Opra has published new guidelines on compromise agreements relating to underfunded defined benefit pension schemes (see Footnote for background).

The new guidance, 'Compromising an employer's debt - actions that Opra expects trustees to take' (Update 7) arises from concerns that some trustees have not been sufficiently rigorous in their fiduciary duty to ensure they act in the best interest of scheme members when negotiating with the employer. Opra believes poor compromise arrangements may sometimes have been achieved, resulting in unnecessarily large reductions in scheme members' benefits. Trustees need to make sure they take appropriate independent professional advice when considering a compromise deal - and be able to demonstrate this to Opra, which is taking a close interest.

Opra expects trustees to:

• avoid conflicts of interest

• consider all the options open to them

• obtain appropriate advice

• be assertive in negotiations

• consider obtaining additional contributions from other employers in a group

• apply the same diligence to compromises where the scheme is to wind up and where it is to be ongoing

• not assume that members will receive Pension Protection Fund (PPF) protection

• treat compromise agreements where the scheme is to wind up as "amber reporting scenarios" (described in Opra note 6 "Pensions Act 1995: the power to report to Opra", also released this month). Trustees (and professional advisers) should consider making a report to Opra where the scheme is about to wind up and the reporter believes that there has been or is likely to be an inappropriate compromise agreement.

Update 7 goes on to describe the action Opra may take to help protect members' interests. This will vary according to circumstances, from simply asking for additional information, to monitoring the actions of the trustees and their advisers. Where Opra considers the current trustees do not have the knowledge, ability or willingness to act in a proper manner, it may appoint an independent trustee to deal with the compromise agreement (or to examine alternatives).

Footnote

A Bradstock agreement (named after the case of Bradstock Group Pension Scheme Trustees Ltd v ~Bradstock Group plc and others [2002] EWHC 651 amounts to a compromise between a sponsoring employer and the trustees of an underfunded defined benefit scheme. Sections 59 (2) and 75 of the Pensions Act 1995 provide for a statutory debt on the employer where such a scheme winds up.

In the Bradstock case, the scheme had an MFR deficit of over £14m (= 74% funded) and there was no hope of the employer making payments to bring it up to 90% of MFR. Had the trustees insisted on enforcing the debt, the employer would have gone into receivership and the scheme would have received significantly less money (and the employees would probably have lost their jobs). Charles Aldous QC, sitting as a deputy High Court judge, held that there was no reason why trustees should not be able to compromise (ie reduce) the debt in this case.