approval. A properly drafted exemption clause is essential.
For other pension scheme trustees, this may well be the most valuable lesson to be learned.
Samantha McConnell, Chief Investment Officer, IFG Corporate Pensions
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