In this bulletin we take a look at the Top 10 pensions developments to watch out for in 2018.
1. GDPR in force from 25 May 2018
The General Data Protection Regulation (GDPR) comes into force on 25 May 2018, introducing new duties, and higher fines for non-compliance. Key responsibilities for trustees include ensuring that their contracts with service providers are GDPR-compliant, that they have adequate cyber-security and data protection policies, and that members have been issued with GDPR-compliant fair processing notices. Although trustees will normally have the legal responsibility for ensuring a scheme is GDPR-compliant, the employer has a commercial interest in ensuring its scheme complies with the GDPR, both as scheme funder and to minimise adverse publicity.
2. A more interventionist Pensions Regulator
In 2017 the Pensions Regulator announced its intention to make greater use of its "moral hazard" and scheme funding powers, having been publicly criticised by a committee of MPs following BHS's insolvency for being reactive and slow-moving. We have already seen evidence it being a "faster, tougher Regulator" and expect that trend to continue in 2018. Increased use of the Regulator's existing powers could have a significant impact and employers should bear this in mind in scheme funding negotiations or when dealing with dividend payments, re-financings or corporate transactions which could weaken the scheme's position as a creditor of the employer. A more proactive Regulator will strengthen the trustees' hand in negotiations with the scheme employer.
3. White Paper on defined benefit pension schemes
The Government's White Paper on defined benefit pension schemes is expected around the end of February 2018. The Government has indicated that consolidation will be one of the key themes of the White Paper, but a DWP speaker at the PLSA conference in October 2017 suggested that there may not be a Pensions Bill before 2020.
4. Auto-enrolment changes
From 6 April 2018, the statutory minimum contribution rates will rise, with employers required to contribute at least 2% of qualifying earnings, and total contribution rates (ie employer plus member contributions) required to be at least 5% of qualifying earnings, so employers will need to ensure both that they are making contributions of at least the minimum rate, and the combined employer/member rate is sufficient. For example, from 6 April 2018, an employer policy of matching member contributions will not ensure compliance if member contributions are below 2.5% of qualifying earnings. Employers contemplating changes should bear in mind that the minimum rates are due to rise again from 6 April 2019, to 3% of qualifying earnings for employer contributions and a combined employer/member rate of at least 8%.
In February 2018 the Supreme Court is considering the "Pimlico Plumbers" case. This will decide where the legal boundary lies between a "worker" and a self-employed contractor. The case will have auto-enrolment implications, as the duty to auto-enrol applies to workers. Separately, the Government is coming under increasing political pressure to alter the legal definition of "worker" to incorporate a broader test which considers whether an individual is truly in business on his own account. Any change that extends the definition of worker will broaden the scope of the auto-enrolment regime.
5. Changes to Employer Debt Regulations
Back in April, the Government consulted on changes to the regulations governing when a "section 75 debt" is triggered following an employer ceasing to participate in a multi-employer defined benefit scheme. The proposals would allow an employer to enter into a "deferred debt arrangement" under which no immediate debt would be triggered on it ceasing to employ any active members, with the employer instead remaining liable to fund the scheme on an ongoing basis. The proposed changes were particularly welcomed by participants in schemes for non-associated employers, for whom the section 75 provisions are often not workable. Unless the draft legislation is significantly amended, deferred debt arrangements seem unlikely to be used much in corporate transactions, as they leave open the possibility of a future debt being triggered on an employer due to circumstances beyond its control.
The original plan was to make the changes from 1 October 2017. Although that timetable has clearly slipped, with no definite date for the consultation response, we expect to see changes made in 2018.
6. Court to rule on GMP Equalisation
The hearing in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC is expected to take place in June 2018. This case concerns the employer's duty to equalise GMPs for men and women, a complex and uncertain area of law. Once the outcome of the case is known, all schemes with GMPs will need to consider what steps to take regarding equalisation in respect of GMPs.
7. Court cases on RPI/CPI
Although the statutory minimum basis for pension increases changed from RPI to CPI from 1 January 2011, the impact on individual schemes depended on the wording of their scheme rules, and cases relating to RPI/CPI continue to occupy the courts. In June 2018 the Supreme Court is due to hear an appeal in the case of Barnardo's v Buckinghamshire. The Barnardo's scheme rules referred to RPI "or any replacement adopted by the Trustees" raising the issue of whether the Trustees can choose to adopt CPI (or another index) as a replacement or must continue to use RPI whilst it continues to be published. The Supreme Court case may clarify the law for other schemes with rules that make express reference to RPI, but contemplate the possibility that a different index could be used.
We are also expecting a High Court judgment on whether a switch from RPI is possible in relation to one of the sections of the BT Pension Scheme. We understand that in that case the rules contemplate the possibility of a switch from RPI if it has "become inappropriate", with the position complicated by there being several potentially relevant rules, each worded slightly differently.
8. Higher Pensions Ombudsman awards?
We think that the recent judgment in Smith v Sheffield Teaching Hospitals NHS Foundation Trust could result in members pursuing complaints further in the hope of obtaining higher awards for non-financial injustice. The judge held that the Ombudsman had been wrong to make a £500 award (the bottom end of the scale) and awarded £2750 instead. In the six years leading up to her retirement at age 55, the member had been repeatedly but wrongly informed that no early retirement reduction would apply.
The Ombudsman's policy is that an award for non-financial loss will be in the range of £500-£1600 unless there are exceptional circumstances, but the judge held that (a) the fact that the correct position could easily have been established simply by reading the rules, and (b) the period of time over which maladministration had persisted, justified making an award in excess of the normal band.
9. New Master Trust authorisation regime in force from 1 October 2018
From 1 October 2018 the new master trust authorisation regime will come into force, requiring a master trust (broadly, an occupational pension scheme for unconnected employers providing money purchase benefits) to be authorised by the Pensions Regulator. Existing master trust schemes will have 6 months to apply for authorisation. Separately, to combat "pensions liberation" the Government is planning to restrict a member's statutory right to transfer benefits so that the right will only apply to a personal pension scheme, master trust, or occupational scheme to which a member can show a genuine employment link. The Government won't make this change until the master trust authorisation regime is in force, but that means that the change could be brought in from 1 October 2018, with the result that schemes will need to adjust their transfer procedures accordingly.
10. Changes to simplify transfers from company DC pension schemes without member consent
The Government plans to change the law on transfers between defined contribution schemes without member consent with effect from 6 April 2018. The change will remove existing requirements for an actuarial certificate and for the transferring and receiving schemes to be related through a common employer or financial transaction. Instead the requirement will be to obtain independent professional advice or transfer to an authorised master trust. The changes should make it easier for companies to consolidate schemes, or to transfer members out of a company DC scheme to a master trust once the master trust regime takes effect in October 2018. The Government has also consulted on changes to allow benefits in a Defined Benefit Scheme which was previously contracted out to be transferred to a new scheme. This will allow employers to use a new scheme to consolidate their existing schemes.