Legal Pitfalls in Pension Scheme Wind-Ups: O’Rourke Case
11 October 2023
The High Court decision in the O’Rourke v Meadowvale Pension Scheme case serves as a cautionary tale, highlighting the risks and liabilities that trustees and employers face if the legal procedures for winding up a pension scheme are not correctly followed.
This article explains the need to follow proper legal formalities when winding up an occupational pension scheme and the key learnings for scheme trustees and employers.
The recent judgement of the High Court in O’Rourke v Meadowvale Pension Scheme ( IEHC 148) on 23 March last determined that a deed purporting to wind-up a small, self-administered pension scheme in 2011 was not legally effective. The trustees of the scheme had failed to properly transfer certain assets out prior to attempting to complete the wind-up, so the trust, and the corresponding obligations and duties of the scheme trustees, remained in existence.
The primary assets of the scheme were shares in a private company registered in South Africa (the “SA Company”). The trustees sought to transfer those shares to a PRSA prior to the purported wind-up being completed. However, all parties involved accepted the invalidity of the transfer of part of the shareholding in the SA Company, owing to non-compliance with the provisions of a relevant shareholders’ agreement. An application was therefore made to the High Court by the scheme trustees, with the SA Company joined as a notice party, to determine whether the relevant shares remained vested with them.
The Court found that the trustees continued to hold the shares on trust, subject to the terms of the scheme:
“There was no divestiture of shares by the trustees … The shares therefore remained in the hands of the trustees despite the deed of wind-up. The share remained subject to a trust. Rather than this being a resulting trust, I believe the better view is that it is the same trust on which shares had always been held as the trustees never validly parted with them.”
The Court then went on to conclude that as the deed of wind-up was predicated on a scheme having no assets or liabilities, the deed itself was legally ineffective:
“The effect of the deed of wind up was therefore not to terminate the Scheme. The deed was fundamentally flawed being incorrectly based on the premise that all trust assets had been distributed and it failed to provide for any means of the trustees divesting themselves of assets which continued to be held by them (albeit inadvertently).”
In addition, it should be noted that as only part of the scheme assets had been validly transferred out, this contravened the Revenue Commissioners prohibition on split transfers and consequently, Revenue continued to treat it as a live scheme. Judge Roberts stated that while Revenue’s conclusion was not determinative of the legal position, it nevertheless reflected “a reality which sits comfortably with the determination of this court”.
To cope with the increased governance and administrative costs associated with ensuring compliance with the European Union (Occupational Pension Schemes) Regulations 2021 (the “Regulations”), many employers are currently in the midst of winding up group pension schemes and transitioning their assets to master trust arrangements. The Pensions Authority has issued guidance exempting such schemes from having to meet the regulatory burden imposed by the Regulations, but only where the wind-up is fully completed by 31 December 2023.
The O’Rourke decision is a stark judicial reminder that regardless of any regulatory pressure to complete the wind-up process before the 31 December deadline, the necessary legal formalities associated with the winding up of an occupational pension scheme must still be followed.
O’Rourke emphasises how vital it is that no assets legally remain in a scheme at the point at which its trustees legally declare it as fully wound up. Notwithstanding the express intention to the contrary of any legal documentation executed by trustees, if the transfer(s) out of assets are legally invalid, the scheme’s trust will endure, as will the risk of liability for trustees and/or indemnifying employers.
First of all, this case showed that legal formalities matter, as failure to follow proper procedure can result in the scheme's trust and obligations persisting. Secondly, the proper transfer of assets out of a scheme is crucial to the correct winding up of the scheme. Finally, even amid regulatory pressure to complete pension scheme wind-ups, compliance with legal requirements is essential.
This article was written by Robert Vard, Solicitor at Unio. If you have any questions on any of the information provided in this article, speak to your Unio Employee Benefits Client Manager or contact us at email@example.com.