What is the Omega Pharma case?
The Omega Pharma case has confirmed that the scheme’s governing documentation and not the Pensions Act minimum funding standard determine the employer’s liability to contribute to defined benefit schemes on wind-up.
On 25 July 2014, Mr Justice Moriarty in the Commercial Court handed down judgment in the case of Holloway & Ors v Damianus BV & Ors  IEHC 383 and found in favour of the trustees of the Omega Pharma defined benefit scheme in their claim for deficit contributions against the scheme’s employers. The trustees succeeded in obtaining judgment in the amount of €2,439,193.56 (inclusive of interest) against the employers. On appeal, the newly established Court of Appeal affirmed the judgment in favour of the trustees (Holloway & ors -v- Damianus BV & ors  IECA 19).
If the Element Six case (Greene & Ors v Coady & Ors  IEHC 38) was the most important pensions law case for trustees in the recent past, the Omega Pharma case was not far behind. The Omega Pharma case is also particularly relevant to employers who operate or participate in defined benefit schemes. However, a number of key issues remain unanswered.
Some questions and answers
1. If a scheme is 100% funded on the Pensions Act minimum funding standard basis can an employer walk away from the scheme and pay no further contributions?
Not necessarily. Employer funding obligations are not determined by reference to the Pensions Act. They are primarily determined by reference to the relevant scheme’s governing documents (usually the trust deed and rules).
2. What is the relevance of the contribution rule?
In the Omega Pharma case, the Court focussed on the words of the rule and the purpose of the rule; that is to pay the moneys “necessary to support and maintain the Fund in order to provide the benefits under the Scheme”. What is noteworthy is that the Court had no difficulty allowing a contribution rule which would initially have been drafted to provide for ongoing employer contributions to be used to ground a once off lump sum deficit demand where the scheme was about to wind up.
3. How are two apparently inconsistent provisions in a trust deed to be interpreted?
This question was the main focus of the judgment of the Court of Appeal. One clause in the trust deed provided that the employer could terminate its contribution liability by serving three months’ notice on the trustees of its intention to do so. Another clause provided that the scheme would commence winding up on the service (rather than the expiry) of that notice. In dismissing the employers’ arguments that contribution liability terminated immediately on serving the notice the Court applied the rule of interpretation generalia specialibus non derogant. This effectively requires a term in a contract which is of a general or standardised nature to yield to more specific terms.
The Court of Appeal found that the term which provided for wind-up to commence on service of the notice had to be read as being subject to the term that provided for a three month notice period, as to do otherwise would make the notice period ineffectual.
Some questions without answers
1. Can trustees validly demand deferred annuity buy-out funding on wind-up?
The case did not focus on the basis of the deficit demand made. Rather, as the demand was made in accordance with the contribution rule and the decision to seek funding at the level it was sought was one which could have been made by a reasonable body of trustees, the Court did not interfere with the trustees’ decision. It seems that a demand could have been valid, irrespective of the basis it was calculated upon, so long as it was within the realm of what a reasonable body of trustees might demand in the circumstances. The question for trustees and employers to consider then becomes whether deferred annuity funding is within the realm of what a reasonable body of trustees might demand. With an undeveloped Irish market in deferred annuities and the fact that deferred annuities may not represent value for money, it remains to be seen whether trustees can insist upon deferred annuity funding on winding up.
2. Can trustees validly make a lump sum deficit demand where the scheme remains ongoing?
While the Omega Pharma case was decided in the context of a scheme imminently about to wind-up, there is nothing in the case to suggest that, in appropriate circumstances, trustees couldn’t make a valid lump sum deficit demand even where wind-up is not contemplated based on a contribution rule such as that in the Omega Pharma case.
3. Can contribution liability be terminated by immediate notice to trustees?
While not explicit in the judgments of the Courts, it does appear that one of the reasons the trustees’ demand was valid was that it was made prior to the expiry of the notice terminating contribution liability. The corollary being that if the demand was made after the expiry of that notice (or if the notice had been immediately effective), the employers may have had no legal liability to pay the contributions demanded.
It remains unclear whether a Court would recognise as effective a notice which purported to take effect immediately thus defeating any deficit demand trustees might make after the notice was given. However, the Commercial Court judgment did include a reference to a UK case – Curtis v. Capital Cranfield Trustees Limited – where (though the comments did not form part of the judgment) one judge said that it would always be necessary to recognise some period of reasonable notice even where the trust deed did not provide for it; otherwise the scheme would become virtually unworkable. There must be at least a fair probability that an Irish Court would, if faced with that question in a subsequent case, imply a reasonable notice period.
4. What is the role of the actuary in scheme funding?
A lot of weight was attached to the fact that the demand made by the trustees was made having taken advice from the scheme actuary. Given that the actuary is perhaps the person best placed to determine how the trustees can best provide members’ benefits and the cost of doing so on a wind-up, the advice of the actuary is key in trustee decision-making on wind-up. The actuary’s advice in the Omega Pharma case was that the best way of providing member benefits was through purchasing annuities for all members. The trustees had regard to this advice but determined, instead, that a transfer value basis (albeit a conservative one) for non-pensioner members was a more appropriate means of securing benefits.
A difficult question persists as to what would the position be if, under the contribution rule, the actuary alone set the contribution rate.
Some key questions remain unanswered. It may be that another case will come before the Courts over the next few years which will provide clarity on some of the remaining issues. However, it might now be a brave employer (or set of members) who would challenge pension scheme trustees after the Element Six and Omega Pharma judgments. What is perhaps more likely is that employers will seek to avoid scheme wind-ups and the risk of large deficit demands.
* This article, co-authored by Chris Comerford and David Francis, was originally published in the IAPF Online Magazine, Spring 2015 Edition.