PETITION OF abrdn (SLSPS) PENSION TRUSTEE COMPANY LTD FOR DIRECTIONS

Factual and Procedural Background

The petitioner is the trustee of a trust-based occupational pension scheme established in 1937 to pay pensions to retired employees of Company A. The scheme, renamed in 2023, has been amended several times, most recently adopting new rules in March 2023. Since 2006, the principal employer responsible for scheme rule amendments, trustee appointments, and contributions has been Company B.

The scheme is closed to new members since 2004 and is hybrid, providing defined benefits and defined contribution benefits. The present case concerns only the defined benefit part, which guarantees members a pension linked to salary and service length, funded almost entirely by participating employers, who are respondents to the petition.

In 2016, the scheme ceased further accrual of defined benefits and introduced a discretionary increase policy allowing the trustee to grant annual increases to pensions up to Consumer Prices Index inflation without employer consent.

The defined benefit part currently has a surplus, meaning assets exceed actuarial liabilities. The petitioner and participating employers seek to "de-risk" the scheme by securing benefits through a two-stage insurance process: a buy-in contract transferring investment and longevity risks to an insurer while the trustee remains liable, followed by a buy-out contract where the insurer assumes direct liability to members, triggering scheme winding up and ending trustee responsibility.

The scheme rules do not address the disposition of any surplus assets after winding up and prohibit amendments permitting payments to participating employers except upon the principal employer’s winding up, which is not intended here. The petitioner considers any surplus would be subject to a resulting trust in favor of the participating employers, reflecting their ongoing funding obligations, but seeks court directions to clarify the proper treatment of surplus assets before proceeding.

The petitioner proposes an arrangement with participating employers to complete the buy-in and buy-out transactions, augment defined benefit members’ pensions using part of the surplus, and convert the discretionary increase policy into a guaranteed CPI-linked increase.

The petition was served on the participating employers, who supported the petitioner’s position. The court remitted the matter to an independent reporter to investigate the facts, the questions posed, and the reasonableness of the trustee’s proposed discretion.

Legal Issues Presented

1. Whether the petitioner is entitled under the current scheme rules and fiduciary duties to enter into the proposed arrangement, including transforming discretionary increases into guaranteed CPI-linked increases and augmenting member benefits as part of the scheme de-risking by buy-out.
2. Whether the remaining surplus assets are subject to a resulting trust arising as a matter of law.
3. If a resulting trust arises:
   1. Does the resulting trust operate in favour of the companies that are participating employers immediately before the date when no members remain in pensionable service under the scheme?
   2. Does the resulting trust arise only after completion of the buy-out transactions, provision for remaining liabilities, and payment of winding up expenses?

Arguments of the Parties

Petitioner’s Arguments

• The petitioner seeks directions confirming its entitlement, not guidance on how to exercise discretion, to enter the arrangement under the scheme rules and fiduciary duties.
• The arrangement benefits members by enhancing pensions and providing guaranteed CPI-linked increases, reducing future risk.
• The petitioner has taken comprehensive legal, actuarial, and professional advice and acted in members’ interests.
• The surplus assets, once scheme purposes are fulfilled, are held on a resulting trust in favour of the participating employers, consistent with Scots law and relevant case law.
• The petitioner is entitled to exercise discretion not to distinguish between members who contributed to the scheme and those who did not, given the disproportionate cost and that members who contributed have received value.

Respondents’ Arguments

• The participating employers support the petitioner’s analysis and agree that each question should be answered affirmatively.

Table of Precedents Cited

Court's Reasoning and Analysis

The court accepted the reporter’s comprehensive factual investigation and legal analysis, noting the petition was effectively undefended but not collusive. The court clarified that the petitioner sought confirmation of its legal entitlement to enter into the arrangement, not direction on discretionary exercise, a distinction supported by precedent.

Regarding the first question, the court found the trustee’s power to administer the fund under the 1937 trust deed and scheme rules included entering the buy-in and buy-out transactions and winding up the scheme. The arrangement enhanced member benefits and reduced risk, aligning with fiduciary duties and trust purposes. The court found no conflict of interest or disadvantage to members outweighing benefits.

On the second question, the court recognized Scots law’s concept of a resulting trust arising when trust purposes are fulfilled and surplus remains. Since the scheme rules do not address surplus distribution, the law applies, creating a resulting trust in favour of the original contributors.

For the third question, the court agreed that only current participating employers immediately before the cessation of pensionable service retain entitlement to the surplus under the resulting trust. Former employers who had ceased participation lose rights, and dissolved companies cannot claim surplus, preventing assets from becoming bona vacantia. The court also held that the resulting trust arises only after completion of the buy-out, provision for liabilities, and winding up expenses.

The court endorsed the petitioner’s discretion not to allocate surplus specifically to members who had contributed, finding it reasonable given the minor proportion of member contributions, their receipt of value, and the disproportionate cost of individual calculations. The court relied on established case law confirming trustees’ discretion to prefer one class of beneficiaries over another if acting properly.

The court found no grounds to interfere with the trustee’s discretion under the limited and stringent standards for judicial intervention, noting the trustee acted reasonably, took expert advice, and negotiated extensively with the employers.

Competency of the petition was affirmed despite the repeal of the relevant statutory provision, as the procedural rules remain in force and the petition met established criteria for court directions.

Holding and Implications

The court’s final decision was to answer all the posed questions in the affirmative, confirming that:

• The petitioner is entitled under the scheme rules and fiduciary duties to enter into the proposed arrangement including benefit augmentation and guaranteed increases.
• The surplus assets are subject to a resulting trust arising by operation of law.
• The resulting trust operates solely in favour of the participating employers immediately before the cessation of pensionable service.
• The resulting trust arises only after completion of the buy-out, provision for liabilities, and winding up expenses.

The petitioner is entitled to recover its expenses from the trust estate.

The decision resolves the legal uncertainty regarding the treatment of surplus assets in the context of pension scheme de-risking and confirms the trustee’s powers and fiduciary duties in such transactions. No new precedent beyond the application of existing trust law and pension scheme principles was established, and the ruling primarily affects the parties by authorizing the proposed arrangement and confirming surplus entitlement.