Meaning of employer contribution rule - taking into account discretionary increases 2

Reference: M00101

The trustees complained that the employer had wrongly failed to agree that members of the scheme were entitled to guaranteed pension increases under the scheme and to discuss the funding position of the scheme in good faith before determining it. The contribution rule of the scheme stated:

“Each employer must contribute to the Plan in respect of Members who are or have been employed by it at such rate as shall be agreed between the Trustees and the Principal Employer in accordance with actuarial advice obtained by the Trustees.”

When the employer announced its intention of dissolving the group in early 2001, the trustees instructed an actuary to review the funding position of the scheme as at 30 September 2001. The trustees found a shortfall of £9m on a buy-out basis and accordingly demanded that the employer pay £3m per month in view of the shortened life expectancy of the scheme. This amount included provision for the pension increases which the trustees claimed to be guaranteed. The employer replied that it could see no basis for making contributions as the pension increases had been discretionary. The trustees argued that, even if the principal employer was not obliged to provide funding to that extent, it was obliged to fund a shortfall of £2.7 million excluding the cost of the increases.

The Ombudsman concluded that the contribution rule meant that any agreement between the employer and the trustees could not be inconsistent with the actuarial advice obtained by the trustees. He found that it was not enough for the two parties to have regard to actuarial advice and decide to do something different.

In addition, although he found that the increases were not guaranteed, he did not agree that the increases could simply be ignored because they were discretionary. He stated that good administration dictated that the employer discuss with the trustees their proposal in accordance with actuarial advice.

The employer was directed to engage in a dialogue with the Trustees about the scheme’s underfunding.