30 August 2024

Pension Fund: Fletcher Building Nominees v. Fletcher Building

 

Fletcher Building’s pension plan has been far more successful than its commercial operations, leading to a High Court dispute over who benefits from a $146 million surplus in a pension scheme currently being wound down: Fletcher’s pensioners or Fletcher itself?  An answer which will pique the interest of any potential investor considering a hostile takeover.

The High Court left this question unanswered, though it did indicate that the general assumption is that any surplus in a company’s pension fund belongs to the company; any surplus is evidence of overfunding in the past.     

Justice Blanchard approved changes to Fletcher’s pension scheme allowing part distribution of this surplus as an increase in pension payouts for some former Fletcher employees, while the fund trustee has a residual discretion to decide each year whether this increase will in fact be paid.

Fund trustee, Fletcher Building Nominees Ltd, is nominally independent of its listed sponsor Fletcher Building Ltd.

Employee pension funds are kept ring-fenced, separate from commercial operations of its sponsoring employer.  This minimises any temptation for an unscrupulous employer to tap into pension funds when business operations run short of cash.

Fletcher’s pension scheme was established in 1982.  No new members have been admitted for years; in practice, it is closed to new members.

The High Court was told there were nearly 490 members remaining in the scheme as at March 2024: some 420 ‘defined benefit’ members, about 70 ‘defined contribution’ members.

Fletcher’s defined contribution members, like members of Kiwisaver schemes, get back only what money they put in plus investment gains earned on those contributions.

Fletcher’s defined benefit members get pension payments based on their final salary plus a prescribed annual increase of 1.75 per cent.  Average age of the pension fund’s defined benefit members is 84 years, the court was told.  

The High Court was asked to give Financial Markets Conduct Act approval to Fletcher’s proposed amendments to its pension trust deed.

These changes affect defined benefit members only.

Fletcher was offering what amounts to an 8.33 per cent annual increase for each year the defined benefit member remains alive, while retaining the right to decide each year whether to pay this increase.

Defined benefit members objected.

This was a niggardly increase, they said, amounting to a current extra cash cost for the pension fund of some one million dollars per year at time when the fund holds a healthy actuarial surplus.  This cost will reduce quickly as current defined benefit members die.

In addition, there were concerns that the independent trustee might decide in future not to pay this discretionary increase.

Directors of the independent trustee are appointed by Fletcher Building.  Any rumoured takeover of Fletcher Building might see new directors subsequently appointed, members said.

Justice Blanchard said the Act only allowed him to approve or disallow proposed pension scheme changes as a package.  He could not approve some parts of Fletcher’s proposal and disallow others.

The current proposal was the result of negotiations spread over nearly a decade, the court was told.

Disallowing these changes in their entirety might result in further negotiations, Justice Blanchard said.  But this will take time.  Many of the elderly defined benefit members will have died in the interim.

Or Fletcher may refuse to start negotiations afresh, he said.  This would leave all defined benefit members with no share of the current surplus.

Justice Blanchard approved the proposed scheme changes.

Fletcher Building Nominees Ltd v. Fletcher Building Ltd – High Court (30.08.24)

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