Actuary’s discretion under scheme rules to determine contribution rate when scheme had a funding shortfall

In a directions hearing, the High Court has handed down judgment relating to the actuary’s role in determining the contribution rate where there was a funding shortfall in the Railways Pension Scheme. The Scheme is an industry-wide DB occupational pension scheme established on privatisation of the railways and operates on a shared cost basis. It is governed by a scheme rules and statute, with separate rules applying to each of its 106 sections. The defendants were the participating employers for the Atos section. The trustees sought clarification on the operation of the scheme rules.

 

The rules provided that if an actuarial valuation showed a non-trivial shortfall, and the employer and trustee were unable to agree arrangements to make it good, member and employer contributions should be increased, and the actuary should determine the rate and period of increase. The trustee claimed that the actuary had a discretion in relation to contributions. Atos argued that the rules did not give the actuary the wide discretion the trustee claimed. The words “arrangements to make good the shortfall” did not mean the shortfall should be eliminated completely. Atos claimed there was no freestanding duty on the employer to fund any shortfall that was not met by employee contributions.

The Court ruled in favour of the trustee. It held that where there was a funding shortfall and the employer and trustee could not agree on how it should be made good, the actuary had a discretion to determine a contribution rate from active members which could be less than that required to make good the shortfall in full. The legislation relating to the Scheme imposed a balance of cost obligation on the employer.

 

The words "contributions ... shall be increased ... as determined by the Actuary" gave the actuary a discretion whether to increase the contributions at all and, if so, by how much and did not simply require a mechanical mathematical calculation. The words "as determined by the Actuary" involved the exercise of judgment and discretion.

 

Although the facts are scheme-specific, the case is of interest due to the interpretation of the shortfall rule, and the importance of the role of the scheme actuary here. Many scheme rules include wording similar to "as determined by the actuary" and the Court's decision gives a good steer on how this might be interpreted. The decision is an odd decision as the Scheme has always operated on a shared cost basis and the Court has driven a cart and horses through that in a situation where an employer and trustee cannot agree on the contributions. This will be of concern to other employers participating in the Scheme.