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National Grid case - Lords ruling
For further information, please contact Danny Wilding at the London office.
The House of Lords has reversed the decision by the Court of Appeal in the National Grid case, ruling that National Power and National Grid will not have to pay back to Electricity Supply Pension Scheme the surplus (of around £1bn) they utilised from the scheme over the period between 1992 and 1995. Although the wider implications will take time to emerge, we broadly welcome the decision.
For companies which sponsor balance-of-cost final salary pension schemes, the judgement seems to represent a sensible and pragmatic approach to the problem of surplus ownership, which recognises the rights of a company which funds for future pension promises in a prudent manner. While scheme members feel understandably protective toward the pension scheme's assets, it is usually right, in our view, that the sponsoring company should have some access to surplus assets, given that the company ultimately foots the bill in a balance of cost pension scheme (by which we mean a scheme where the employee contributions are fixed, but the employer contributions are determined so as to be expected to be sufficient to provide the benefits promised).
The Court of Appeal's earlier decision threatened to penalise companies for being prudent in their funding by effectively earmarking surplus for the benefit of scheme members. A consequence of the earlier judgement might have been for companies to fund their pension schemes only on a minimalist basis.
The Lords ruling does not preclude the possibility of surplus being used for the benefit of scheme members, if the employer and trustees are in agreement.
As far as the potential implications for other pension schemes are concerned, we should remember that ownership of surplus will also be governed by the rules and circumstances applicable to each scheme. In particular the rules should determine the respective bargaining powers of the sponsor and the trustees in allocating surplus. This judgement of itself will not override scheme rules - although it may perhaps be a step towards an industry-wide review of the subject of surplus ownership (as suggested in the Myners Report).
The rules of many schemes are more protective about surplus assets than others - and benefit improvements are sometimes prioritised ahead of any employer use of surplus. Pension funds protected by these "share of fund" characteristics (rather than just the balance of cost principle) will continue to be difficult for employers to access.
In our view, this judgement goes some way towards clarifying the normal balance between the interests of pension scheme sponsors and members. Hopefully it will help to reassure companies who otherwise might have considered reducing their contributions to defined benefit schemes.
Danny Wilding, April 2001.