Part 3 – Buy ins, buy outs and surplus – lessons from Coca Cola

Background

The Scheme’s liabilities were secured by way of a buy-in policy. The policy was then reinsured back‑to‑back with a captive reinsurer within the employer group under the ‘PenCap II’ structure, with a fronting insurer  interposed between the trustee and the captive reinsurer. The captive reinsurer was required to hold regulatory capital. Market movements meant that, on termination of the buy-in agreement, the payment due under the existing arrangements would have exceeded the cost of a like‑for‑like replacement buy‑in (roughly £232m versus £150 – £160m), thereby increasing an existing surplus of about £46m.

Both the terms of the buy-in policy and the applicable Scheme rules were key.  The trustee could terminate the insurance agreement only in specified circumstances, including the start of winding‑up; it had no unilateral power to wind up the Scheme and no power to grant augmentations while the Scheme continued. Membership profile also informed timing: there were five active members, with several hundred deferred members and pensioners, and the average pensioner age was in the early seventies – so delay risked fewer beneficiaries ultimately sharing any uplift.

The trustee’s proposals

The trustee sought the Court’s approval for a package under which the termination sum payable on the existing buy‑in would be reduced to the cost of an equivalent replacement policy, in return for the principal employer giving notice to terminate the Scheme. On winding‑up, the trustee would then exercise its augmentation power to apply surplus by way of an equal‑percentage uplift for all beneficiaries (indicatively up to 27 per cent).  If successful, these two proposals would result in the termination and winding up of the Scheme. The trustee regarded these proposals as ‘momentous’ and therefore wished to obtain Court approval.

Procedure and representation

The trustee’s application was prepared as a ‘Type 2’ application, following Public Trustee v Cooper.  The Court made a representation order under the Civil Procedure Rules appointing a representative beneficiary to speak for any potentially disadvantaged members. The Court was assisted by evidence explaining the trustee’s reasoning and by independent input indicating that there were no credible grounds to oppose the application.

Court approval and reasoning

The Court was asked to approve two linked decisions. First, the termination sum under the existing buy‑in would be adjusted so that it matched the cost of purchasing a like‑for‑like replacement policy; in return, the principal employer would give notice to terminate the Scheme. Secondly, once winding‑up commenced, the trustee would use its augmentation power to allocate surplus as an equal‑percentage increase across the membership (up to around 27 per cent).

The Scheme had 286 pensioners, 494 deferred members and 5 active members. Most liabilities were already insured and, as mentioned above, reinsured with a captive within the corporate group. The trustee could not on its own trigger winding‑up or grant augmentations whilst the Scheme remained on‑going, and therefore required the employer’s co‑operation for the proposal to proceed.

Applying the Public Trustee v Cooper Type 2 test, the judge was satisfied that the decisions were within the trustee’s powers, that the board had taken a rational, properly informed approach, and that relevant matters had been considered with conflicts appropriately managed. A representation order was made so that a beneficiary could speak for those who might be disadvantaged; after taking advice, the application was not opposed. In substance, the Court considered that the trustee’s proposal traded the possibility of a larger surplus arising later—likely to be shared among fewer surviving members—for improvements deliverable now to a wider cohort, and it approved the decisions.

In short, the Court confirmed that the proposed exercises of power were lawful and within the trustee’s power, that the trustee’s decision‑making was rational and properly informed, that relevant and irrelevant factors were correctly distinguished, and that conflicts were identified and managed; on that basis, approval was granted.  Particular attention was given to the five active members, whose accrual would cease on termination. The trustee’s heads of terms allowed for additional, targeted increases for this group, with statutory consultation to inform the final outcome. The Court regarded this approach as a proper way to balance fairness and flexibility at this stage.

WB Comment

The factual matrix was unusual – especially the captive reinsurance structure and the interaction with termination payments – and the judgment should not be read as a mandate to unwind historic buy‑ins. That said, it is a useful reminder that the Court will support trustees who present a clear proposal that protects the interests of members and beneficiaries, backed by evidence that a careful and considered process has been followed with proper consideration of trustee powers and conflicts of interest which are properly managed.

The interval between buy-in and buy-out can be lengthy and financial conditions may meanwhile change significantly. The case illustrates that in suitable cases the recasting of buy-in contracts may be feasible.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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