REPORT TO THE TRUSTEES OF THE INDUSTRIAL BANK OF JAPAN PENSION SCHEME A Introduction The Principal Employer of the IBJ Scheme, Mizuho Corporate Bank Limited, is also the principal employer of the Fuji Bank Scheme. Mizuho Bank Limited wishes to merge the IBJ Scheme with the Fuji Bank Scheme in order to have the IBJ Scheme (to be renamed as the MHCB London Final Salary Scheme) as the ongoing pensions vehicle for Mizuho Corporate Bank Limited. This transfer has been discussed in correspondence for a long time. To be clear, we set out below the basis on which we believe the Trustees of the IBJ Scheme are requested to accept the transfer as reflected in the documents the IBJ Trustees are asked to execute We comment on the documents giving effect to the transfer and we comment on the trustees' duties in relation to this transfer. The IBJ Scheme is governed by a trust deed dated 28 March 1991 as amended. The documentation contains a power under rule 12 to accept a transfer to the Scheme of all or any of the assets of any retirement pension fund or arrangement approved by the Inland Revenue. (d) The Fuji Bank Scheme is currently governed by a definitive deed dated 24 June 1968 as amended from time to time and the third edition of the Rules. We have not had the opportunity of reviewing the current governing documentation for this scheme. As a result of the merger, the governing documentation of both the IBJ Scheme and the Fuji Bank Scheme will be amended and the trustees of the IBJ Scheme will be required to enter into a new third definitive trust deed and rules which will include certain protections for Fuji Bank Scheme members if the transfer takes place. B Merger proposals (d) (f) Mizuho Corporate Bank Limited wishes to harmonise benefits for all group members and staff and wishes to merge all its pension schemes to provide one ongoing pension scheme for employees. It is proposed that the trustees of the Fuji Bank Limited Pension Fund and Life Assurance Scheme (the "Fuji Bank Scheme") transfer the assets and liabilities of the Fuji Bank Scheme to the trustees of the Industrial Bank of Japan Retirement Benefits Scheme (the "IBJ Scheme"). The transfer will be without consent and one clear month's notice of the transfer will be given to the Fuji Bank Scheme members. A GN16 Certificate will also need to be signed by the Fuji Bank Scheme actuary, and we assume for the purposes of this paper that the Fuji Bank Scheme Actuary can give this certificate. Updated formal actuarial advice from the IBJ Scheme Actuary is awaited and should be considered along with this legal advice, as the IBJ Scheme trustees should be happy that the proposal does not significantly reduce the security for existing IBJ Scheme members. We believe this advice will indicate that whilst the Scheme is currently 92% funded on an ongoing pre-merger it will be 91% funded on an ongoing basis post merger. The overall reduction in the funding position is therefore very small and we believe the actuary will not be troubled by this. This slight dilution in funding is not in our view something which should prevent the trustees from agreeing the merger. It is proposed that on the merger being agreed, additional funding of 2.7m, nominally split as to 0.83million to the IBJ Section members and 1.87million to the Fuji Scheme members, intended to represent forward funding of contributions to October 2005.
(g) (h) After the merger, a further scheme actuarial valuation is due in April 2005, and it is agreed under the merger deed that the IBJ Scheme Trustees shall request the Scheme actuary to provide the valuation, assuming any deficit on an ongoing basis existing within the IBJ Scheme as at the merger date be discharged over the period to 30 September 2017. However, this will not limit the trustees' rights to set contributions to meet the minimum funding requirement or any other funding requirement introduced by subsequent legislation. Once the valuation has been obtained, the contribution rate will be set in accordance with the new trust deed and rules. The contribution rule in the new trust deed and rules has been amended and in relation to any valuations prior to October 2017 where the Principal Employer and the Trustees cannot reach agreement in relation to the contribution rate required, then an independent actuary will be appointed to act as an expert and set a reasonable rate, and in giving this advice he also needs to put himself in a position (perhaps as scheme actuarial adviser) that the trustees can rely on his advice. The amended wording of the clause should provide the trustees with some comfort as any actuary appointed will have to err on the side of caution in determining an applicable contribution rate. There are ringfencing proposals contained in the merger deed. They give some additional comfort to the IBJ Trustees on the funding levels. The ringfencing proposals work by running a check every three years, or more frequently at the request of the Principal Employer, on the comparative funding levels of the Fuji Bank Section (assuming the Fuji Bank Scheme assets, adjusted and added to by the appropriate amount of contributions are applied to that section) and the IBJ Section (the remaining assets) both calculated on a buy out basis. Once the two sections are equal, a certificate to this effect is provided by the IBJ Scheme actuary, and the ringfencing falls away. Prior to that, if the Principal Employer triggers a winding up of the Scheme, the balancing amount needed to make the two sections equal (and thus not disadvantage the IBJ Section members) will be a debt owed by the Principal Employer. No changes are to be made to past or future benefits for any members except: (A) (B) IBJ Scheme members who seek to retire early after the age of 60 do not require Principal Employer consent, previously unclear whether this is a Scheme benefit, has been included in the deed and rules; and Pensions in payment for IBJ Scheme members are increased at the lesser of 5% or RPI, not limited to post 1997 benefits. These are both benefit improvements and thus positive factors in favour of the merger. C Definitive Trust Deed (d) As part of the merger, the IBJ Scheme Trustees are asked to sign a new definitive trust deed and rules, incorporating the Fuji Scheme section and the benefit improvements outlined above. The scheme name will be changed to the MHCB London Final Salary Scheme. In summary, the new deed will replace the current trust deed and rules of the IBJ Scheme and will incorporate a new trust deed and divide the rules into five separate schedules. Schedule 1 deals with definitions and interpretations, incorporating the definitions appropriate to both the former IBJ Scheme and the Fuji Bank Scheme. Schedule 2 is the rules for the former Industrial Bank of Japan section. Schedule 3 is the rules for the former Fuji Bank section. Schedule 4 sets out the Inland Revenue limits. Schedule 5 deals with contracted out employment. Some amendments have been made to the Scheme deed and rules. These are:
(ii) (iii) (iv) (v) (vi) (vii) How to set contributions. The existing employer contribution rule under the second definitive trust deed and rules dated 28 March 1991 states that "each individual employer should pay such contributions under the scheme as the principal employer and the trustees, acting on the advice of the actuary, using such appropriate method of valuation as he so decides, shall determine as being required to secure the benefits hereinafter described in respect of the members". There is therefore an existing requirement for the principal employer and the trustees to determine the level of contributions. The changed wording proposed in the draft deed and rules is "each Employer shall make such contributions (if any) to the Scheme as the Principal Employer and the Trustees, guided by the Actuary agree are required to provide the benefits payable under the Rules in respect of the Members which it employs " In practice (on a historic basis) the trustees and principal employer jointly have negotiated/set a contribution level and we would expect that to continue. The revised wording does represent a weakening of the current contribution rule, but not one which is significant, as it would not,, in our view, allow a Principal Employer to unreasonably reject the Actuary's guidance in setting the contribution rate. Transfers in of assets. The transfer-in rule is amended to allow the Principal Employer to direct that the trustees accept a transfer-in, and that the amount of benefits awarded on a transferring-in of assets will be decided by the Principal Employer (after hearing actuarial advice and discussing with the Trustees). However, the Trustees retain an ability to reject any transfers-in if they reasonably believe that it will "prejudice the benefits of" the remaining members. We believe that this would include prejudicing the security of the benefits of existing members. In practice, the existence of this provision will require the trustees to be involved in any transfers-in in the future, and the terms of those transfers-in. Amount payable on a transfer out. The current transfer out power is one which is wholly in the hands of the trustees. The amendments proposed allow the Principal Employer some say in the amounts of any bulk transfer out of the Scheme. However, the Principal Employer cannot force a bulk transfer from the Scheme, the Trustees still retain the ability to decide whether such a transfer happens at all. In practice therefore, although this is a weakening of the power of the trustees, we do not consider it to be a material worsening of the members' security. How to appoint advisers. The power governing appointment of advisers in the latest draft of the third definitive trust deed and rules, though worded differently, is little different from that contained within the current second definitive trust deed and rules. The trustees retain the power to appoint their own advisers though employer agreement is required as to the remuneration level. Scheme Indemnities. The indemnity clause has been amended so that the trustees are indemnified out of the fund to the extent that the trustee are not indemnified out of the fund they will be indemnified by the Principal Employer. The Principal Employer also now has to give consent if individual trustees want to obtain insurance. Contribution schedules and scheme termination. The clause dealing with contribution schedules has been amended to state that the schedule of contributions must show separately contributions payable to the Industrial Bank of Japan and Fuji Bank sections of the Scheme whilst the ringfencing remains in effect. On termination the trustees are under a duty to reserve fund assets held within any individual money purchase accounts to meet the liability of money purchase benefits under the relevant rules. Amendment. The power of amendment continues to be exercisable only with the consent of the trustees and there are specific clauses in there to prevent any amendments which reduce any benefits applicable to
pensionable service under the rules of the Fuji Bank section without the consent in writing of the affected members. (viii) Benefit improvements. The rules of the Industrial Bank of Japan section of the Scheme have been amended to reflect the benefit improvements described in section B paragraph (I). It will be necessary for a Section 67 certificate to be signed for this deed and rules to take effect. David Jarman, as Scheme Actuary, will now need to sign the certificate and this issue is being discussed with him. D Merger Deed (d) (f) (g) (h) The merger deed sets out the terms of the proposed merger. The merger deed provides that from a date to be agreed, the Fuji Bank Scheme Trustees shall transfer to the IBJ Scheme trustees all the assets and liabilities of the transferring scheme subject to the terms and conditions of the merger deed. The IBJ Scheme trustees will receive all the assets and liabilities of the transferring scheme and the deferred and pensioner beneficiaries under the transferring scheme will become deferred and pensioner members and beneficiaries of the IBJ Scheme entitled to benefits under that scheme's new trust deed and rules. Following the merger, the Fuji Bank Scheme will be terminated and wound up. In our view, this definitive deed should be dated on the day of the transfer so it is clear it applies only once the transfer is certain to happen, or at the earliest on the date of the payment in of the 2.7m. As the transfer of beneficiaries from the Fuji Bank Scheme to the IBJ Scheme will be without their consent, a GN16 certificate will be required from the actuary to the transferring scheme. The Principal Employer, the trustees of the Fuji Bank Scheme and the IBJ Scheme are deemed by signing the merger agreement to agree to the terms contained therein. There then follows a number of warranties provided by the trustees of the Fuji Bank Scheme confirming the Scheme is exempt approved, setting out the benefits provided under the Scheme, and confirming that the data being transferred is up to date (to the best of the trustees' knowledge), there are no outstanding claims against the transferring trustees (nor claims which the transferring trustees are currently taking) and that the transferring trustees undertake not to make any benefit improvements prior to the merger date in respect of any of the transferring beneficiaries without the consent of Mizuho Corporate Bank Limited and the IBJ Trustees. The IBJ Scheme trustees are being asked to warrant that the IBJ scheme is exempt approved, benefits which are currently provided under the receiving scheme are as set out in the definitive trust deed which will be appended to the deed of merger, to the best of the actual knowledge or recollection no claims have been made against the IBJ trustees for actions undertaken in the Pensions Ombudsman's Office or with OPRA, nor are they pursuing any claims or actions against third parties, and that they will undertake to make such amendments to the governing documents of the IBJ Scheme as shall be required. There then follows a number of more standard clauses dealing with the transfer and assignment of assets and liabilities, benefits to be provided under the receiving scheme and how additional voluntary contributions would be dealt with. The ringfencing provisions are included in the merger deed please see comments at section B paragraph (H). There then follows a number of standard clauses dealing with the winding up of the Fuji Bank Scheme - receipt of member contributions, linked qualifying service and
continued rights, contracted out employment, member-nominated trustees, death benefit nomination forms. (j) (k) The Principal Employer agrees to pay the fees and costs of both the Transferring Trustees and the Receiving Trustees. Following our previous meeting with the Principal Employer, an indemnity has been included under which the Principal Employer agrees to indemnify the IBJ Scheme Trustees against claims that it was negligence, fraud or other breach of trust to agree to enter into the deed of merger, and including wide indemnities in the event of a claim relating to other aspects of the benefits being transferred in, for example, that the benefits were not equalised, or failure to provide discretionary benefits which were previously provided under the Fuji Scheme. In our view this is a sufficiently wide indemnity, and taken with the indemnity in the IBJ Scheme deed and rules, provides the IBJ Scheme Trustees with reasonable cover if they properly enter into the deed of merger. (l) The Trustees should note however, that there is an indemnity in identical (wide) terms for the benefit of the Fuji Trustees. Under this indemnity, if the Principal Employer fails to indemnity the Fuji Trustees fully, the IBJ Scheme Trustees will indemnify them out of the assets of the IBJ Scheme during the time that the ringfencing is in operation, provided that the indemnity shall be limited to the extent of the ringfenced assets. (m) (n) In previous drafts of the deed of merger, an adverse event clause was included. This has now been deleted in its entirety. Under clause 20, the agreement can be executed in counterpart, so it will not be necessary for all trustees to be together, but clearly the trustees will wish to question ourselves and Gissings on the terms of the transfer. The agreement will bind successors to both the IBJ Scheme and the Fuji Bank Scheme trustees. E Ability to reclaim a debt on the employer The Trustees will recall that we obtained a legal opinion from Japanese lawyers on the enforceability of a debt in Japan. The conclusion of the opinion is that (although it is not absolutely straightforward) a judgement debt obtained in this country should be enforceable in Japan as a debt without a retrial of the substantive merits before a Japanese court. This is important, as one of our concerns is that the debt on the employer legislation whilst known and understood here, may be less clear to a Japanese court if a trial on substantive issue had to take place there. The merger document has been amended to incorporate clear governing law provisions and service provisions, which would allow the ringfencing debt to be claimed here and enforced against the Japanese parent. The full buy out debt on the employer would probably be enforced through the provisions of the deed and rules, but there are also helpful provisions in the governing law clause in the merger deed too designed to assist if enforcement of this debt ever becomes an issue. In practice, this is an issue for the IBJ Scheme trustees whether or not this merger goes ahead. In our view the merger deed slightly improves the IBJ Scheme Trustees' position and does not worsen it. F Trustees' Duties When considering the exercise of the powers under the IBJ Scheme's trust deed and rules and debating whether to comply with the requests of Mizuho Corporate Bank Limited, the trustees need to bear in mind their overriding duties imposed by general trust law which may be summarised for these purposes as follows: To promote the best interests of the beneficiaries (present and future) in their capacity as beneficiaries "best interests" generally means best financial interests;
(ii) (iii) to act exclusively as trustees setting aside their other roles (for example, shareholders, directors, employees or union representatives); to ignore extraneous considerations, for example, self interest as a director, a member or an employee. The trustees should, however, bear in mind that an occupational pension scheme operates in a commercial context. Although Mizuho Corporate Bank Limited should not be regarded as a primary beneficiary, nevertheless the trustees do owe duties to try and accommodate the legitimate commercial decision made by Mizuho Corporate Bank Limited in connection with dealing with the pension schemes of their employees. Accordingly, the trustees should not act in a manner which imposes an unnecessary burden on Mizuho Corporate Bank Limited. When considering whether and how to exercise the powers under the IBJ Scheme's deed and rules, the trustees need to consider three basic issues: (ii) (iii) do the trustees have the relevant power? what are the mechanics for the exercise of the power? should the trustees exercise the power? These issues will be looked at in the remainder of this paper. G Do the trustees have the relevant powers? At rule 1, clause 2 in the current IBJ Scheme rules and rule 7 in the proposed new definitive deed, the trustees of the IBJ Scheme do have the power to accept the assets and liabilities. Both powers are relevant because the Trustees need to have the power both to enter into the Merger Deed, and to accept the transfer a month later, at which point it is envisaged that the deed and rules will have been replaced. Under the current IBJ Scheme rules, the Trustees may with the consent of the Principal Employer accept a transfer to the Scheme or the assets of any other retirement benefit fund, plan or arrangement approved by the Inland Revenue. Transferring members to be entitled to such benefits under the IBJ Scheme as may be agreed between the Trustees and the Transferring Trustees provided that any amount certified as representing employees' contributions shall be treated as such in the IBJ Scheme. Acceptance of any transfer in imposes an obligation on the IBJ Trustees to obtain a certificate from the Transferring Trustees or administrator of the other Scheme as to the period of employment to which the transfer relates and what part (if any) of the transferred assets represents employees' contributions made to the other scheme and also what conditions (if any) appertain to the refund of contributions. The certificate must also state the maximum amount which could be taken by the member or members in a lump sum form under the rules of the other scheme. Additionally, transfers in respect of guaranteed minimum pensions or accrued rights may be revalued by the IBJ Scheme actuary on any one of the bases as specified in the revaluation rule (rule 29). The Trustees are also being asked to execute a new definitive deed and rules. This involves the exercise of clause 15 (the amendment power). Under clause 15, the principal employer from time to time by deed executed by the Principal Employer and the Trustees may amend the Scheme but the power of amendment may not be exercised to relieve the Principal Employer or any associated employer from liability for any company contributions that have become payable before the effective date of amendment. No amendment can be made to the provisions of the Scheme which prejudices or adversely affects any pension or annuity then payable or the rights of a member of the Scheme who is no longer in pensionable service. Nor can an amendment be made if in the opinion of the actuary it operates to reduce the aggregate value of the members' benefits payable under the Scheme of any member who is in pensionable service. Subject to the trustees' decision to agree to the
merger on the proposed terms, the trustees do have the power to replace the deed and rules with the amended deed and rules. H Should the trustees exercise their powers? The IBJ Trustees need to weigh all the factors outlined in this note and the actuarial advice in reaching their conclusion. There is existing case law to suggest that the IBJ Scheme Trustees should not stand in the way of a reasonable proposal by the Principal Employer to run its schemes as it wishes. Edge v the Pensions Ombudsman established that the Trustees have a duty not to stand in the way of the company's legitimate commercial interests in the running of its business. However, they need to be satisfied that in agreeing to the proposal they are not materially worsening members security or benefits. One issue needs specific consideration, which is, would refusal to agree to the merger on the proposed terms worsen the existing members' position? Before 11 June, this often included a consideration of the likelihood that the Principal Employer will trigger a winding up of the Scheme. Since 11 June, with the issue of revised regulations, governing the basis on which any debt on the employer would be calculated, it has both become less likely perhaps that a Principal employer would trigger a winding up and much less of a concern that members would be severely adversely affected. This is because where a solvent employer winds up a scheme now, any debt on the employer is to be calculated on the basis of the full buy out costs of all benefits. The Trustees should consider whether a winding up of the scheme is in their view likely in which case the members will lose both future earnings linkage for past benefits and future accrual. A winding up should not however have the severe adverse effect on members' past benefits as would have been the case prior to 11 June 2003, assuming the principal employer is solvent and sufficiently so to pay the full buy out cost. In essence the options for the trustees are to proceed with the merger on the basis as set out or not to agree. The trustees should bear in mind that since the merger process began they have obtained a significantly better deal than that originally offered. They are obtaining some pre-funding into the Scheme in agreeing to the merger. They are also obtaining some benefit improvements. Against this there is some weakening of the Scheme provisions as set out in this note. However it is our view that, subject to actuarial advice confirming that the funding position is not materially worsened, agreeing to this merger proposal is within the reasonable range of options available to the IBJ trustees if they so decide. Addleshaw Goddard 5 March 2004