Welcome to our latest edition of our Trustee Quarterly Update!


 

Legislation
Pension Schemes Bill

The Pension Schemes Bill received its first reading in October.  It provides for a significant extension to the Pensions Regulator's powers, creating a number of broad new criminal offences, ie avoiding/reducing a debt on the employer under section 75 of the Pensions Act 1995 without reasonable excuse or acting without reasonable excuse in a way which detrimentally affects the likelihood of accrued scheme benefits being received.  The penalties include fines and imprisonment for up to seven years. The Bill also includes important provisions on trustee funding and investment strategy, members' right to a transfer value, and the establishment of a "pensions dashboard".  

Although the Bill fell because of the dissolution of Parliament prior to the general election, the Conservative party manifesto indicates that a Conservative government would re-introduce the Bill, and it is in any event likely that most measures in the Bill will enjoy cross-party support, as the pensions minister and shadow pensions minister worked together on the Bill.  For more information on the Bill's provisions, see our e-bulletin.

Civil partnerships extended to opposite sex couples

Regulations coming into force on 2 December 2019 will amend the law on civil partnerships to make such partnerships available to opposite sex couples as well as same sex couples.  The measure follows the Supreme Court judgment in Steinfeld v Secretary of State for International Development which held that it was contrary to the European Convention on Human Rights to restrict the availability of civil partnerships to same sex couples only.  The regulations apply in England and Wales.  Measures are underway to make similar changes in Scotland and Northern Ireland.

Under GMP legislation, on the death of a male member leaving a female civil partner, the civil partner's GMP will be calculated in the same way as for a same sex civil partnership, ie by reference only to the member's pensionable service post-April 1988.  This is different from the position on the death of a married male member leaving a female widow, where the widow's GMP would be calculated by reference to all service.  It is arguably surprising that the government has not amended the GMP legislation to remove this difference in treatment between opposite sex marriages and opposite sex civil partnerships, as its policy in relation to public sector schemes is that people should not be treated differently depending on whether they are in a marriage or civil partnership.

Scheme trustees should check their scheme rules to make sure that they will still operate as intended following the change.  They should also check member literature to make sure it is still accurate, for example to make sure that it does not suggest that civil partnerships are only relevant to same sex couples.

Prohibition on investment consultancy services without strategic objectives in force from 10 December 2019

As reported in our previous update (under "CMA issues order requiring compulsory competitive tendering for fiduciary managers"), from 10 December 2019 trustees will be prohibited from obtaining investment consultancy services unless they have set strategic objectives for the provider of such services.  

On 28 November 2019, the Pensions Regulator published a guide for trustees on setting objectives for their investment consultant.  The guide acknowledges that there are many ways to monitor and assess performance and that it is for trustees to decide their approach based on the characteristics and circumstances of their scheme. It says that trustees should consider the method and regularity for assessing the consultant's performance against the objectives and that in most cases trustees should look to assess performance on an annual basis and complete a detailed assessment of performance at least every three years.

The guide says that one approach that can be used is a "balanced scorecard", which seeks to identify, in advance, a range of measures that are important to the delivery of the overall outcome or service and then, after a suitable period, can be used to assess performance of the provider against those measures.  It includes some case studies with examples of balanced scorecards, but acknowledges that these are quite detailed, that trustees should take a proportionate approach for their scheme and that there is no "one size fits all" assessment.

Trustees should make sure they have objectives in place with any provider of investment consultancy services, as that is a legal requirement from 10 December 2019.  The Regulator's guidance outlines what the Regulator regards as good practice, but is not itself legally binding.

Extension to exemption from clearing requirement for OTC derivatives

In our previous update, we reported on provisions to exempt pension schemes from the requirement which would otherwise apply under the European Market Infrastructure Regulation (EMIR) to clear over-the-counter derivative transactions.  UK regulations to address this point post-Brexit have now been made and provide for the exemption to continue until 18 June 2023.

Cases
Safeway v Newton: European Court judgment re closure of "Barber window"

On 7 October 2019, the Court of Justice of the European Union (CJEU) handed down its judgment in the case of Safeway v Newton which considers when the Safeway pension scheme's "Barber window" closed.  The CJEU held that on the face of it, the member announcement was not sufficient to close the Barber window because (a) it did not meet the requirement for equalisation measures to be "immediate and full", and (b) it did not satisfy the need for legal certainty, ie for the persons concerned to know precisely their rights and obligations.  However, the CJEU went on to say that measures to end discrimination may, exceptionally, be adopted with retrospective effect provided they:

  • respect the "legitimate expectations" of the persons concerned; and
  • are warranted by an "overriding reason in the public interest". 

For more information, click here 

Court holds Ombudsman incorrectly applied redundancy test in early retirement case

In the case of Downe v Universities Superannuation Scheme, the court has allowed a member's appeal and remitted to the Pensions Ombudsman the question of whether the member's employment had been "terminated by reason of redundancy" within the meaning of the scheme rules.  The scheme rules provided that a member could retire on an unreduced pension where employment was "terminated by reason of redundancy". The scheme rules defined redundancy as including the scenario where the requirement for an employee to carry out a particular type of work was expected to cease or diminish.   A dispute arose as to whether Ms Downe's employment had been terminated by reason of redundancy within the meaning of the rule.

The background to the case was that Ms Downe had a "poor professional working relationship with her manager" and had been on long-term sick leave with stress-related illness.  Shortly after she returned to work, Ms Downe's employer approved proposals for a restructuring of its operations which would involve a change in the balance between the work carried out internally as opposed to being outsourced.  Ms Downe believed that the proposals would result in her being made redundant.  She and her employer entered into a "Compromise Agreement" which referred to a number of claims which Ms Downes "has or may have" and provided for a payment to be made to Ms Downe "without admission of liability" which was described as referable to "Enhanced Redundancy Pay".

When Ms Downe's claim to an unreduced early retirement pension was refused, Ms Downes complained to the Pensions Ombudsman.  The Ombudsman did not uphold her complaint, finding that Ms Downes had instigated the termination of her employment "based on her flawed perception that she was going to be made redundant" and there had been no coercion on her employer's part to instigate termination.  However, on appeal from the Ombudsman's decision, the court held that the Ombudsman's analysis had a misplaced emphasis on the question of whether termination of Ms Downe's employment arose at the instigation of her employer rather than focussing on the test in the scheme rules.  It remitted the matter to the Ombudsman for reconsideration.

Our thoughts

This case emphasises the importance of considering the precise wording of scheme rules in a case where the rules provide for an unreduced early retirement pension in circumstances involving termination of employment.  In this case, unlike the statutory test for redundancy in employment legislation, the scheme's definition of redundancy did not require the member to have been dismissed by reason of redundancy, and that proved to be an important difference in the case in question.

Court rejects challenge to state pension age increase 

In the case of R (on the application of Delve and another) v Secretary of State for Work and Pensions, the court has rejected a legal challenge brought by a number of women born in the 1950s against the way in which the government increased state pension age.  The claimants have applied for leave to appeal.

In the event that the government is required to make changes to state pension age, this will have an impact on schemes with benefit structures that are integrated with the state pension system, eg schemes that provide bridging pensions for members who start to receive their scheme pension before state pension age.

Pensions Ombudsman
No requirement on scheme to warn member about loss of lifetime allowance protection

The Pensions Ombudsman has rejected a complaint by a member who complained that neither his scheme nor employer warned him about the risk of loss of his protection against the lifetime allowance ("fixed protection 2012") as a result of being auto-enrolled into a scheme (Mr T PO-23961).  

The member had applied for and been granted fixed protection 2012 after accruing a substantial pension entitlement while working for a bank.  The member subsequently took up a role as a visiting lecturer with a university.  The university sent him a letter informing him that he would automatically be enrolled into the Teachers' Pension Scheme and that he had the right to opt out.  The letter provided details of how to opt out.  It was only in a discussion with his financial adviser three years later that the member discovered that he his membership of the Teachers' Pension Scheme had resulted in the loss of his fixed protection.  He complained that he had not been warned of the consequences of not opting out of the scheme.

The Ombudsman rejected the complaint in relation to both the employer and Teachers' Pensions (the scheme administrator), saying that neither should routinely be expected to provide scheme members with detailed information about lifetime allowance protection in new member enrolment information and that "a requirement to do so would represent a significant and unwarranted administrative burden".

Ombudsman upholds transfer complaint where receiving scheme turned out to be scam

The Pensions Ombudsman has ordered Hampshire County Council to reinstate a member in the Local Government Pension Scheme (LGPS) following a complaint from a member who took a transfer value to an arrangement which turned out to be a scam (Mrs H PO-21489).  

The Council, as the body responsible for administering the scheme, had concluded that it was under a legal obligation to make the transfer.  However, the Ombudsman held that it was under no such obligation in the member's case.  The Ombudsman noted that the statutory right to take a cash equivalent transfer value from one occupational pension scheme to another applied where a member was acquiring transfer credits in the receiving scheme.  Transfer credits were defined in the legislation as rights allowed to an "earner".  Following the court's decision in the case of Hughes v Royal London, the earnings did not need to come from the receiving scheme's employer.  The Ombudsman said that in the Hughes case, the judge and parties had proceeded on the basis that in order to obtain transfer credits, a member had to be a current earner from an employer of some sort. He concluded that Mrs H was not an "earner", as at the time the transfer was made, she was not in employment and was living off state benefits.  The Ombudsman acknowledged that a future case might provide clarity on this issue, but said, "… at this time, Mrs H's statutory right to a transfer had not been made out."

The consequence of the conclusion that Mrs H did not have a right to transfer was that the scheme had a discretion to make the transfer.  The Ombudsman concluded that had the Council realised that it had a discretion whether or not to make the transfer, it was likely that it would have noticed several "red flags".  Mrs H was approaching her normal retirement age, but the employer was a steel stockholding company based several hundred miles from Mrs H's home. Another red flag was that the receiving scheme was recently established.  The Ombudsman held that in that situation, "one would have expected the Council to make an attempt, by phone or email, to explain its concerns to Mrs H and to point out the possibility that the Scheme should be a scam."

Our thoughts

Schemes making transfers on the basis that they are legally obliged to do so notwithstanding the presence of potential scam "red flags" should take note of the Ombudsman's decision that a person not currently in receipt of earnings is not an "earner" for the purposes of having a statutory right to a cash equivalent transfer value.  Since the transfer in this case, the law has been changed to require transferring schemes to satisfy themselves that a member has taken "appropriate independent advice" before taking a transfer of more than £30,000 from a defined benefit to a money purchase scheme.  However, even had this requirement been in force at the time, it would not have applied in this case as the transfer value was £26,234.

Ombudsman rejects complaint against provider that made transfer despite potential scam warning

The Pensions Ombudsman has rejected a complaint against a pension provider which processed a transfer to an arrangement which turned out to be a scam in a case where the member had a few weeks earlier contacted the provider and asked it not to make a transfer to a scheme of a different name due to concerns about the receiving scheme being under investigation by the FSA (the predecessor to the FCA) (Mr L PO-22419).  

The member had been visited at home by an individual who persuaded him to sign a blank transfer discharge form.  The Ombudsman found that on 27 October 2011, the member or his father had contacted the provider of the transferring scheme and instructed it not to make any transfer to businesses known Pensions Release or Pensions Online.  The provider noted the instruction on its computer system as, “Do not transfer this policy away to a pension provider in the name of Pensions Release or Pensions Online as they are being investigated by the FSA and the client does not wish to transfer to them anymore, if any problems call the [policyholder] on [ ] or [ ].”

On 2 December 2011, the transferring scheme provider received the letter enclosing the member's signed transfer form and asking for a transfer to be made to a scheme with a name which did not include the names "Pensions Release" or "Pensions Online".  The date next to the member's signature had been amended to 23 October 2011.  The transferring scheme provider processed the transfer.  The receiving scheme arrangement turned out to be a scam.

When the matter came before the Ombudsman, there was a dispute between the parties as to whether the transferring scheme provider had been instructed not to make any transfer or only not to transfer to a provider with the name of Pensions Release or Pensions Online.  The Ombudsman concluded that it was more likely than not that the call referred expressly to Pensions Release/Pensions Online.  As the scheme to which the provider had been asked to make a transfer did not suggest a connection with those schemes, the Ombudsman considered that there were no grounds for suspicion at that time.  He therefore did not uphold the member's complaint.

Our thoughts

The transfer in this case was made in 2011, before the Pensions Regulator had issued its warnings about pension scams.  If the same circumstances were to occur today, the Ombudsman might well take a tougher line.  It would be advisable for trustees to have processes in place to ensure if a transfer request is received in respect of a member who has already raised concerns about a pension scam, direct contact is made with the member to ensure that the request is genuine.

RPI to CPI change upheld where rules allowed change to index approved by Revenue

The Pensions Ombudsman has rejected a complaint by a member regarding a scheme trustee's decision to base revaluation increases on CPI rather than RPI (Mr R PO-27867).  

The scheme rules provided for increases by reference to the scheme's definition of "Index", namely "The index of Retail Prices published by the Department of Employment or such other index as may be approved by the Revenue for the purposes of the Scheme."  The trustee argued that this wording was analogous to the wording in Arcadia Group Ltd v Arcadia Group Pension Trust Ltd where the validity of a switch to CPI had been upheld.  In the Arcadia case, the relevant wording was "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of HM Revenue and Customs”.  The Ombudsman held that the wording of the scheme rules did allow an alternative to RPI to be used notwithstanding that RPI continued to be published.

The change in the index had been agreed by the trustee as part of a package of measures designed to reduce the scheme's deficit and ultimately achieve full funding of the scheme on a self-sufficiency basis, bearing in mind that a professional covenant reviewer had graded the employer covenant as "Weak/Tending to Weak".  The Ombudsman held that it was not unreasonable for the trustee to have decided to change the index from RPI to CPI in the expectation of improving the security of the scheme for the membership as a whole.

Service credit for transfer in did not count towards pensionable service "completed"

The Deputy Pensions Ombudsman (DPO) has held that pensionable service credited to a member in respect of a transfer in did not count towards his pensionable service for the purposes of a rule which allowed a member to retire early on an unreduced pension if he had "completed" 40 years' pensionable service (Mr Y PO-22720).  The definition of pensionable service in the scheme rules was "the period of service (not exceeding 36 years at Normal Retirement Date) which is credited to the Member under these Rules for the purpose of calculating his benefits".  The DPO held that the use of the word "completed" in the "40 Year Rule" was an additional stipulation on top of the scheme definition of pensionable service.

Our thoughts

This appears to be a case where the provisions of the scheme's rules did not marry together very well.  Read literally, the reference in the definition to pensionable service not exceeding 36 years at Normal Retirement Date could have prevented a member completing 40 years' pensionable service for the purposes of the 40 year rule, but it appears to have been accepted that the reference to pensionable service not exceeding 36 years was a cap on accrual.  This case underlines how the exact wording of a particular rule can be key in determining a member's entitlement.

Pensions Regulator
DB funding code consultation may be in January 2020

The Pensions Regulator has said that it will seek to publish the first of its two consultations on a revised defined benefit (DB) funding code in 2020.  Speaking at the Pensions and Lifetime Savings Association (PLSA) conference, the Regulator's director for policy, analysis and advice, David Fairs, said that there would be two routes for complying with the new funding requirements: (a) "fast track" and (b) "bespoke".  

Under "fast track" the Regulator will set out in detail what a scheme needs to do to comply.  The aim will be to reach low dependency on the sponsoring employer by the time the scheme is "mature".  The Regulator will describe what it means by this and will consult on what is meant by "maturity".  It will prescribe a period over which it expects the deficit to be paid off and consult on whether that should vary by employer covenant grade.  Schemes with funding plans that meeting the requirements for "fast track" will get very little regulatory scrutiny.

The "bespoke" route will allow for more varied recovery plans that allow the scheme to take more investment risk.  The Regulator will expect schemes to justify their recovery plans, including that any risks taken are sustainable.

Update to DB to DC transfers guidance following changes to FCA certification regime

The Pensions Regulator has updated its guidance on DB to DC transfers to address the question of how trustees should check that a member has received "appropriate independent advice" on a DB to DC transfer in the light of changes to which individuals are included in the FS Register, ie the register which trustees use to check that a financial adviser has the required qualifications.  The change to the Regulator's guidance stems from the introduction of the FCA's Senior Managers and Certification Regime (SM&CR) from 9 December 2019.  Under this new regime, only individuals in Senior Manager roles will appear on the FS Register, so it will cease to cover most financial advisers.  The FCA is introducing a new Directory which will contain details of such individuals, but is not due to go live until December 2020.

Paragraph 39 of the Pensions Regulator's guidance says that trustees should continue to check the FS Register for firm details, and that they will then need to contact firms to confirm that the relevant individual works for that firm "or check an appropriate third party directory". 

Pensions Regulator publishes guides on tendering and setting objectives for investment service providers

On 28 November 2019, the Pensions Regulator published a series of guides relating to tendering and setting objectives for investment service providers.

The guide on choosing an investment governance model is aimed at helping trustees understand matters they should consider when deciding whether to use fiduciary management or other investment governance models.  The guide on tendering for fiduciary management services is aimed at trustees considering appointing a fiduciary manager or who are considering a re-tendering exercise for an existing fiduciary manager.  The Regulator has also published a guide to tendering for investment consultancy services and a guide to setting objectives for investment consultants (covered in more detail above under "Prohibition on investment consultancy services without strategic objectives in force from 10 December 2019").

Pensions Regulator updates DB investment guidance

The Pensions Regulator has updated its DB investment guidance to reflect recent changes to the law on statements of investment principles (previously covered in our e-bulletin).  

Stewardship

On stewardship, the guidance says that for many pension schemes, stewardship activities, including engagement, are likely to be undertaken by the investment manager on the trustee board's behalf, especially where investments are made via pooled funds.  It encourages trustees to become familiar with their managers' stewardship policies and to use stewardship as a criterion when shortlisting and selecting managers.  For wholly insured schemes, the guidance acknowledges that it is unlikely to be possible for trustees to engage directly with their providers' fund managers, but says trustees should ask their provider for information about the fund manager's stewardship policies.  

The guidance suggests that where practicable, trustees may wish to agree specific voting criteria with investment managers and consider willingness to abide by preferred voting criteria when selecting investment managers.  Where specific voting criteria are not agreed with investment managers, the guidance suggests asking them questions such as who their proxy voting adviser is, how often they have disagreed with their advisers' recommendations and, if so, on what issues, and whether there are instances in which they did not cast votes at all and, if so, why.  The guidance refers trustees to the Financial Reporting Council's Stewardship Code (covered below).

Non-financial factors

The guidance notes the new requirement applicable from 1 October 2019 for a statement of investment principles to include the extent, if at all, to which non-financial matters will be taken into account in the scheme's investment strategy.  It says that decisions based on non-financial matters should be taken considering both questions the Law Commission identified as a test, namely, "do you have good reason to believe that members share the concern and are you satisfied that the risk would not involve material detriment to members relative to a scenario where those factors were disregarded?" 

The guidance says that whilst trustees should not necessarily rule out the option to take account of members' views, they are never obliged to do so.  Interestingly, the guidance says, "It would be reasonable to assume that, in the UK, the overwhelming majority of people would be opposed to controversial business practices, investments in warfare or single use plastics, even if they offer significant returns or are legal under UK jurisdiction."

Implementation

The guidance notes that designing and implementing a new investment strategy imposes demands on trustees' time and on their governance budget and suggests that trustees should consider whether such costs will add value taking into account any ongoing costs involved, eg for investment monitoring.

Impact investment and patient capital

The guidance explains the concepts of "impact investment" (investments that aim to deliver tangible positive impacts on society and the environment alongside generating investment returns) and "patient capital" (the provision of long-term finance to firms that have potential for growth over the long-term), but stresses the importance of trustees carefully considering whether such investments are appropriate for their scheme.

HMRC
Update on GMP equalisation tax issues

HMRC's Pension schemes newsletter 114 says that HMRC is aiming to publish guidance in December on the GMP equalisation tax issues associated with:

  • the lifetime allowance;
  • LTA protection regimes including enhanced, fixed, primary and individual protection; and
  • the annual allowance.

The newsletter says the guidance will be high level and specific to GMP equalisation only.  It says that for schemes choosing to equalise through the statutory conversion process, the issues are proving more complicated to resolve and HMRC continues to explore them.  

The newsletter says that the HMRC GMP Equalisation Working Group "continues to work on other pension tax issues including the payment of crystallised lump sums, such as serious ill-health lump sums, small pots and trivial commutation."  It says HMRC is aiming to provide a progress update on such issues in December.

Our thoughts

The tax implications of different methods for achieving GMP equalisation are material factors for trustees to consider, and continued delay on the part of HMRC in reaching a view on the issues make it difficult for trustees to make meaningful progress.

Countdown Bulletin 49 sets out HMRC role following end of Scheme Reconciliation Service

HMRC's Countdown Bulletin 49 deals with various issues relating to how HMRC will deal with issues relating to the period when schemes were contracted-out now that HMRC's Scheme Reconciliation Service (SRS) has ended.

The bulletin (published in October) says that all schemes that engaged in SRS will receive a final data cut later in the year, based on HMRC's records.  It will not be possible to query the information with HMRC.  Now that SRS has closed, HMRC will not amend a Scheme Contracted Out Number (SCON) on its records where the GMP amount which HMRC holds is correct and it is only the SCON on HMRC's records that the scheme disagrees with.  The bulletin says that now that HMRC is no longer tracking scheme membership, the importance of the SCON held by HMRC has changed, and it is not definitive evidence of who holds liability for the member's GMP.

HMRC will amend records if the GMP information it holds for an individual is incorrect.  Schemes can use the online GMP Checker service at any time, but a query can only be sent to HMRC if a "life event" is occurring.

The bulletin says it is no longer possible to pay a Contribution Equivalent Premium (CEP) for members as the time limits to do so have passed.  It also says that HMRC will not accept queries where schemes believe they paid a CEP, but it is not recorded on HMRC's records.

Miscellaneous
Update on GMP equalisation tax issues

HMRC's Pension schemes newsletter 114 says that HMRC is aiming to publish guidance in December on the GMP equalisation tax issues associated with:

  • the lifetime allowance;
  • LTA protection regimes including enhanced, fixed, primary and individual protection; and
  • the annual allowance.

The newsletter says the guidance will be high level and specific to GMP equalisation only.  It says that for schemes choosing to equalise through the statutory conversion process, the issues are proving more complicated to resolve and HMRC continues to explore them.  

The newsletter says that the HMRC GMP Equalisation Working Group "continues to work on other pension tax issues including the payment of crystallised lump sums, such as serious ill-health lump sums, small pots and trivial commutation."  It says HMRC is aiming to provide a progress update on such issues in December.

Our thoughts

The tax implications of different methods for achieving GMP equalisation are material factors for trustees to consider, and continued delay on the part of HMRC in reaching a view on the issues make it difficult for trustees to make meaningful progress.

Countdown Bulletin 49 sets out HMRC role following end of Scheme Reconciliation Service

HMRC's Countdown Bulletin 49 deals with various issues relating to how HMRC will deal with issues relating to the period when schemes were contracted-out now that HMRC's Scheme Reconciliation Service (SRS) has ended.

The bulletin (published in October) says that all schemes that engaged in SRS will receive a final data cut later in the year, based on HMRC's records.  It will not be possible to query the information with HMRC.  Now that SRS has closed, HMRC will not amend a Scheme Contracted Out Number (SCON) on its records where the GMP amount which HMRC holds is correct and it is only the SCON on HMRC's records that the scheme disagrees with.  The bulletin says that now that HMRC is no longer tracking scheme membership, the importance of the SCON held by HMRC has changed, and it is not definitive evidence of who holds liability for the member's GMP.

HMRC will amend records if the GMP information it holds for an individual is incorrect.  Schemes can use the online GMP Checker service at any time, but a query can only be sent to HMRC if a "life event" is occurring.

The bulletin says it is no longer possible to pay a Contribution Equivalent Premium (CEP) for members as the time limits to do so have passed.  It also says that HMRC will not accept queries where schemes believe they paid a CEP, but it is not recorded on HMRC's records.

Key contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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