Welcome to the latest edition of our Trustee Quarterly Update!
Pension increases paid for 20 years held invalid due to failure to follow amendment power requirements
In its judgment in Burgess v BIC, the Court of Appeal has held that members had no right to pension increases which had been paid by a scheme for approximately 20 years, as there had been no formal amendment to the scheme rules to introduce the increases.
The facts of the case were complex, and the Court of Appeal's decision ultimately turned on a point which was very specific to the scheme in question. However, of broader interest are the Court of Appeal's comments on what degree of formality is required for an amendment where the amendment power allows amendments by trustee resolution with principal employer consent. In this case the decision to introduce the increases had been documented in the Trustees' minutes, but the minutes had not been signed by all the trustees (or the principal employer), nor did they set out specific wording for any rule change. The Court was inclined to think that if the minutes had been intended to amount to a rule amendment, they would have included the full text of the amendments to the rules, they would have been signed by all the trustees, and the principal employer would also have signed them to signify its agreement.
The formalities required to amend a scheme rules will depend on what the scheme's amendment power says. It is common for a scheme's trust deed and rules to specify that amendments must be made by deed. Had that been the case here, it would have been clear that there had been no valid amendment. However, even where the scheme allows amendments to be made by trustee resolution, this case indicates that the courts will still expect to see a high degree of formality in order to be satisfied that a trustee resolution amounts to an amendment.
Advocate General opinion on Safeway v Newton case re closure of "Barber window"
On 28 March 2019, the Advocate General to the Court of Justice of the European Union (CJEU) handed down his opinion in the case of Safeway v Newton which considers when the pension scheme's "Barber window" closed. The case of Barber established the principle that differing retirement dates for men and women breach EU law. Subsequent cases established the principle that for accrual from 17 May 1990, the date of the Barber judgment, until benefits have been equalised, benefits accrue on the more favourable basis. This period is often referred to as the "Barber window". The Safeway scheme rules required amendments to be made by deed, but provided that amendments could take effect retrospectively from the date of a prior written announcement to members. A member announcement re equalisation was issued in 1991, but no deed of amendment documenting the change was executed until 1996, raising the issue of whether the Barber window closed in 1991 or 1996.
The Advocate General concludes that what is needed to close the Barber window is a legally binding amendment, not simply a power under national law to make retrospective changes. So if an announcement was of itself sufficient to produce a legally binding effect of men and women having equal pension ages going forward, the announcement will close the Barber window, but a mere power to amend the scheme retrospectively once an announcement has been issued will not be sufficient. The Advocate General concludes that it is for the national courts to decide which category the announcement falls into. The Advocate General is an adviser to the CJEU, and the CJEU does not always follow the Advocate General's opinion. However, if the CJEU does follow the Advocate General's opinion in this case, it seems likely that the ultimate conclusion will be that the Barber window did not close until 1996.
Section 67 of the Pensions Act 1995 (which came into force in April 1997) now generally prevents amendments which retrospectively reduce accrued rights. However, the events of the Safeway case took place before section 67 came into force, as did the measures taken by many schemes which equalised during this period. Before section 67, it was not uncommon for schemes to introduce changes which were adopted following a member announcement, but not actually documented via a formal rule amendment until some time later. There is therefore potential for this case to have ramifications beyond the Safeway scheme itself.
Court holds trustees owe no duty to scheme employer
In the case of Keymed v Hillman, the High Court has held that the trustees of a pension scheme do not owe a duty to the employer to act in its interests. This case was a complex one, involving allegations of dishonesty, ultimately not upheld, against individuals who were both directors and trustees. The scheme's funding rule allowed the trustees to unilaterally set the employer contribution rate. The judge held that the trustees were entitled to have regard to the employer's interests even if those interests were a matter of indifference to scheme members, but in the event of a conflict between member and employer interests, it was clear that the trustees had to prioritise the interests of members.
The express ruling in this case that trustees must prioritise the interests of members over those of the employer well turn out to be the "high water mark" on this issue and should be treated with a degree of caution, as other cases that have touched on this issue have been more equivocal. Nevertheless, this is a helpful case for trustees dealing with a situation where the interests of members and the scheme employer may conflict.
Tribunal upholds Pensions Regulator fines of £3500 for each failure to prepare actuarial valuation
In the case of Vive-Kananda v The Pensions Regulator, the Upper Tribunal has upheld financial penalties of £3500 per trustee per breach imposed by the Pensions Regulator on three trustees for their failure to take all reasonable steps to ensure that a scheme valuation was prepared in accordance with statutory requirements. As two of the trustees had failed to comply with their duties in relation to two consecutive valuations, this resulted in them being fined a total of £7000 each.
This was a particularly extreme case in that there appears to have been an almost total failure by the trustees to seek to comply with their duties and to engage with the Pensions Regulator. However, one point worth noting is that the Tribunal agreed with the Regulator that the trustees' failure to obtain actuarial valuations should be classed as "Band 3", ie the most serious category of breach for the purposes of the Regulator's penalty policy.
PPF legislation does not turn a scheme into a segregated scheme
The case of PS Independent Trustees v China Shipping concerned the application of the employer debt legislation to a multi-employer scheme where the principal employer had gone bust, triggering a winding-up of the scheme, but the two other participating employers were still solvent. Under section 75 of the Pensions Act 1995, a scheme going into winding-up will trigger a debt on the employer(s), calculated by reference to the scheme's deficit. However the relevant legislation provides that if a scheme is segregated (ie divided into separate sections on a basis that does not allow the assets of one section to be used for another section), the debt legislation applies to each section as if it were a separate scheme.
It was common ground between the parties in this case that prior to the principal employer's insolvency, the scheme had not been a segregated scheme. However, the solvent employers argued that the PPF legislation dealing with employer insolvency had the effect of turning the scheme into a segregated scheme. This argument was based on the point that the scheme rules contained an option for the trustees to segregate assets on an employer ceasing to participate in the scheme, and PPF legislation says that where scheme rules contain such an option, trustees are deemed to have exercised it unless and until they have decided not to and given the PPF notice of such decision. The judge rejected this argument. In the case in question, the option to segregate under the scheme rules only applied to the associated employers which had not become insolvent. However, the judge said that even if the option to segregate under the rules had applied to the principal employer, the effect of the PPF legislation was not to create a segregated scheme for the purposes of the employer debt legislation.
British Airways case settles
We have previously reported that the case of British Airways plc v Airways Pension Scheme Trustee Ltd was due to go to the Supreme Court. However, it has recently been reported that the case has settled. The case stemmed from the RPI/CPI pension increase change, but has potential wider implications regarding the extent to which trustees are allowed to use their powers to increase scheme liabilities without employer consent.
US Privacy Shield regulations made in preparation for Brexit
The Government has made regulations designed to ensure that arrangements allowing personal data to be transferred from the UK to the US under the "Privacy Shield Framework" continue to operate post-Brexit. The regulations take effect immediately before the date on which the UK exits the EU, whatever that date may be.
New regulations address age discrimination issues re bridging pensions
The Government has passed legislation to ensure that bridging pensions can continue to be paid without breaching age discrimination legislation now that state pension age has increased above age 65, as the previous legislation designed to address this issue provided that any pension reduction had to start between ages 60 and 65. The new legislation came into force on 15 May 2019, with the Government taking the view that it was not legally able to backdate the effect of the legislation, despite the fact that state pension age increased beyond age 65 from 6 December 2018.
Regulations re overseas transfer charge
The Government has made regulations setting out the conditions and procedure for making a claim for repayment of the overseas transfer charge. The charge is levied in some circumstances on a transfer to a qualifying recognised overseas pension scheme (QROPS). It was introduced in 2017 with the aim of preventing abuse of the law regarding overseas pension transfers. The legislation provides for repayment of the charge if, within 5 tax years of the transfer, the circumstances have changed so that a tax charge would no longer apply, hence the need for the regulations which came into force on 25 April 2019.
Pension Charges Bill
Labour MP Angela Eagle introduced a Pension Charges Bill into Parliament on 8 May 2019. The Bill would require pension providers to publish standardised information on charges for pension products and would also provide for a cap on charges. Bills do not usually become law unless they have government backing, so it seems unlikely that this bill will itself become law. It seems likely that the aim of the bill is put pressure on the government to take action in this area.
- Pensions Regulator
Corporate plan to 2019-22
The Pensions Regulator has published its corporate plan for 2019-22. It describes its six priorities as being:
- Extending its regulatory reach with a wider range of proactive and targeted regulatory interventions.
- Providing clarity, promoting and enforcing the high standards of trusteeship, governance and administration.
- Intervening where necessary so that DB schemes are properly funded to meet their liabilities as they fall due.
- Ensuring staff have an opportunity to save into a qualifying workplace pension, through automatic enrolment.
- Enabling workplace pensions schemes to deliver their benefits through significant change, including responding to Brexit.
- Building a regulator capable of meeting the future challenges it faces.
Two key performance indicators which the Regulator specifically mentions in relation to DB schemes are increasing deficit repair contributions and reducing the length of recovery plans.
Annual funding statement
In March 2019 the Pensions Regulator published its annual funding statement for defined benefit pension schemes. The statement is particularly relevant to schemes with valuation dates between 22 September 2018 and 21 September 2019. In an effort to be clearer about how its expectations will vary according to the circumstances of the scheme, TPR breaks down the different potential scenarios into more different categories than has previously been the case. In particular, as the majority of defined benefit schemes are closed to new members, TPR puts greater emphasis on scheme maturity as an issue which is relevant to funding and investment considerations. For more detail, see our e-bulletin.
Regulator blog post outlines plans for scheme funding regulation
In a blog post published on 9 May 2019, the Regulator outlines its plans for future regulation of scheme funding. The Regulator plans to consult on options for a clearer framework, including what it sees as a suitable long-term funding objective. It will consult on setting clearer parameters (for instance discount rates) around "journey plans" and associated technical provisions based on scheme specific factors such as maturity or covenant strength. The consultation will also consult on proposals for clearer guidelines on acceptable lengths of recovery plans for different covenant strengths. In particular, it will seek views on whether, all other things being equal, stronger employers should be required to fund technical provision deficits in a shorter period (particularly where they have the benefit of proportionately lower deficits).
In relation to investments, the Regulator will outline proposals as to how trustees could demonstrate whether the risk in their investment strategy is supported, for instance through a simple stress test.
The Regulator says that the flexibilities in the funding regime will remain and that it is not planning "MFR 2" (a reference to the old statutory minimum funding requirement), but that it needs to ensure that the flexibilities are not abused and that there is greater transparency on the risks defined benefit schemes are running.
The Regulator plans two formal consultations on scheme funding. The first is expected to be in the summer, and will focus on options for a clearer framework for defined benefit funding. The second consultation on the draft code will take place next year once the Regulator has more clarity on the legislation the Government intends to introduce.
Regulator fines professional trustee £73,750 for pensions law breaches
The Pensions Regulator has imposed financial penalties totalling £73,750 on the professional corporate trustee of a master trust for various breaches of pensions law, specifically:
- failure to provide statutory money purchase illustrations (SMPIs) to members in two consecutive years (£9375 per breach);
- a failure to obtain audited accounts in four consecutive years (£6250 pre breach); and
- failure to notify the Pensions Regulator of breaches of the law on six occasions (£5000 pre breach).
The case illustrates the potential for a series of regulatory breached to result in substantial financial penalties even where there is no suggestion that the breaches have resulted in reductions to members' benefits.
PPF guidance says plan for employer insolvency even when times are good
The Pension Protection Fund (PPF) has recently published some practical guidance on making sure transfers into the PPF go smoothly. The steps suggested by the guidance depend on the covenant strength of the employer, but there are some steps which the PPF says all trustees should be taking even where the employer covenant is strong. For more detail, see our e-bulletin.
- Pensions Ombudsman
Member's claim to higher benefits fails despite clear misrepresentation
The case of Miss L (PO-14432) is a stark example of the principle that providing incorrect information to a member about the level of benefits payable does not of itself confer a right to benefits at that level, even when the misinformation has been provided over a number of years.
In this case, the scheme had adopted a practice of providing revaluation at a fixed rate of 5%. This was consistently reflected in benefit statements and member booklets. However, it subsequently came to light that the scheme rules themselves did not confer such a right. The scheme therefore adopted a practice of providing statutory revaluation only. This resulted in the member's pension entitlement being approximately £20,500 pa whereas with 5% fixed rate revaluation it would have been approximately £33,000 pa. The member brought a claim based on the legal doctrine of "estoppel", which broadly provides that there are certain circumstances where it would be inequitable for the courts to allow a party to enforce what would otherwise be the strict legal position. There had been a point in her career when the member had been offered the opportunity to join the Principal Civil Service Scheme (PCSPS) instead of her current scheme, and the member claimed she would have done this had she been provided with correct information about the benefit structure under her current scheme.
The Deputy Pensions Ombudsman rejected the member's estoppel claim on the grounds that the member had not been able to show that she had relied on the misrepresentations to her detriment. The PCSPS itself provided inflation-linked revaluation, so transferring to the PCSPS would not have resulted in the member's benefits being revalued at a higher rate while inflation remained below 5%. A benefit comparison between the two schemes showed that the question of which scheme was more generous depended on which benefits being compared. The DPO concluded that the member had not been able to show that she would have chosen to transfer to the PCSPS had she been provided with the correct information. However, she did award the member £500 for distress and inconvenience.
Employer and scheme administrator not liable for failing to alert member about impact of benefit option on death in service benefits
In the case of Mrs T (PO-19080), the Pensions Ombudsman has held that an employer and scheme administrator were not liable for failing to warn a terminally ill member that taking a serious ill-health lump sum would substantially reduce the benefits which would be payable on his death in service.
At a time when the member knew that his life expectancy was less than one year, the member asked about his benefit options and opted to commute his pension for a serious ill-health lump sum of approximately £22,000. The result of this was that in the event of the member's death in service the lump sum death in service benefit would be one times salary, compared to six times salary had he remained a member of the scheme. The member died in service four months after receiving his serious ill-health lump sum.
The member's widow brought a claim on behalf of the member's estate arguing that the scheme's employer and administrator (a company which was also authorised to provide financial advice, but which had not been instructed to do so by the member) should have been more proactive in alerting the member to the effect of taking a serious ill-health lump sum on his death-in-service benefits. However, the Ombudsman rejected the complaint. He found that the member could have found out the impact on his lump sum by reading the scheme literature provided to him, and that advising the member regarding his benefit options would have amounted to regulated financial advice. The employer was not authorised to provide such advice. Although the administrator was authorised to provide such advice, it had not been instructed by the member to do so.
An important factor leading to the Ombudsman's rejection of the complaint in this case was that scheme literature had been provided to the member, from which the member could have ascertained the effect which taking a serious ill health lump sum would have on his lump sum death in service benefit. This case illustrates the importance of providing sufficient information about benefit options to enable member to make an informed choice.
Employer liable for not bringing terminally ill member's incapacity pension into payment immediately
In the case of the Estate of the late Mrs N (PO-19673), the Deputy Pensions Ombudsman (DPO) has upheld a complaint brought by the estate of a deceased member (Mrs N) against Mrs N's employer for delaying the date on which the terminally ill member's ill-health retirement commenced.
Mrs N was a member of the Local Government Pension Scheme. After Mrs N was diagnosed as terminally ill and known to have a life expectancy of months rather than years, her employer agreed to terminate Mrs N's employment on grounds of incapacity with the result that she would become entitled to an ill-health pension. The decision was made mid-month, and the employer (presumably for reasons of administrative simplicity) informed the member that her employment would be terminated with effect from the end of the month. Sadly, the member died the day before her employment was due to end. The benefits payable under the scheme as a result of death in service were much lower than the benefits that would have been payable had the member retired before her death. The deceased member's widower complained to the Pensions Ombudsman's office about the delay to implementing the member's ill-health retirement after the decision had been approved.
The DPO upheld the complaint on the grounds that by approving Mrs N's ill-health retirement, the employer was agreeing that she was permanently incapacitated. This was at odds with the decision to keep her employed (albeit on sick leave) and therefore an active member until the end of the month. The DPO ordered the member's employer to pay the member's estate compensation based on the benefits that would have been payable had the member retired immediately on the decision being made to terminate her employment.
It is not immediately obvious what the legal basis is for the DPO's conclusion that, having made the decision to terminate the member's employment on grounds of incapacity, the employer was obliged to do so with immediate effect. It is difficult not to suspect that the DPO's understandable sympathy for the member and her husband played a part in the final determination. Nevertheless, trustees and employers should take note that if they are dealing with a member who they know is terminally ill, they risk substantial claims against them if an administrative delay to putting benefits into payment results in the member's estate being much worse off.
Ombudsman holds trustees could use all of member's DC pot to meet GMP underpin
In the case of Mr S (PO-14648), the Ombudsman has held that scheme trustees were entitled to set the element of a member's money purchase fund that had accrued post-April 1997 against the cost of providing the member's GMP. The circumstances of the case were unusual. The scheme had been a defined benefit contracted-out scheme, but in 1991 all benefits (past and future) were converted to money purchase benefits, save that the member remained entitled to a GMP. Under changes to contracting-out legislation, all GMP accrual ceased from 6 April 1997. The member argued that post-6 April 1997 contributions should not be used to offset GMP liability. However, the Ombudsman found that the terms of the scheme rules allowed this, and that there was nothing in legislation to prevent this.
The outcome of this case is perhaps somewhat surprising, given that "anti-franking" legislation does prevent certain increases to GMP being offset against other benefits. What the case does underline is that where a scheme provides for a benefit underpin, it is essential to understand which benefits or funds can be offset against the underpin. The conversion of accrued benefits from defined benefit to money purchase would now generally be prevented by section 67 of the Pensions Act 1995, which took effect on 6 April 1997.
Pensions dashboard consultation
On 4 April 2019, the Government published a response to its consultation on enabling delivery of a "pensions dashboard", ie the facility for individuals to view information about all their pension benefits in a single place online. The recently created Single Financial Guidance Body (now re-named the "Money and Pensions Service") will lead delivery of the initial phase of the project, bringing together a delivery group made up of industry stakeholders, consumer groups, regulators and government.
It is proposed that pension schemes will generally be compelled to provide the necessary information for inclusion in the pensions dashboard.
The Government proposes a phased approach to compelling schemes to provide data for dashboards, suggesting that master trusts (and perhaps some other large DC schemes) might be ready to provide data on a voluntary basis from 2019/20 and that large DC schemes will be the first to be obliged to provide data. The Government expects the majority of schemes to be providing data via dashboards within a 3 to 4 year timeframe.
The Government intends that the initial dashboard costs will be funded by the Financial Services Levy and General Levy on pension schemes in addition to some central government funding.
The next stage in implementing dashboards is for the Money and Pensions Service to establish the delivery group. The Government anticipates that the delivery group will be fully operational by the end of summer 2019.
HMT consults on Fifth Money Laundering Directive
The Government is consulting on transposing the EU's Fifth Money Laundering Directive (MLD 5) into EU law. The Fourth Money Laundering Directive (MLD 4) was transposed into UK law in June 2017. Although MLD 4 was not specifically targeted at pension schemes, it did bring in new requirements on trusts, thus imposing additional compliance requirements on many pension schemes. These initially comprised record-keeping requirements and, depending on what taxes the pension scheme had been liable for, potentially an obligation to register with the new Trust Registration Service (TRS). However, in a last minute U-turn, HMRC announced that registered pension schemes would not be required to register on TRS. MLD 5 introduces registration requirements for all express trusts (regardless of what taxes they pay), broadens access to beneficial ownership information and requires national registers to be linked up to a new EU platform.
Given current uncertainty over the UK's future relationship with the EU, as well as the fact that with MLD 4 we saw a last minute U-turn by HMRC regarding the implications for pension schemes, we think it would be premature for pension schemes to make detailed plans for compliance with the MLD 5 requirements at this stage. However, this is an area which scheme trustees should keep under review.
Government response to consultation on CDC schemes
In March 2019 the Government published the response to its consultation on "collective defined contribution" (CDC) schemes, a type of scheme under which contributions are invested in, and benefits paid from, a collective fund. A key driver for such schemes is the objective of achieving better fund performance by pooling contributions. However, the amount of pension which a member will receive from such a scheme is not guaranteed. The Government plans to introduce a bill to allow employers to introduce this type of scheme if they wish. A key driver for this has been a desire on the part of Royal Mail to introduce such a scheme.
Templates launched to enable fund managers to report costs and charges in standardised format
On 21 May 2019, the Cost Transparency Initiative launched new templates and guidance for asset managers designed to enable them to report costs and charges in a standardised format. The aim of the template is to allow scheme trustees to make clear costs and charges comparisons across their different investment management suppliers and asset classes. The Cost Transparency Initiative is a partnership initiative between the Pensions and Lifetime Savings Association (PLSA), the Investment Association and the Local Government Pension Scheme Advisory Board who are working together with a view to encouraging transparency of costs and charges information for institutional investors.
Government guidance on GMP equalisation
On 18 April 2019, the DWP published guidance on how schemes can use GMP conversion legislation to comply with their equalisation duties in respect of GMPs. The guidance provides a useful summary of the steps which need to be followed when using the conversion legislation to effect GMP equalisation. However, it also highlights some significant issues with the current wording of the legislation (particularly regarding which employer(s) are required to consent to the conversion process) and that complex issues can still arise, particularly where pensioners or active members are concerned. For more detail, see our e-bulletin.
FCA Policy Statement on new Directory raises possibility of no DB to DC transfers for a year
On 8 March 2019, the FCA published a Policy Statement on its new Directory, a new public register with details of individuals carrying out specific roles in UK financial services. The need for the Directory has arisen due to changes in the information held on the Financial Services Register (FS Register).
The FS Register provides a public record of the firms regulated by the FCA and the individuals approved by the FCA. Following changes to the regulatory regime, only individuals for specified Senior Manager roles at FSMA firms will appear on the FS Register, so it will cease to cover most financial advisers. The FCA is therefore introducing the Directory, a new public register which will make information public on additional individuals.
The Policy Statement says that the Directory will go live shortly after the information on Directory persons has been uploaded in March 2020 for banking firms and insurers, and December 2020 for all other firms. This raises the possibility of a gap of approximately one year between advisers (who are not "Senior Managers") being removed from the FS Register in December 2019 and being searchable on the new Directory from December 2020. This would make it impossible for trustees of defined benefit schemes to make the checks which they are required by law to make when they are required to check that the member has received "appropriate independent advice". This requirement generally applies if the member is transferring more than £30,000 from a DB to a DC pension arrangement. It has been reported in the pensions press that the Pensions Regulator has said it is aware of the issue and will update its guidance later this year.
Government and Pensions Regulator agree with CMA fiduciary manager and investment consultancy proposals
In our March 2019 Update, we reported on the Competition and Markets Authority's (CMA's) proposals to require trustees to go through a competitive tender process before appointing fiduciary managers to their schemes. On 12 March 2019, the DWP, Pensions Regulator and HM Treasury published a joint response to the CMA's proposals. The response accepts the CMA's recommendation that the Pensions Regulator should take on the responsibility for overseeing compliance by trustees and says the government will consult on regulations to move the relevant provisions currently contained in the CMA order into the main body of pensions law. The Regulator will also consult in summer 2019 on guidance for trustees on complying with the requirements.
Relief at source for Scottish taxpayers
Pension schemes newsletter 109 published on 30 April 2019, covers relief at source for members subject to Scottish rate of income tax. It explains that for tax year 2019/20, an administrator of a pension scheme providing tax relief via relief at source will continue to claim tax relief at 20% for members who are Scottish taxpayers, including those who are below the income tax threshold or whose marginal rate is the Scottish starter rate of 19%. Taxpayers liable to income tax at the Scottish intermediate rate of 21% are entitled to claim additional relief. HMRC will not pay this directly into the scheme on behalf of members, but says it will adjust their tax code so that members get tax relief through their pay. Members can claim any additional tax relief due to them through their self-assessment tax return.
Single Financial Guidance Body re-named Money and Pensions Service
The Single Financial Guidance Body (SFGB) was officially launched in January 2019 and was re-named the "Money and Pensions Service" with effect from 6 April this year. It is responsible for the services previously provided by the Money Advice Service, Pension Wise and the part of the Pensions Advisory Service (TPAS) that did not deal with dispute resolution. The dispute resolution function of TPAS has already transferred to the Pensions Ombudsman's office.