UK: What's happening in Pensions - January 2011

Last Updated: 19 January 2011
Article by Paul Stannard

CPI for RPI Consultation on impact for private sector schemes

Consultation:

http://www.dwp.gov.uk/consultations/2010/cpi-private-pens-consultation.shtml

The Government has issued a consultation on the impact on private sector occupational pension schemes of the move from RPI to CPI as the measure of price inflation (see WHiP Issues 20 and 22). It is proposed that there will be:

  • no legislation requiring schemes to switch from RPI to CPI for revaluation or indexation of pensions in payment where increases by reference to RPI are specifically written into scheme rules; and
  • no assistance where the employer and/or trustees would like to switch but are hindered or prevented from doing so by the scheme amendment power and/or section 67 of the Pensions Act 1995 (relating to the protection of subsisting rights).

This means in particular that where a scheme's rules expressly state that revaluation or increases in payment are by reference to RPI, it could be very difficult to change the revaluation or increases attaching to pension already accrued.

It is proposed, however, that schemes with rules that require the indexation of pensions in payment by reference to RPI will not need to apply a CPI underpin to their RPI indexation calculation. There is no similar suggestion in the consultation document for revaluation rules (for which the problem is less common) but this might be an oversight.

The DWP also proposes that changing the rate at which pensions are increased or revalued will be a "listed change" for the purposes of the regulations requiring prior consultation with affected members, "but only where that change would be less generous to members or members of a particular description". Presumably this is intended to include a move from RPI to CPI but the drafting could be clearer on this.

The consultation closes on 2 March 2011.

2010 Revaluation order

Revaluation order:

http://www.legislation.gov.uk/uksi/2010/2861/contents/made

The 2010 revaluation order has been laid before Parliament. These annual Orders specify the rates applicable under the statutory requirements for revaluation and the increase of pensions in payment. As was already known, the 2010 order uses CPI as the measure of price inflation for 2010.

Accounting treatment

UITF abstract:

http://www.frc.org.uk/asb/uitf/pub2477.htm

The Urgent Issues Task Force (UITF) of the Accounting Standards Board has published its final abstract on how companies should reflect, under accounting standard FRS17, a reduction in the liabilities of a scheme which they sponsor caused by a switch from RPI to CPI in the revaluation and/or indexation provisions of that scheme. This follows a consultation and draft abstract last year (see WHiP Issue 22). The abstract also explains when the effect of a reduction in scheme liabilities should be recognised and what disclosures should be made.

Tax regime changes

Various documents and draft clauses have been published regarding forthcoming changes to tax legislation. Please see WHiP Issue 22 for detailed background.

Annual allowance

HM Treasury website:

http://www.hmtreasury.gov.uk/consult_pensionsrelief.htm

It had already been announced that there would be an exemption from the AA charge where the member is entitled to a serious ill health commutation lump sum. An exemption will now also apply to some cases of ill health early retirement even when there is not very short life expectancy, i.e.:

"if the individual ... becomes entitled to all the benefits to which the individual is entitled under the arrangement in consequence of the scheme administrator having received evidence from a registered medical practitioner that the individual is suffering from illhealth which makes the individual unlikely to be able to undertake gainful work (in any capacity) at any time in the future (otherwise than to an insignificant extent)"

When the ill health enhancement is simply the disapplication of an actuarial reduction, there will be no additional pension input and so no AA charge can be triggered by that alone. If, however, the enhancement is by way of adding prospective service or if there is a fixed benefit (for example a fixed lump sum or a fraction of salary) that is more generous than the accrued unreduced pension then there will be an additional pension input to be taken into account when the individual compares his or her total pension input amount against the £50,000 annual allowance.

Note that the test is a very strict one that will be harder to satisfy than the incapacity test in most schemes' rules. Members of schemes with such enhancements might therefore ask trustees also to seek medical advice based on this stricter test when seeking medical advice under the scheme rules' test. Moreover, depending on the final form of the clause, some schemes may consider amending their ill health retirement rule.

There are new anti-avoidance provisions relating to the AA. There will be the concept of an "avoidance-inspired post-entitlement enhancement", which is "an increase in the annual rate of a scheme pension under the arrangement, at a time after the member has become entitled to the scheme pension" "if the main purpose, or one of the main purposes, of the individual in entering into the scheme [sic] was to avoid or reduce a liability to the annual allowance charge". Such an enhancement will result in an additional pension input. This is less far-reaching than expected. For example, whilst it would catch improvements to pension increase rates, it would not catch pre-retirement increases to aspects of the pension that do not affect its value for AA/LTA purposes, such as lowering the member's normal pension age. There is, however, a proposed power for the Government to amend this (and other provisions) by regulations.

See also "Anti-avoidance ('disguised remuneration')" below for avoidance by the use of non-registered pension schemes.

Guidance on annual allowance "carry forward" and pension input periods

HMRC guidance:

http://www.hmrc.gov.uk/pensionschemes/rest-pens-tr.htm

HMRC has issued guidance on the unused AA "carry forward" facility and the setting of pension input period (PIP) end dates for AA purposes.

The guidance includes a section on the retrospective changing of PIP end dates. There is a window of opportunity before 6 April 2011 for schemes to set their PIP end dates retrospectively to suit their administration systems. After then, the law will change with the effect that only future PIP end dates may be changed.

We presume that if PIP end dates have already been set, they cannot now be changed. For DC arrangements, as is already the case, an individual member may nominate his or her own PIP end date if the trustees have not already notified him or her of a date. Scheme administrators may find it a nuisance to have DC members with different PIP end dates, particularly now that they are likely to be faced with more requests for pension input statements as more members are potentially affected by the reduced AA. Trustees should therefore be thinking about making their own PIP end date nomination, perhaps to tie in with the scheme year end, and notifying members of this.

Please note, if you are changing a PIP end date, that it is not permissible to have two PIP end dates in the same tax year.

Consultation on "scheme pays" for high annual allowance charges

Consultation:

http://www.hmtreasury.gov.uk/d/consult_pensions_301110.pdf

The Government is consulting on proposals to require schemes, on request, to pay high AA charges on behalf of members. Members are likely to be required to pay at least part of the charge themselves (£2,000 to £6,000 is suggested) so those with AA charges below that level would have to pay the whole charge themselves. In other cases, the member may require the scheme to pay the rest and reduce his or her benefits correspondingly. Trustees would not be entitled to charge for collecting this tax on behalf of HMRC.

The trustees would decide the assumptions to be used in calculating the benefit reduction. There is a question over whether the scheme should be required to pay the charge when it arises or when the member's benefits crystallise – the Government will decide one option or the other; it is not proposed that the member or the trustees will be able to choose. If payment is deferred, interest would be added at the rate applied to late payments of tax.

If the individual is a member of more than one scheme, he or she is likely to be able to choose which scheme to ask to pay the charge. If, however, the AA was exceeded by pension savings in a single scheme, the member would have to choose that scheme.

The facility might be applied only to DB arrangements: the consultation paper asks if it is really necessary for DC arrangements, where the member has greater control over the level of pension input.

Draft Finance Bill clauses are expected in February 2011.

Anti-avoidance ("disguised remuneration")

HM Treasury proposals:

http://www.hmtreasury.gov.uk/d/disguised_remuneration.pdf

There will be legislation to prevent the use of trusts and similar arrangements to avoid the AA charge. This includes employer-financed retirement benefit schemes (EFRBSs, i.e. non-registered pension schemes). Without anti-avoidance legislation, it could be more tax efficient to use an EFRBS rather than a registered pension scheme to provide pension benefits to an employee affected by the AA.

The scope of the draft legislation is very unclear. The tax benefits of funded EFRBSs are intended to be withdrawn but it seems that unfunded EFRBSs (i.e. employers' contractual promises to pay pensions) may also be affected, especially if they are backed up by security. The answer might depend on whether the arrangement is documented as a trust. We will be raising a query with the Government about this.

The legislation will attack contributions to EFRBSs or assets earmarked ("however informally") for individuals' benefit. An employment income tax charge and National Insurance contributions will apply as though the amount of the sum or the value of the asset concerned were a payment of PAYE income provided by the employer to the employee.

There are anti-forestalling provisions attacking the payment of sums and provision of assets between 9 December 2010 (when this was announced) and 5 April 2011, if they would be caught by the anti-avoidance legislation if paid or provided after 5 April 2011. These allow the unwinding of any such payments before 6 April 2012 as a way of avoiding the tax and NI charges.

Lifetime allowance

Draft HMRC LTA guidance:

http://www.hmrc.gov.uk/budgetupdates/autumn-tax/lta-guidance-2680.htm

As expected, the lifetime allowance (LTA) is to be reduced from £1.8 million to £1.5 million in April 2012 (see WHiP Issue 22). Anyone (other than those who already have enhanced or primary protection) may apply to keep an LTA of £1.8 million ("fixed protection") if they make no further pension savings after 5 April 2012. Revaluation in line with scheme rules as they currently stand will not count as pension savings for this purpose. Enhanced and primary protection will both continue to apply.

The limit on trivial commutation and winding-up lump sums (which is currently 1% of the £1.8 million annual allowance) will be specified as £18,000. There will be no automatic indexation of this figure but the Government will have power to increase it by regulations.

Removing the requirement to annuitise by age 75

HMRC Treasury website:

http://www.hmtreasury.gov.uk/consult_age_75_annuity.htm

The requirement for DC arrangement members to buy an annuity by age 75 is to be abolished from 6 April 2011 (see WHiP Issue 20). As an alternative to a scheme pension or annuity purchase, DC members may draw down pension from their capital sum while keeping it invested. The annual drawdown limit will be set at 100% (currently 120%) of the value of a comparable annuity (as determined by the Government Actuary). Individuals with a lifetime pension income of at least £20,000pa (including state pensions, annuities and pensions from other schemes) will be able to make uncapped drawdowns (including of the full scheme entitlement as a lump sum). An individual who takes his or her entire drawdown fund will be subject to the annual allowance charge on the full amount of any further pension savings.

Funds remaining on the beneficiary's death after drawdown has started that are paid out as a lump sum will also be taxed at 55% (but note that there is no tax charge if the member has no living dependants and it is paid to a charity). There will be no such tax charge in respect of members who die before age 75 without having bought an annuity or having started drawdown.

For both DC and DB arrangements, the age 75 ceiling will be removed for pension commencement lump sums, serious ill-health lump sums, trivial commutation lump sums and winding-up lump sums. However, a 55% charge will be payable on serious ill-health lump sums paid after the individual has reached age 75.

A summary of consultation responses including the Government's response has also been issued.

Early access to pension savings

HM Treasury website:

http://hmtreasury.gov.uk/consult_early_access_pension_savings.htm

The Government has issued a call for evidence on accessing pension savings before (in most cases) age 55. This would be permitted in order to encourage pension saving and to help alleviate cases of hardship (of the member and also perhaps of their relatives). The options under consideration will be:

  • loans from the pension fund to the individual;
  • permanent withdrawals (but perhaps only in cases of hardship);
  • early access to the pension commencement lump sum (i.e. before age 55 and before drawing the pension);
  • "feeder-funds" linking ISAs and pensions together.

The paper asks if these options should be permitted for DB as well as DC schemes.

It also asks for suggestions to help DC members with low-value pension savings (perhaps under £5,000) to access their benefits, for example by raising the trivial commutation thresholds or by facilitating transfers in order to combine funds. Responses should be submitted by 25 February 2011.

Pension protection levy 2011/12

PPF 2011/12 levy web page:

http://www.pensionprotectionfund.org.uk/levy/1112_determination/Pages/11-12Determination.aspx

The Pension Protection Fund has published final documentation relating to the 2011/12 pension protection levy, including requirements and guidance as to the reporting and certification of contingent assets, deficit reduction contributions and block transfers.

The pension protection levy includes a risk-based element which is calculated by reference to a scheme's underfunding level, the insolvency risk of its sponsoring employer, and the anticipated funding needs of the PPF (by way of a "scaling factor": 2.07 for 2011/12). It also includes a scheme-based element not related to risk, calculated as a multiplier (0.000135 for 2011/12) of the scheme's PPF-protected liabilities.

The risk-based element of the 2011/12 PPF levy is payable by schemes with a funding level of less than 155% on the PPF valuation basis as at the most recent valuation submitted (via the Pensions Regulator's "Exchange" system) by 5pm on 31 March 2011 (but taking into account subsequent deficit reduction contributions if properly certified). It is calculated on a sliding scale (referred to as the "taper"), with schemes funded at less than 135% paying the full amount.

Contingent assets can be used to reduce or eliminate the risk-based element of the PPF levy if certification documentation is filed with and accepted by the PPF. Annual re-certification of existing contingent assets is also required. The deadline for certifying and re-certifying contingent assets (including the provision of hard copy supporting documents) is 5pm on 31 March 2011.

There are the following changes this year:

  • Schemes now trigger the risk-based element of the PPF levy if they are less than 155% (formerly 140%) funded on the PPF valuation basis and pay the full levy if less than 135% (formerly 120%) funded.
  • For types B and C contingent assets (i.e. security, letters of credit and bank guarantees), a reduced levy is payable if the asset improves the funding level on the PPF valuation basis to a level between 135% and 155% (formerly 120% and 140%).
  • The cap on the risk-based element of the PPF levy is increasing from 0.5% to 0.75% of PPF-protected liabilities.
  • A copy print-out of the contingent asset certificate (from "Exchange") must be included when submitting hard copy supporting documents to the PPF.

Compromising pension disputes

Case report:

http://www.bailii.org/ew/cases/EWCA/Civ/2010/1349.html

The Court of Appeal has given its written reasons in the appeal of IMG v German and HR Trustees. As reported in WHiP Issue 19, an oral ruling was given in June 2010 to the effect that the High Court was wrong to rule (see WHiP Issue 15) that section 91 of the Pensions Act 1995, which generally invalidates the surrender of pension rights, prevents the valid settlement of pension disputes.

The Court of Appeal's written reasons confirm that it has overturned the High Court's ruling in this regard. This was the only issue in this appeal: the intention was that if this ruling was given then the remaining disputes in the case could be validly settled.

The question asked of the Court was framed disappointingly narrowly: "Would s91 of the Pensions Act 1995 render unenforceable a court-approved compromise of all the issues in the appeal and cross-appeal?" The judgment is clear, however, that section 91 does not prevent the bona fide compromise of a genuine pension dispute without the need to seek the court's approval.

Financial support directions: High Court decision

Case report:

http://www.bailii.org/ew/cases/EWHC/Ch/2010/3010.html

The Pensions Regulator has already decided to issue a Financial Support Direction (FSD) against certain of the Lehman Brothers and Nortel companies in administration (see WHiP Issues 22 and 20). Those FSDs will require the companies to put financial support in place for the Lehman Brothers and Nortel pension schemes. If the companies do not comply, the Regulator may issue contribution notices requiring the companies to pay contributions to the pension schemes.

In Bloom and others v The Pensions Regulator (Re Nortel), Mr Justice Briggs has held that liabilities flowing from an FSD to a company after it has gone into administration must be discharged by the administrators as expenses of the administration. The same principle applies to companies in liquidation. This means that an administrator or liquidator must comply with an FSD, and the expenses of doing so may be met as disbursements from the estate. Similarly, if the Pensions Regulator issues a contribution notice because the company has not complied with an FSD during its administration or liquidation, the liability under the contribution notice must also be met as an expense.

Mr Justice Briggs had some sympathy for the view that liabilities flowing from an FSD ought to be provable debts and so rank in the same way as claims by unsecured creditors. But he roundly rejected the administrators' argument that any FSD liabilities should fall into a "black hole" (and effectively be unenforceable against insolvent companies) because they are neither expenses of the administration/liquidation nor provable debts. The judgment will also be a considerable relief to the Pensions Regulator and to pension scheme trustees where the employer is insolvent or threatened with insolvency. Conversely, it may be of concern to other types of creditor of insolvent companies.

It will be also of concern to insolvency practitioners. However, Mr Justice Briggs concluded that the Court would have jurisdiction to determine in advance of an FSD being issued or complied with that an administrator's fees could take priority over any liabilities subsequently arising as a result of the Pensions Regulator issuing an FSD.

This decision does not affect the status of liabilities that arise from an FSD which is issued before the company enters insolvency. Whilst the status of these liabilities was not the subject for determination by the court, the principles set out in this case suggest that such liabilities would rank as provable debts in the company's insolvency.

The administrators have obtained leave to appeal to the Court of Appeal.

(Note: So far as the Lehman Brothers and Nortel insolvencies are concerned, if an FSD is issued during the administration and the company then goes into liquidation, a contribution notice made as a result of non-compliance with the FSD will be a provable debt, not an expense of the liquidation. This is because of the Insolvency Rules that applied when the relevant Lehman Brothers and Nortel companies went into administration. Under those Rules, if a company goes from administration to liquidation, the relevant date for determining whether debts are provable is the date on which the company goes into liquidation (not the earlier date on which the company went into administration). The Insolvency Rules have now been amended on this point.)

Pensions Regulator statement:

http://www.thepensionsregulator.gov.uk/press/pn10-26.aspx

The Pensions Regulator has issued a statement on the decision.

Phasing out the default retirement age

Consultation response:

http://www.bis.gov.uk/Consultations/retirement-age?cat=closedwithresponse

ACAS guidance:

http://www.acas.org.uk/index.aspx?articleid=3203

The Government has confirmed its proposal (see WHiP Issue 20) to phase out the default retirement age (normally age 65) under age discrimination legislation from April 2011.

There will be a transitional period permitting the enforcement of retirement for retirements before 1 October 2011 that are initiated before 6 April 2011. Employers will still be able to operate a compulsory retirement age if they can objectively justify it.

Concerns had been raised about the consequences of removing the default retirement age for the provision of risk benefits such as life assurance, medical cover and PHI. The Government has decided to add an exception to the age discrimination legislation in respect of "group risk insured benefits provided by employers". We will need to look carefully at the legislation when it appears to see what is covered.

The Government, via ACAS, has issued guidance for employers on "Working without the default retirement age".

Normal minimum pension age of 50/55

HMRC Newsletter:

http://www.hmrc.gov.uk/pensionschemes/ps-newsletter44.pdf

Q&A document:

http://www.hmrc.gov.uk/pensionschemes/min-pen-age.pdf

Since 6 April 2010, pensions are subject to unauthorised payment charges if they start to be paid before age 55, except in certain circumstances. HMRC had earlier (see WHiP Issue 20) announced that the exceptions would continue to apply to members who change pension provider. It has now announced that it will be extending this to cover DC members who switch or transfer from an unsecured pension (i.e. where the member's DC pot remains invested and regular payments are made from it without an annuity having been purchased) to a scheme pension or an annuity provider, or to a different unsecured pension provider. The changes are all to be backdated to 6 April 2010.

HMRC has also corrected an earlier announcement concerning the date for applying the normal minimum pension age (50 or 55) test. It had previously said that the member's age on the date he or she first becomes entitled to draw pension is the age to be used. It now accepts that it is the date of the first pension payment that counts. Trustees who relied on the earlier, incorrect statement will not be subject to an unauthorised payments charge.

A previously issued Q&A document has also been updated to reflect this.

Abolition of DC contracting-out

Consultation response:

http://www.dwp.gov.uk/docs/abolitioncontracting-out-dc-response.pdf

The Government has changed its mind and will allow transfers from contracted-out DB schemes to DC schemes when DC contracting-out is abolished, with the receiving scheme not having to retain any protections relating to the formerly contracted-out rights. The announcement appears in the Government's response to the consultation (see WHiP Issue 20) on draft legislation regarding the abolition of contracting-out on a DC basis from 6 April 2012.

It had been commented that the original proposal would have prevented enhanced transfer value exercises. Although this is no longer the case, there will be "safeguards to ensure that members are aware of the implications of transferring, in particular that there will no longer be a requirement to provide for survivor benefit after transferring".

Other points of interest are as follows.

  • Under the original draft regulations, trustees would have had to inform members affected by the abolition of DC contracting-out within one month of this happening and within four months about the effect on them. The revised draft regulations (which have not yet been published) will also allow schemes to comply by providing this information at any time in the year before 6 April 2012.
  • A contracted-out DC arrangement that has paid a serious ill-health lump sum before 6 April 2012 will have had to retain protected rights for the member's spouse or civil partner. If the scheme's rules allow, trustees will be permitted to pay that remaining sum to the member after 5 April 2012.

Pensions Regulator

Guidance: Transfer and benefit conversion inducements

Pensions Regulator materials:

http://www.thepensionsregulator.gov.uk/press/pn10-25.aspxhttp://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx

http://www.thepensionsregulator.gov.uk/docs/transfer-incentives-consultationreport.pdf

The Pensions Regulator's final revised guidance on inducements to transfer out or modify benefits has been issued, with a consultation response. The guidance sets out the Regulator's expectations of what trustees and employers should do when there is a proposal to offer enhanced transfer values or to convert benefits (for example, converting non-statutory pension increases into additional fixed pension). The Regulator says that:

  • "Trustees should start from the presumption that such exercises and transfers are not in most members' interests, and they should therefore approach any exercise cautiously and actively. There will be members whose personal circumstances mean it is more likely that they would benefit from accepting such an offer. However, these cases are likely to be in a minority and, very possibly, a small minority. High quality financial advice is key to identifying those members.
  • Fully independent financial advice should be made accessible to all members and promoted in the strongest possible terms. In almost all circumstances, the structure of the offer should require that members take financial advice before accepting.
  • Members to whom an offer is being made should be presented with the appropriate information in a way that is clear, fair and not misleading, to enable them to make a decision that is right for them.
  • Trustees should engage in the offer process and apply a high level of scrutiny to all incentive exercises to ensure members' interests are protected. Trustees should ensure that they are comfortable that the selection, remuneration and broader commercial interests of advisers are aligned with members' interests.
  • No pressure of any sort should be placed on members to make a decision to accept the offer."

Guidance: Monitoring employer support

Pensions Regulator materials:

http://www.thepensionsregulator.gov.uk/press/pn10-23.aspxhttp://www.thepensionsregulator.gov.uk/guidance/monitoring-employersupport.aspx

http://www.thepensionsregulator.gov.uk/docs/monitoring-employer-supportconsultation-response.pdf

The Pensions Regulator has finalised its guidance for trustees on monitoring the employer covenant, following a consultation (see WHiP Issue 19). A consultation response has also been issued. Key points include the following:

  • "All trustees should therefore have a framework for assessing and reviewing employer covenant, including regular monitoring. Trustees should regard this as just as important to the security of the scheme as monitoring fund performance."
  • "Trustees should ask probing questions to understand the covenant the employer provides for the scheme, and where they have any doubts about their ability to do this, they should engage the right professional help."
  • "Trustees and employers should prepare plans for realising the employer support standing behind a scheme, should this become necessary. For example, this may encompass the provision of identified contingent assets to increase overall support or underwrite risks, or the agreement of negative pledges with the employer, such as not to grant new security without the agreement of trustees."

Guidance: Multi-employer schemes and employer departures

Pensions Regulator materials:

http://www.thepensionsregulator.gov.uk/guidance/multi-employer-schemes-andemployer-departures.aspx

http://www.thepensionsregulator.gov.uk/docs/multi-employer-consultationresponse.pdf

The Pensions Regulator has finalised its guidance for trustees and employers on the mechanisms by which an employer can depart from a multi-employer scheme, including the various options for reallocating a section 75 debt. A consultation response has also been published.

Analysis of recovery plans

Pensions Regulator report:

http://www.thepensionsregulator.gov.uk/docs/recovery-plans-assumptions-triggers-2010.pdf

The Pensions Regulator has published a report analysing DB schemes' recovery plans received up to 31 August 2010. This year, the report does not include an analysis of scheme funding (including contingent assets): a more detailed, separate report on that subject will follow.

New chair

Press release:

http://www.dwp.gov.uk/newsroom/pressreleases/2010/dec-2010/dwp174-10-081210.shtml

The new chair of the Pensions Regulator, from 1 January 2011, is Michael O'Higgins.

Central Government outsourcing: Two tier code replaced

Cabinet Office website:

http://www.cabinetoffice.gov.uk/resourcelibrary/principles-good-employmentpractice

The "Two Tier" code of practice that required central government bodies outsourcing functions to the private sector to ensure that new recruits working in that function would be given the same pension (and other) benefits has been withdrawn. It has been replaced by "Principles of Good Employment Practice". These are voluntary principles that will not be enforced as part of the procurement process. They "provide a flexible guide to suppliers and signal what Government expects of the best suppliers in their employment practices".

Principle 3 says: "Where a supplier employs new entrants that sit alongside former public sector workers, new entrants should have fair and reasonable pay, terms and conditions. Suppliers should consult with their recognised trade unions on the terms and conditions to be offered to new entrants."

The "Fair Deal" code, which requires providers of functions outsourced from central government to provide transferred staff with broadly comparable benefits, is also due to be reviewed shortly.

Note that none of this applies to local government outsourcings.

TUPE transfer: assurances by new employer

Case report:

http://www.bailii.org/ew/cases/EWCA/Civ/2010/1312.html

In Whitney v Monster Worldwide Ltd (MWL), the TUPE regulations operated to transfer contracts of employment to MWL. The transferring employer had guaranteed employees in 1989 that there would be "no detriment" to them when they agreed to move from a DB to a DC arrangement. When there was a TUPE transfer to MWL in 1997 as part of an internal reorganisation following a change of ownership, assurances were given by MWL that terms and conditions would remain unaltered following the transfer, at least for the time being.

The Court of Appeal agreed with the High Court that MWL had given fresh assurances that amounted to contractual promises. Although most contractual rights relating to occupational pension schemes do not transfer under TUPE, MWL as new employer had effectively entered into a novation of the employees' terms and conditions, which the Court of Appeal found included the "no detriment guarantee" on pensions.

High Court approves novel form of compromise

Case report:

http://www.bailii.org/ew/cases/EWHC/Ch/2010/3365.html

In Capita ATL Pension Trustees Limited v Zurkinskas, a case concerning the Sea Containers pension scheme, the High Court has approved a novel method of compromising pension disputes. It was acknowledged that the model used in this case could set a precedent as a convenient way of settling pension disputes in suitable cases.

The disputes in question concerned the validity of steps taken to equalise pensions between men and women and some changes to accrual and contribution rates. The purported changes were as follows.

  • The normal retirement date for new joiners was equalised at age 65 from 1 January 1991 by a deed of amendment dated 1 March 1993.
  • Normal retirement dates were equalised from 1 August 1994 by means of an announcement and acknowledgement slips to be returned before 22 July 1994.
  • Accrual rates were reduced with effect from 1 May 2002, except for members who agreed to pay increased contributions. This was documented by announcements and consent forms issued on 11 March 2002. (The return date for the forms is not mentioned in the judgment.)
  • A new definitive trust deed and rules was executed on 16 December 2005 but purported to take effect from 1 July 2004. It reflected the changes described above.

The scheme's amendment power provided that accrued benefits could not be reduced without members' consents. The first purported change above was therefore accepted as invalid to the extent it was retrospective.

Lawyers for the parties agreed, after negotiation, percentage chances of success between 20% and 45% for the employers' claims of validity of the other three changes described above. The actuary converted this into additional benefits for affected members and valued the additional liability at £17.5 million. The Court was asked to approve this compromise.

The Judge recognised that this was a novel approach and, noting that the costs of litigating the dispute should not exceed £1 million, considered that the compromise needed very careful scrutiny. He acknowledged that there had been a genuine negotiation process and that "a benefit can be shown to accrue to each of the members and to each of the employers if this compromise is approved". He noted that cost avoidance was a factor and that early resolution of the disputes had a number of advantages.

In this case, the historic employers were insolvent and the scheme is significantly underfunded. However, the scheme is being run as a closed scheme with a new principal employer which is a shell company controlled by the trustees.

Although the scheme was not in a PPF assessment period, it was recognised that the PPF had an interest in the case but it had decided not to be represented. The Judge also ruled that the compromise would result in rule changes but that those changes would have effect even if the scheme entered the PPF because they fell within a statutory exception to the general rule that rule changes made within the three years before a PPF assessment period are not recognised by the PPF. The relevant exception covers amendments made to comply with overriding sex equality laws.

Automatic enrolment: default investment options for DC schemes

Consultation:

http://www.dwp.gov.uk/consultations/2010/dc-default-option-consult.shtml

The Government is consulting on issues surrounding the selection of default options for DC schemes used for automatic enrolment. There are separate sections of the consultation paper regarding occupational and personal pension schemes. The consultation closes on 7 March 2011.

Corporate governance

NAPF corporate governance web page:

http://www.napf.co.uk/PolicyandResearch/Policy_topics/Corporate_Governance.aspx

The NAPF has finalised its revised Corporate Governance Policy and Voting Guidelines. These have been updated to take account of changes to the UK Corporate Governance Code which were announced by the Financial Reporting Council last year.

NEST

Press release:

http://www.nestpensions.org.uk/documents/NEST_Corporation_sets_NEST_charging_level.pdf

The National Employment Savings Trust (NEST) has announced a reduction in its charges. The 2% charge on contributions is reduced to 1.8%. The 0.3% annual management charge remains unchanged.

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