Actuarial Liabilities, Multi-Employer Pension Schemes and the Keyser Soze effect

Neil Copeland

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What possible connection can Kevin Spacey fans have with various employers and former members associated with the Pilots National Pension Fund (“the PNPF”) – the industry-wide pension scheme for UK marine pilots?

If you haven’t seen Spacey’s performance in the Usual Suspects, and want to avoid a plot spoiler, look away now.

The connection is that slightly queasy feeling cinema goers got when, in the final scenes of the Usual Suspects, they realised that Verbal Kint, Spacey’s mild mannered con man with a pronounced limp, is actually Keyser Soze, a seemingly omnipotent psychopathic criminal mastermind who had been a foreboding presence throughout the film. Without a limp. Indeed up to that point they were probably unsure as to whether Keyser Soze was even real, or just a mythic bogey man figure used to keep recalcitrant criminals in line. One reality was overturned and a new much less pleasant one substituted in its place.

There are likely to be a few employers and former members associated with the PNPF who are starting to get a similar feeling in their stomachs.

The case is extremely complex. The scheme was established in 1971 and, according to the FT Article on the case, has a £285m actuarial deficit, a shortfall which, not surprisingly, the trustees are trying to make good. Nothing unusual about a scheme with an actuarial deficit but it’s who is ultimately responsible for this deficit that throws up some unique issues in this case. HM Revenue & Customs provided a concession to pilots, who were generally self-employed, to participate in this occupational scheme and it is these members who account for a significant proportion of the scheme liabilities.

Eversheds head of pensions litigation, Giles Orton, who is involved with the case said “The court is having to grapple with complex questions on the application of scheme specific funding and employer debt legislation and the scheme’s power of amendment.” Having provided advice to a number of bodies who participate in PNPF and read the scheme documents, there do not appear to be any specific provisions in the PNPF rules to deal with deficits, or indeed surpluses, and while the trustee has some power to adjust contributions the power is relatively limited. The trustee does have the power to amend the rules although only, it appears, to a limited extent.

The big questions the High Court will have to deal with is whether the trustees have the power to amend the scheme to increase contributions and which “employers” (including those members who were self employed) are liable for these increased contributions. Could the employers who still participate with employed staff in the Scheme be liable to fund the deficiency as a whole even though they only account for a relatively small proportion of the liabilities? Would this be fair? Would it be fair that a current generation be required to pay for a previous generations benefits – anyone see any parallels with state pensions here? Could the trustee pursue the individual members who were self employed and if so on what financial basis?

Undoubtedly this case has a number of very specific issues related to the rules of the PNPF, but it does raise a number of more general points. Final salary scheme costs are wholly unknown and we do not know what circumstances will arise in the future. Is it fair that promises are made by people who ultimately may not be those required to make good on them? Multi-employer last man standing arrangements expose employers to an additional significant risk. Participating employers in these schemes need to be fully aware of the terms under which they participate and take appropriate professional advice. There are a large number of industry wide and other multi-employer schemes out there who will have similar issues to those of the trustees of the PNPF, in terms of fairness of cost across past and present employers and members.

If,  as the lawyer representing the trustee suggests, any of the decisions of the court could have wider application, there is the real possibility that there will  be a number of former employers associated with such schemes going about their business unaware that an actuarial Keyser Soze has them in his sights.

 This case is one to watch.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.