Amendment made in breach of amendment power held to be partially valid where some members benefited and others lost out

If a purported amendment breaches a scheme's amendment power, but some aspects of the amendment could have been validly made, will the whole amendment be invalid or only those elements that breached the amendment power?  This was the issue at the heart of the case of Avon Cosmetics Limited v Dalriada Trustees Limited.  In this article we take a look at the court's decision, which will be of interest to pension scheme trustees and sponsoring employers, particularly those dealing with a situation where the validity of a scheme amendment has been called into question.  For more detail, click here. 

Court rules scheme's conversion from defined benefit to money purchase was valid

In this article we look at the case of Newell Trustees Ltd v Newell Rubbermaid UK Services Ltd in which the court considered the validity of an amendment made in 1992 in which final salary benefits had been converted to money purchase benefits.  Whilst such an amendment would not be permitted today, there are other aspects of the court's ruling which are worth noting, particularly its ruling on the practice of making an amendment via an interim deed that doesn't set out the terms of the amended rules in full, but instead provides for the scheme to be modified in accordance with the terms of an attached member booklet.  For more detail, click here. 

Final version of scheme funding regulations published

The final version of the scheme funding regulations was published on 29 January 2024.  The regulations are due to come into force on 6 April 2024 and will apply to valuations with effective dates on and after 22 September 2024.  The economic assumptions used to calculate a scheme's maturity must be chosen by reference to the economic circumstances prevailing on 31 March 2023.  (A fixed date has been prescribed to avoid scheme maturity fluctuating as a result of volatility in the market price of gilts.)

The regulations flesh out more of the detail on the requirement introduced by the Pension Schemes Act 2021 for schemes to have a formal funding and investment strategy (FIS). Another key element of the new funding regime is the Pensions Regulator's new DB funding code, but the final form of this is yet to be published.  For more detail on the regulations as originally consulted on, see our September 2022 Update.  

The consultation response published alongside the regulations highlights the following key areas where changes have been made to the final form regulations compared to the draft previously published for consultation:

• to make clear that there is no standalone regulatory requirement to invest in accordance with the FIS (meaning that there is no requirement for employer agreement to the scheme's investments).  However, the requirement for the scheme to be fully funded on a low dependency funding basis after the "relevant date" (-broadly the date on which the scheme reaches "significant maturity" as defined in the funding regime) is a regulatory requirement;
• to spell out that when preparing or revising a recovery plan, one of the matters which trustees must take into account is the impact of the recovery plan on the sustainable growth of the employer;
• to make explicit that in determining the future maturity of a scheme, trustees may take into account whether new members may be admitted to the scheme and the future accrual of benefits; and
• by giving the Pensions Regulator the flexibility to ask for less detailed information in some cases depending on the circumstances of the scheme.

The regulations have also been amended to allow the DB funding code to provide for different criteria for when a scheme reaches significant maturity depending on the type of scheme.  This has been prompted by the recognition that cash balance schemes have shorter durations of liabilities due to paying lump sums rather than pension benefits.

General Code published

On 10 January 2024 the Pensions Regulator (TPR) laid its General Code before Parliament.  The Code is expected to come into force on 27 March 2024.  The General Code brings together ten of TPR's existing codes of practice into a single code and in some cases updates the content.  Key areas where the Code includes new content or has changed since the previous draft include:

• TPR's expectations regarding the statutory requirement for trustees to have an "effective system of governance" (ESOG);
• TPR's expectations regarding the statutory requirement for trustees of schemes with 100 or more members to carry out an "own risk assessment" (ORA) to assess how well the ESOG is working and the way potential risks are managed.  The ORA will generally need to be prepared within 12 months of the end of the first scheme year to fall fully within the period after TPR has issued the Code, with subsequent ORAs carried out at least every three years;
• TPR's expectation that trustees establish a remuneration policy setting out the basis and means for paying those undertaking activities in relation to the scheme that are paid for by the trustees. This should be reviewed at least every three years, but in most cases annually.  The Code clarifies that the remuneration policy should cover the principles for determining pay.  Some had read the earlier draft of the code as requiring specific amounts to be disclosed.  In a change from the previous draft, TPR does not expect the remuneration policy to be published; 
• the code no longer includes an expectation that professional trustees should have indemnity insurance;
• TPR expects that trustee meetings should be held at least quarterly, but the code no longer suggests that trustees should consider publishing minutes of meetings;
• detailed expectations regarding trustee knowledge and understanding (TKU); and
• acknowledgement that continuity planning should be proportionate to the size and nature of the scheme.

Our thoughts

As an initial step to ensuring they have an ESOG in place, trustees should review existing policies against the requirements of the Code and identify any gaps.

TPR calls on schemes to report significant cyber-related incidents

In December 2023 the Pensions Regulator (TPR) issued revised cyber-security guidance.  TPR asks schemes, their advisers and providers to report significant cyber incidents to TPR on a voluntary basis.  TPR classes incidents as significant if they are likely to result in a significant loss of member data, a major disruption to member services, or negative impact on a number of other pension schemes or pension service providers.

TPR has recently published a report detailing learning points following a recent high profile cyber-security incident involving a major pensions administrator.  These include:

• ensuring that contingency plans don't underestimate the amount of work involved in identifying data affected by cyber-security incidents and matching that data to individuals;
• that trustees should contact members promptly if there is a reasonable chance their data is at risk.  It may be appropriate to do this before investigations into the cyber-security incident have been completed;
• trustees should be mindful that data may continue to be stored by other parties even when that party is no longer actively involved with the scheme; and
• the importance of ensuring that contact details are kept up to date.

Private markets investment guidance

The Pensions Regulator (TPR) has published guidance on private markets investment such as private equity, private debt, private real estate and infrastructure and natural resources.  The guidance outlines the main types of private market assets, key differences between public and private market investments and some of the opportunities and risks associated with private market investments.  It sets out the key considerations for trustees deciding whether to invest in private market investments.

New questions added to scheme return

The Pensions Regulator has published details of changes that have been made to this year's scheme return for defined benefit and hybrid schemes. There are new questions about fiduciary managers and investment consultancy providers, whether the scheme uses leveraged LDI, the scheme's primary contact in relation to pensions dashboard duties, and details of AVCs held by the scheme.

Lifetime allowance abolition: latest developments

The Finance Act 2024, which deals with abolition of the lifetime allowance, received Royal Assent on 22 February 2024. However, some changes that have been announced are due to be made by regulations that have not yet been published.

HMRC's Lifetime allowance guidance newsletter - December 2023 says that for the tax year 2024 to 2025 onwards a new reportable event, "Event 24" will be added to the Event Report on the Managing Pension Schemes service.  Event 24 will apply where an event has caused a member to exceed the member's available allowance, or where the allowance would have been exceeded but for the member relying on a protection or enhancement factor.  The newsletter says that the legislation as currently drafted provided for Event 24 to apply every time a lump sum is paid, but that this is an error and will be amended at the earliest opportunity.

On 25 January HMRC published its Pension schemes newsletter 155 which has a section on LTA abolition.  This identifies areas where HMRC believes the Finance Bill will require further amendment and also includes an FAQ section.  HMRC published a further set of FAQs on 13 February in its Lifetime allowance guidance newsletter. 

Ombudsman responds to Court of Appeal decision that Ombudsman not a "competent court"

On 20 December 2023 the Pensions Ombudsman (PO) published his response to the Court of Appeal's decision in Pensions Ombudsman v CMG Pension Trustees Limited.  The PO says that, in response to the ruling, the "DWP is supporting legislative changes to formally empower TPO to bring an outstanding overpayment dispute to an end without the need for a County Court order".  

In Pensions Ombudsman v CMG Pension Trustees Limited the Court held that the Pensions Ombudsman does not have the power to authorise trustees to make deductions from members' pensions to recover past overpayments.  This is because section 91(6) of the Pensions Act 1995 provides that trustees cannot exercise a right of set-off where there is a dispute as to the amount unless the obligation in question has become enforceable under an order of a "competent court".  The Court of Appeal held that the Pensions Ombudsman is not a "competent court" for this purpose.  The upshot of the Court's ruling is that even where the Ombudsman has held that trustees are entitled to recover past overpayments by offsetting them against future benefit payments, the trustees must (if the member continues to dispute the amount) obtain an order from the County Court before actioning any deduction.

The PO response contains a link to a factsheet providing guidance on how overpayment disputes should be managed until such time as the relevant legislation is changed.  The factsheet says that to facilitate the process, the PO's determination will set out a schedule of the amount and rate of recoupment.  When issuing the determination, the PO will provide a certified copy for the county court.  The factsheet includes details of the court process that must be followed to obtain the necessary court order.  The court will not revisit the merits of the PO's decision.

The PO's response also contains a link to the PO's decision in Mr Y CAS-39869-Q8J7, the PO's first determination in an overpayments case since the Court of Appeal judgment.  See below for our summary of that determination.

First Ombudsman determination re overpayments since Court of Appeal decision in CMG case

The Pensions Ombudsman (PO) has given his first determination in an overpayments case since the Court of Appeal's judgement in Pensions Ombudsman v CMG Pension Trustees Limited in which the Court held that the PO is not a "competent court" for the purposes of authorising scheme trustees to offset previous pension overpayments against future payments (Mr Y CAS-39869-Q8J7). 

In Mr Y's case, the Trustee discovered an overpayment of approximately £16,000 as a result of a failure to apply the required early retirement deduction to Mr Y's pension.  The Trustee had sought to exercise the remedy of equitable recoupment by withholding future increases to Mr Y's pension until the overpayment had been recovered in full.  The Trustee had apparently received unqualified legal advice that section 91(6) of the Pensions Act 1995, which requires scheme trustees not to exercise set-off without obtaining an order of a "competent court", did not apply in such circumstances.

The PO's determination notes that the in the CMG Court of Appeal case, much of the analysis was premised on the assumption that section 91(6) does apply where trustees seek to recover past overpayments by making deductions from future benefit payments.  The PO therefore concluded that, "The legal position is therefore, in my view, reasonably well settled on this specific issue."  The PO also concluded that, "Where there is a dispute concerning whether all or any part of the alleged overpayment is recoverable, this would still be considered a dispute as to the amount of the overpayment."

The PO concluded on the facts that the overpayments were recoverable, but that the Trustee should not have commenced recovery of the overpayments without an order of a competent court.  This gave rise to a somewhat convoluted determination, as the PO firstly ordered the Trustee to repay to Mr Y an amount equal to the monies he would have received had the pension increases not been withheld, and to increase Mr Y's pension to the level it would have been had the overpayment not been recovered in breach of section 91(6).  However, he then directed that, subject to satisfying section 91(6) (ie the requirement for an order of a competent court) the Trustee was entitled to recoup the overpayments by reducing Mr Y's monthly pension payments at the rate of £306.25 per calendar month.

Our thoughts

Under the current law, we now have a situation where trustees will be forced to incur the additional time and expense of obtaining a county court order before offsetting past overpayments against future benefit payments (unless the member agrees to this), even where the PO has held that trustees are entitled to recover overpayments in this way.  The county court will not revisit the merits of the PO's determination, so the requirement for a court order in such circumstances benefits no one.  We hope that the DWP makes the required legislative change quickly to remove the requirement for a court order in such circumstances.

Ombudsman holds employer still liable for section 75 debt despite delay in pursuing claim

In this article we look at a Pensions Ombudsman determination regarding the employer debt regime under section 75 of the Pensions Act 1995.  The Ombudsman held that scheme trustees were not time barred from pursuing a section 75 debt despite having allowed a period of years to elapse without notifying the relevant employer that a debt would be due.  However the Ombudsman did find that the scheme's trustee was liable for negligent misstatement for assuring the employer that nothing would change as a result of incorporation of the employer's business when the reality was that the change in employer triggered a substantial section 75 debt.  For more detail, click here. 

Ombudsman dismisses complaint where buy-out meant no more discretionary pension increases

The Ombudsman has dismissed a complaint by a member regarding the fact that following a scheme buy-out, the member no longer received discretionary increases on his pension (Mr Y CAS-93708-Q1W7).  

Mr Y had been in pensionable service under the scheme from 1 November 1983 until 30 April 1997. In April 2008 Mr Y started to receive his pension.  For pension accrued before 6 April 1997, the scheme rules did not confer a right to pension increases on the excess over GMP.  However, they provided, "Any pension or annuity currently payable out of the Scheme shall be reviewed annually and may with the consent of the Principal Employer from time to time be increased by such amount and at such times as the Trustees after taking the advice of the Actuary shall decide."

In 2018 the scheme's trustees purchased a bulk annuity policy in respect of the scheme's pensioner liabilities, including those of Mr Y.  The policy did not provide for increases on pre-6 April 1997 pension in excess of GMP. In 2020 the Trustees wrote to Mr Y explaining that the policy securing his benefits was to be transferred into his name.  On 1 January 2022, the scheme employer triggered the winding-up of the scheme.

In January 2022, in correspondence with an association of the scheme's pensioners, the employer said that there were not sufficient residual funds in the scheme to insure pre-1997 discretionary pension increases and that, as the employer was not willing to make an additional payment to the scheme, no such increases would be provided via the insurance policies securing members' benefits.  Following a complaint by Mr Y in 2022, the Trustees said that in eight of the last 13 years, no discretionary increases had been awarded.

The Ombudsman rejected Mr Y's complaint, holding that as increases on the pre-6 April 1997 excess over GMP had not been payable as of right, there was no requirement for the Trustees to secure any such increases when purchasing the buy-out policy.  The Ombudsman also noted that even if there was a surplus after benefits had been secured on a winding-up, the Trustees were under no obligation to use any such surplus to increase benefits and the scheme rules allowed surplus to be paid to the scheme's participating employers with the consent of the Principal Employer.

Our thoughts

The Ombudsman's decision in this case is unsurprising.  A finding that trustees are under an obligation to provide for discretionary increases on a buy-out would (in the absence of a very clear provision to that effect in the scheme's rules) have sent shockwaves through the pensions industry.  Nevertheless, this case does highlight that where there has been a past practice of awarding discretionary pension increases, a move to buy-out that removes any possibility of future discretionary increases may not be popular with pensioners.

Complaint dismissed where trustees split surplus 50/50 between benefit increases and employer

The Ombudsman has dismissed a member's complaint regarding a decision by scheme trustees to split a surplus on scheme wind-up 50/50 between enhancing member benefits and a payment to the scheme's employer.  The member had argued that the whole of the surplus should have been used to increase member benefits (Mr Y CAS-94719-B9L5).

The scheme rules provided that if a surplus remained on a scheme wind-up after benefits payable as of right had been secured, "The Trustees may use all or part of them in one or more of the following ways…"  The three ways listed were broadly: (a) to increase the benefits of members and other beneficiaries; (b) to provide a different benefit for or in respect of members and beneficiaries; and (c) to provide a benefit to anyone whose benefits had been forfeited.  The rules required that any surplus then remaining was to be paid to the scheme's employer, subject to deduction of tax.

The Trustees said that they had taken independent legal and actuarial advice to ensure that a proper process was followed.  They said the factors that they had considered included:

• the current levels of high inflation and the inflationary protection provided by the scheme, which included fixed 5% per annum increases granted on pensions accrued before July 2006;
• the costs of increasing members' benefits;
• the impact of different potential uplifts to members' benefits; and 
• the interests of the scheme's sponsoring employer.  In this respect the Trustees considered that the employer had a legitimate interest in the surplus, which had arisen in large part due to the employer's £3 million contributions to the scheme in 2016/17 and further deficit recovery payments of £0.85 million from 2016 onwards.  The employer had also paid the scheme's running costs which amounted to £0.72 million over the same period.

The Ombudsman dismissed the member's complaint.  He found that:

• the Trustees had followed the requirements of the scheme rules and interpreted these correctly;
• the factors which the Trustees had taken into account had been relevant, and they had not taken into account any irrelevant factors; and
• the decision reached by the Trustees was not unreasonable or one that was perverse to the extent that no other reasonable decision-maker could have made it.

Our thoughts

This is not the only case in the past year in which a scheme member has complained to the Pensions Ombudsman about a decision by trustees to pay surplus to an employer on a scheme wind-up.  When faced with such a complaint, the Ombudsman will consider whether the trustees have followed the scheme rules, whether they have adopted a proper decision-making process (taking into account relevant factors and not taking into account irrelevant factors), and whether the decision is one which a reasonable body of trustees could have taken (ie is not perverse).  Provided the Ombudsman is satisfied on these points, there is no obvious basis for the Ombudsman to overturn a trustees' decision on surplus.  However, as this case illustrates, it only takes one member to bring a complaint, so trustees making decisions about distribution of surplus need make sure they can demonstrate that they have followed a proper decision-making process.

Delay in making transfer value did not amount to maladministration

The Pensions Ombudsman has dismissed a complaint by a member who complained that he had suffered a loss of £32,470 because a delay in processing his transfer out had delayed the point at which he could make his intended investments in the receiving scheme (Mr N CAS-57256-T1V5).

The scheme administrator received Mr N's completed transfer paperwork on 29 or 30 April 2020.  Because Mr N was taking a transfer value of over £30,000 from a defined benefit to a money purchase scheme, the scheme's trustee was obliged to ensure that Mr N had taken appropriate independent advice.  On 22 May 2020 the scheme administrator e-mailed the company which appeared to be the employer of the member's IFA (the "Financial Advice Company").  The administrator said it had been made aware by the FCA that some advisers were using the details of the Financial Advice Company when they did not work there.  The scheme administrator therefore asked the Financial Advice Company to confirm whether it employed Mr N's IFA.  There was no evidence before the Ombudsman that the Financial Advice Company responded to this e-mail, though Mr N did get in touch to confirm that the IFA was FCA-regulated.  On 26 May 2020 the administrator completed its due diligence checks for Mr N's transfer.

There followed some subsequent correspondence regarding the fact that a very small portion of Mr N's AVC fund was held in investments from which it would take longer to disinvest.  The transfer was completed on 5 June 2020.

The Ombudsman's decision

The Ombudsman found that the transfer had been completed within 23 or 24 working days of Mr N's request (depending on the exact date of receipt of the transfer value request).  The Ombudsman said that whilst it may have been theoretically possible for the scheme administrator to carry out certain actions more quickly than it did, the transfer was completed well within the statutory six month deadline.  The Ombudsman found that the time taken was reasonable and did not amount to maladministration.  Whilst it was unfortunate that the unit prices of Mr N's intended investments  appeared to have increased over the period in question, the Ombudsman did not consider that Mr N should receive any redress for his claimed financial loss.

Our thoughts

This case is interesting because there has been at least one instance, in the context of a transfer from a money purchase scheme, of the Pensions Ombudsman upholding a complaint relating to a shorter delay period notwithstanding that no statutory time limits were breached.  It appears that the Ombudsman may make a distinction between (a) cases such as those of Mr N the member has a right to a transfer value of a guaranteed amount, but delay results in investments being made in the receiving scheme at a less advantageous time, and (b) cases where the transfer value paid from the transferring scheme is lower than it would have been because of a delay.

PPF Levy Determination 2024/25

The PPF has issued its levy determination for 2024/25 confirming its intention to reduce its levy to £100 million (compared to £200 million for the previous year).  The PPF expects 99% of schemes to see a decline in their levy.

Government consults on a public sector consolidator and changes to surplus rules

The Government is consulting on changes to the law governing payments of surplus to employers, and also on proposals for establishment of a public sector "consolidator" vehicle for defined benefit pension schemes.  The consultation runs until 19 April 2024.

Extraction of surplus

The consultation seeks views on:

• the possibility of introducing either an overriding statutory power to make surplus payments to employers or a statutory power to allow scheme rules to be amended to allow surplus payments to the scheme employer;  
• amending the tax regime to allow surplus to be used for one off payments to members in circumstances where such payments would currently be taxed as unauthorised payments;
• altering the funding threshold for extraction of surplus so that it is no longer necessary for a scheme to be fully funded on a buy-out basis in order for surplus to be paid to the employer; 
• what the criteria should be for extraction of surplus; and
• the possible introduction of the option to pay a PPF "super levy"  in exchange for the PPF offering 100% compensation in the event of employer insolvency.

Model for a public sector consolidator

The consultation seeks views on the establishment, by 2026, of a public sector consolidator administered by the PPF.  The idea is to provide an alternative "endgame" solution for schemes unattractive to commercial consolidation providers (ie insurance companies offering buy-outs and commercial superfunds).  The consultation seeks views on what eligibility criteria should apply to a public sector consolidator.  The Government is proposing that the consolidator pays the actuarial equivalent of full scheme benefits to the members of transferring schemes, but does so under a small number of standardised benefit structures.  It suggests that the public sector consolidator could be required to meet the same funding standards as commercial consolidators.

The consultation proposes that schemes could be allowed to enter the public sector consolidator while still in deficit, with the employer entering into a contract to make good the deficit by instalments.  In the event of employer insolvency before all instalments had been paid, members would have their benefits reduced.

The consultation includes questions designed to gauge the level of interest in a public sector consolidator.

Our thoughts

The proposals contained in the consultation would amount to major changes in the pensions landscape.  Most of the proposals would take some time to implement.  It is not yet clear whether these proposals would be taken forward in the event of a change of government at the next General Election, though Labour has said that it is in principle in favour of greater consolidation of pension schemes. 

Labour sets out its vision for pensions policy

In its "Financing Growth" report published on 31 January 2024 the Labour party has set out its vision for the financial services sector.  Whilst only a small proportion of the document is devoted to pensions, the document gives an indication of Labour's likely areas of focus in the event of a General Election victory.  

The document outlines the following specific pension policies:

• Labour intends to enable "greater consolidation of all types of schemes".  For DC schemes, Labour will give the Pensions Regulator (TPR) new powers to bring about consolidation where schemes fail to offer sufficient value to members.  Labour will ask TPR to provide explicit guidance around fund and strategy suitability, and their expectation of a default cohort investment approach.  Labour says it will "keep the minimum thresholds for scheme performance under review to ensure continued improvement in returns where possible."
• Labour will review the current state of the pensions and retirement savings landscape evaluate whether the current framework will deliver sustainable retirement incomes for individuals.  The review will cover all types of pension schemes.  Labour wants to tackle barriers to pension schemes investing more into UK productive assets.
• Modelled on the French ‘Tibi’ scheme, Labour will set up an opt-in scheme for DC funds to invest a proportion of their assets into UK growth assets –split between venture capital, small cap growth equity, and infrastructure investment.  The participating institutional investors will be asked to allocate a small proportion of their funds to the scheme and will have full discretion over which funds from the accredited list that they invest in.

Our thoughts

In terms of headline policy, namely wanting to see more investment in productive assets and consolidation of pension schemes, there does not appear to be a huge gulf between Labour's policies and current government policy.  Notably there is no mention of the lifetime allowance – perhaps an indication that Labour would not seek to reverse the abolition of the lifetime allowance.

PASA Pensions Dashboards Connection Readiness Guidance 

In December PASA published its Pensions Dashboards Connection Readiness Guidance.  The guidance is divided into five key "pillars":

• Governance Readiness: ensuring a project is in place to deliver connection and that the right stakeholders are engaged;
• Matching Data Readiness: preparing for find requests at scale; 
• Pension Values Readiness: Preparing to handle view requests at scale, which involves improving the quality and coverage of view data, including pension values;
• Technology Readiness: ensuring the scheme is tested and running on its 'Provider Connection Technology';
• Administration Readiness: Establishing business processes are in place to handle queries, ongoing changes, and impacts on business as usual resulting from dashboard connection.

The guidance provides information on what each pillar entails, the steps required to achieve readiness, and how success can be evidenced. It also includes a timeline suggesting it may take 18 months or longer to achieve all elements of connection readiness for one scheme.