In this Update we take a look at key legal developments for trustees of occupational pension schemes over the past quarter. These include some important cases such as the decision in Virgin Media Limited v NTL Pension Trustees II Limited regarding the consequences of failing to obtain a section 37 certificate, and the decision in British Broadcasting Corporation v BBC Pension Trust Limited regarding whether a reference to members' "interests" in a scheme amendment power included the right to continue to accrue future service benefits. We also look at the key points arising from the draft legislation to abolish the lifetime allowance, and consider the potential impact of the "Mansion House reforms", the raft of pensions measures which the Government hopes will stimulate investment by pension funds in UK private equity and infrastructure.
Trustee Quarterly Update - September 2023
Failure to obtain section 37 certificate rendered pension scheme amendments void
The High Court's judgment in the case of Virgin Media Limited v NTL Pension Trustees II Limited has raised concerns that many pension scheme amendments made years ago might be void because no "section 37 certificate" was obtained from the scheme actuary before making the amendment. The requirement for a section 37 certificate applied from 6 April 1997. Although it became common practice to narrate the fact that Trustees had obtained the necessary confirmation from the actuary and often to attach an actuarial certificate, that practice did not become widespread until the late 1990s meaning that it may now be difficult to confirm whether or not a section 37 certificate was obtained before the amendment was made. We understand the judgment is going to be appealed. For more information, click here.
Pension scheme amendment power: "interests" includes future service benefits
In British Broadcasting Corporation v BBC Pension Trust Limited the High Court had to rule on the meaning of a proviso in a scheme amendment power which restricted amendments prejudicial to active members' "interests".
The otherwise broad amendment power contained a proviso which stipulated that no amendment could "take effect as regards the Active Members whose interests are certified by the Actuary to be affected thereby" unless the Actuary certified that the amendment did not "substantially prejudice the interests of such members" (or other conditions to protect members were met). The court held that the reference to active members' "interests" included the ability of members to accrue future benefits under the scheme on the same terms as applied immediately before the amendment
The BBC has indicated that it is considering whether to appeal.
The precise wording of an amendment power can be crucial when determining whether a particular amendment can be made. It is relatively unusual for a scheme amendment power to prevent amendments to benefits which members may earn in respect of future service, but the judge in this case considered that the term "interests" should be given a broad construction. This contrasts with the High Court's judgment in the case of Wedgwood Pension Plan Trustee Limited v Salt in which the court held that a reference in an amendment power to "the rights of any member" was a reference to accrued rights in respect of past service.
Court approves scheme trustee's decision to wind up sponsoring employer
The High Court has approved a decision by a pension scheme trustee to issue winding up petitions against the pension scheme's sponsoring employers. This was done under rules which allow trustees to seek court approval for a "particularly momentous" decision. There had been repeated failures by the employer to pay the contributions due, and the trustee had concerns about the employer's financial position. The trustee was concerned that the scheme's financial position would worsen over time if benefits continued to be paid in full, but had no power to terminate the scheme unless the scheme's Principal Employer was the subject of insolvency proceedings. Whilst it is rare for scheme trustees to bring insolvency proceedings against a scheme employer, this case illustrates that there can be circumstances where this is appropriate. For more information, click here.
Members' appeal dismissed in fossil fuels claim against trustee
In McGaughey v Universities Superannuation Scheme Ltd, the Court of Appeal considered claims from two pension scheme members who alleged that the directors of the scheme's corporate trustee had breached their duties by continuing to invest in fossil fuels without an adequate plan for divestment. The Court dismissed the claimants' appeal on all grounds, but the case illustrates the potential for scheme trustees to face legal challenges to their investment policy as regards climate change-related issues. For more information, click here.
Tribunal agrees with Pensions Regulator's decision to use its "moral hazard" powers
In its decision in Shah v The Pensions Regulator, the Upper Tribunal has found that the Pensions Regulator (TPR) acted reasonably in deciding to use is "moral hazard" powers to issue a contribution notice against a director of a pension scheme's sponsoring employer for his role in entering into an agreement which deprived the scheme's employer of the proceeds of sale received by one of its subsidiaries on the sale of a joint venture company. The sponsoring employer subsequently went into liquidation leaving the scheme with a substantial deficit. The original decision by TPR's Determinations Panel was covered in our March 2022 Update.
TPR had imposed a contribution notice on Mr Anant Shah on the grounds that he had been party to an act which met the "material detriment" test, ie it had detrimentally affected in a material way the likelihood of accrued scheme benefits being received. The Upper Tribunal considered that there was no requirement for the amount of the contribution notice to be limited by reference to the loss to the scheme which had resulted from the act, at least when a contribution notice was being issued by reference to the material detriment test. It noted that the Upper Tribunal's decision in Re Bonas Group Pension Scheme suggested that it would not be reasonable to issue a contribution notice for an amount which exceeded the loss to the scheme resulting from the act. However, that decision had been in relation to an earlier version of the legislation before the introduction of the material detriment test.
The original decision by TPR's Determinations Panel had been to issue a contribution notice on a joint and several basis for £3,688,108, being the amount of the sale proceeds, against two individuals, Mr Anant Shah and his nephew, Mr Rohin Shah. The Upper Tribunal's decision records that Mr Rohin Shah withdrew his reference to the Upper Tribunal after reaching a settlement with TPR, following which TPR reduced by 50% the basic amount which it was seeking from Mr Anant Shah (though this was then subject to an uplift to reflect the passage of time since the relevant events occurred).
Draft legislation re abolition of lifetime allowance
The Government has published draft legislation dealing with the abolition of the lifetime allowance with effect from 6 April 2024. The changes deal with the detail of the significant change to the current pensions tax regime announced in the March 2023 Budget, and scheme trustees should familiarise themselves with the basics of how the revised tax regime will operate. The draft legislation provides for the introduction of two new lump sum allowances which apply to an individual and are used when a relevant lump sum is paid in respect of an individual and at least part of that lump sum is tax free. For more information, click here.
DWP to consider changes to transfer values regulations
In June the DWP published its review of the operation and appropriateness of the regulations governing transfer values which have been in force since 30 November 2021. (For a summary of the changes introduced by the regulations, see our December 2021 Update.) The review notes that there are issues with the practical application of certain provisions, namely the "red flag" relating to the offering of incentives to make a transfer and the "amber flag" where overseas investments are included in the receiving scheme. The DWP therefore plans to conduct further work with the pensions industry and Pensions Regulator to consider whether changes could be made to the regulations "to improve the pension transfer experience, without undermining the policy intent".
Digitisation of relief at source
The Government has published draft legislation regarding digitalisation of the relief at source system for pensions tax relief. The related policy paper explains that relief at source currently operates on a paper-based process and that the current legislative framework would not allow the modernised system to operate as intended. The measures contained in the draft legislation do not alter the principles of pensions tax relief, including who is eligible for relief. However, the Government does intend to insert provisions allowing HMRC to withdraw the registration of a pension scheme for non-compliance with any relief at source regulations. The Government plans to consult on related regulations in due course. The changes will take effect from 6 April 2025.
Draft statement of strategy for DB funding code "likely to appear in the autumn"
According to media reports, a lead investment consultant at the Pensions Regulator (TPR) has said that TPR is likely to publish a draft statement of strategy (SoS) for the purposes of the defined benefit funding regime in the Autumn. Under the new funding regime, trustees must prepare a SoS that illustrates the main risks faced by the scheme in implementing the funding and investment strategy and details how the trustees intend to mitigate or manage them. The SoS must be submitted to TPR at the same time as the actuarial valuation.
Regulator encourages schemes to signpost members to Midlife MOT
In a blog post published in July, the Pensions Regulator suggests that schemes signpost members to the Government's digital Midlife MOT. The blog explains that the money section of the digital Midlife MOT involves a digital tool asking questions covering debt, budgeting, insurance and pensions. The intention is that people can educate themselves on the pensions basics, check their state pension age, find any lost pension pots and go through a step by step guide to boosting their pension and planning their retirement income. The Midlife MOT is particularly targeted at those aged 45 to 65.
Regulator publishes revised superfunds guidance
In August the Pensions Regulator (TPR) published revised guidance on pensions superfunds. A superfund is an arrangement incorporating an occupational pension scheme which allows an employer to sever its liability to fund a defined benefit scheme by transferring the assets and liabilities of the scheme to a superfund. Instead of a conventional employer covenant, the scheme's "covenant" is a "capital buffer" provided by external investors who expect a return and/or by the fee paid by the employer divesting itself of its defined benefit liabilities.
TPR originally published its superfunds guidance in 2020, stating that it expected employers to apply for clearance in relation to a transfer from their scheme to a superfund and that it would not issue a clearance statement in relation to a superfund which it had not assessed in accordance with its guidance.
Key changes in the updated guidance are:
- a change in the discount rate assumption to be used by superfunds from gilts +0.5% to gilts +0.75%;
- a change to the rules on when the actuary needs to assess whether buy-out would be affordable. (TPR will not approve a superfund transfer for a scheme which is in a position to buy out benefits or has a realistic prospect of being able to do so in the "foreseeable future");
- a change to allow up to nine months between the date on which capital adequacy is demonstrated and the date of transfer to the superfund;
- an agreement in principle that superfunds could be allowed to extract profits at a point before scheme benefits have been bought out with an insurer.
In a separate but related development, the DWP has published its response to its 2018 consultation on superfunds. This says that the Government is committed to having a permanent regulated superfunds regime "as soon as parliamentary time allows", but does not commit to a specific timeframe. The DWP consultation response also envisages that the superfund regime will allow profits to be taken before buy-out.
So far only one superfund has successfully completed TPR's assessment and no transfers to the superfund have taken place. It remains to be seen whether the changes announced by TPR will have a significant impact.
Latest dashboards developments
The Government has made regulations delaying the timescale within which schemes will have to connect to pensions dashboards. The regulations require schemes to connect no later than 31 October 2026, but also require them to have regard to guidance on connection issued by the DWP, the Pensions Regulator (TPR) and the Money and Pensions Service. The Government's intention is that for practical purposes it will be the guidance that determines the staging timetable. No such timetable has yet been published.
TPR has amended its initial dashboards guidance. This says that trustees should not make final decisions about whether to follow the connecting date until they have "engaged with the guidance". It also says trustees should keep clear audit trails to demonstrate decisions made and the reasons for them, as well as actions taken. In a separate blog post, TPR encourages trustees to prepare for dashboards by ensuring that all necessary scheme data is available in a "dashboards ready" format.
The Pensions Administration Standards Association (PASA) has issued Dashboards Values Guidance which is designed to provide good practice approaches to a number of common issues not addressed in the legislation or official guidance.
Trustee entitled to pro-rate pension increase in first year of payment
The Pensions Ombudsman has dismissed a complaint from a member who complained that his first pension increase was only a proportionate increase, as his pension had not been in payment for a full year. This was as provided in the scheme's trust deed and rules, but the point was not addressed in the communications sent to the member. The Ombudsman noted that various member communications about benefits had made clear they were subject to the scheme's trust deed and rules. He held that, in the absence of a specific question from the member, there was no requirement for the member communications to set out the proportionate increase rule. For more information, click here.
Ombudsman rejects complaint where member transferred against IFA's advice
The Pensions Ombudsman has rejected a complaint against a trustee that actioned a member's transfer request despite the member having been advised not to transfer. The determination is notable for the Ombudsman's comments regarding the Pension Scams Industry Group's 2015 Code of Good Practice, specifically that this should not be treated as having the same status as a statutory code. For more information, click here.
Ombudsman awards £2000 to member's estate for severe non-financial injustice
The Pensions Ombudsman has awarded £2000 to a member's estate for non-financial injustice. This followed a complaint by the member's widow regarding the way in which the scheme administrator had deal with matters relating to her late husband's pension (the Estate of the late Mr R CAS-35611-Z7D3).
Mrs Y had contacted the scheme administrator after her husband, Mr R, received a terminal diagnosis. Mr R's doctor had confirmed that Mr R was terminally ill with "prognosis estimated at short weeks". The Pensions Ombudsman concluded that the scheme administrator had committed several acts of maladministration in the way it had handled the case. Specifically:
- the scheme administrator had failed to keep proper records of the fact that Mr R had provided a letter of authority to allow the administrator to discuss his pension with Mrs Y. This resulted in at least two occasions when call handlers on behalf of the administrator refused to discuss Mr R's pension with Mrs Y despite a letter of authority having already been provided;
- the administrator had initially failed to advise of the possibility of taking a commuted one off lump sum despite having been informed that Mr R's prognosis was terminal;
- the administrator had at one point provided pension figures which were significantly inaccurate; and
- it had taken the administrator 18 days to provide an estimate of retirement benefits. Whilst the administrator's standard length of time for providing such an estimate was 40 working days, an 18 day period was unreasonable in the context of Mr R's prognosis.
This sad case illustrates the importance of dealing sensitively with cases where a member has received a terminal prognosis. In particular, the Ombudsman may regard an administrator's standard timescales for providing information as unreasonably slow if the administrator is aware that the member's life expectancy is very short. Where a member has given permission for a scheme administrator to discuss the member's benefit entitlements with another person, it is important for the scheme administrator to maintain adequate records so that any person handling a query on behalf of the administrator can see that this is the case.
Call for evidence on options for defined benefit schemes
The Government has published a call for evidence seeking views on changes which could be made to the regime governing defined benefit pension schemes in order to achieve greater investment in "productive finance", for example infrastructure and private equity. The call for evidence asks about the impact of possible changes to allow scheme surplus to be withdrawn from ongoing schemes. It also asks for views on the possibility of a "public consolidator" vehicle for schemes, and the possibility of the Pension Protection Fund taking on this role. For more information, click here.
Call for evidence on pension trustee skills, capability and culture
The Government has published a call for evidence on pension trustee skills, capability and culture. This is part of a group of documents published in connection with the Government's wider agenda to increase investment in alternative assets including high growth businesses. The call for evidence asks questions in relation to trustee skills and capability, the role of advice, and "barriers to trustee effectiveness". In this article we look at the questions raised and consider whether the tenor of the call for evidence is consistent with the Pensions Regulator's messaging. For more information, click here.
DWP consults on what options schemes should offer to members taking benefits
In its consultation "Helping savers understand their pension choices", the DWP is consulting on the support and products to be made available to members of DC occupational pension schemes at "decumulation" (ie the point when they take their benefits). The Government intends to place a duty on trustees to offer decumulation services which are suitable for their members and consistent with pension freedoms. The consultation seeks views on what the minimum requirements should be. For more information, click here.
Response to Value for Money consultation published
In July the DWP, Pensions Regulator and FCA published a response to their consultation "Value for Money: A framework on metrics, standards and disclosures". The idea behind the proposals is to achieve greater standardisation of reporting regarding the performance of DC schemes, which will in turn allow trustees to make better informed investment and governance decisions and allow employers to better compare schemes when deciding where to automatically enrol their employees. The consultation response fleshes out some of the detail regarding the proposals. However, the Government does not commit to a timescale and there appears to be considerable work yet to be done before the Government brings the new requirements into force. For more information, click here.
DWP proposes default consolidator model for deferred small pension pots
In July the Government published a response to its call for evidence on addressing the challenge of deferred small pension pots. This incorporates a further consultation on the Government's proposals for dealing with this issue. The Government says that data provided in response to the consultation suggests that there are approximately 12 million deferred pension pots worth less than £1000, and that pension providers were consistent that a pot below £1000 is loss-making to the provider if only charged through an annual management charge.
The Government proposes a system of multiple "default consolidators", ie pension schemes to which small deferred pots will be automatically transferred unless the member opts out of the transfer. The Government envisages that a sub-group of master trusts will apply for authorisation to become default consolidators, and that the design of the multiple default consolidator approach will have the central objective of producing a considerably more consolidated master trust market. The Government will work with the FCA to consider whether providers of personal pension schemes could seek authorisation to act as a consolidator.
The Government proposes that deferred pots with a value of £1000 or less will be treated as small pots for the purposes of automatic consolidation, subject to a statutory requirement for the Government to review this limit at regular intervals. The Government proposes that a central clearing house is created to inform schemes where to transfer a member's eligible deferred pot. A pot will be treated as "deferred" for this purpose 12 months after the last contribution was made into the pot.
The Government's plans will require an Act of Parliament and new regulations which will require further consultation. The Government does not commit to a specific timescale for bringing the changes into force. The Government is initially looking to form a "delivery group" with the pensions industry and other interested parties.
The response to the consultation seeks views on some points of detail arising from the Government's proposals, for example how a member who has not made a decision should be allocated to a consolidator. The current consultation closes on 5 September.
Pensions Regulator warns trustees to focus on protecting members from economic volatility
In June the Pensions Regulator (TPR) published a blog post entitled "Trustees must not lose focus on protecting savers from economic volatility". TPR's key messages are that:
- DC trustees need to ensure their default pre-retirement strategy is fit for purpose in the current market environment. TPR particularly highlights the need for trustees to ensure that their bond investments align with member choices at retirement;
- trustees should provide up-to-date context in annual statements and should signpost members towards appropriate sources of guidance such as Pension Wise and MaPS.
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