UK: Pensions Update - Autumn 2011

Last Updated: 22 November 2011
Article by Caoimhe O'Neill and Michael Jones

A new session means new legislation and case law. In this month's bumper issue we cover: the Pensions Act 2011, Nortel, the benefits of an "ignorance" defence and various other practical and legal nuggets for you to store away for Winter.

Lehman/Nortel court of appeal Judgment

On 14 October the Court of Appeal upheld the decision of the High Court, handed down in December 2010, that where a Financial Support Direction (FSD) is issued against a target company by the Pension Regulator following an insolvency event, the costs of complying with it would rank as an expense of the administration or liquidation. The effect of this is that the expense must be paid before any distributions to preferred creditors, floating charges and unsecured creditors,thus giving the FSD super priority.

The Court of Appeal has held that, where the Pensions Regulator issues an FSD to a company after that company enters administration, the liability under any subsequent Contribution Notice will rank as an expense of the administration. The court held that, if a statute imposes a financial obligation that arises after the administration or liquidation of a company and that liability is not otherwise provided to be provable as an unsecured debt, it will rank as a necessary disbursement and an expense of the relevant insolvency process.

Therefore this decision needs to be a factor in any corporate restructuring strategies adopted where a distressed company operates a defined benefit occupational pension scheme.

Equity treats as done what ought to have been done

The High Court has given judgment in HR Trustees Ltd v Wembley plc (in liquidation) and another (still to be reported). The case centred around the validity of an amendment made to a scheme operating under standard Legal & General rules. The rules included a requirement for the trustee to "forthwith declare" amendments in writing. The key issue for the court was whether the trustees had indeed properly declared the amendments. In this case the amendment was designed to reduce the annual rate of increase applying to pensions in payment for future service from 5% fixed to LPI capped at 5%. The court concluded that the amendment was valid even without the declaration as the court applied the maxim that equity "treats as done that which ought to have been done". When we have more details on this case we will let you know its wider application.

Incapacity, its always better to ask further questions

The Pensions Ombudsman's determination in the case of Middleton is further proof of the need for trustees to fully investigate a member's condition before reaching a decision as on ill- health application.

Mr Middleton was a member of the NHS Pension Scheme. In 2008 he applied for ill-health early retirement on the basis that his depression and blackouts meant he was permanently incapable of carrying on his normal employment. The trustees, in accordance with the Schemes definition of incapacity, sought medical evidence with respect to the various different conditions. The medical evidence indicated that no firm diagnosis had been obtained in respect of the blackouts, and that the medication was working to alleviate the symptoms of depression. However, neither pieces of advice specifically addressed whether the conditions were firstly, incapacitating the member and more importantly, likely to be permanent to a normal retirement date. The Ombudsman found that the trustees had wrongly concluded that because the medical advice suggested that there was no firm diagnosis and currently no further need for the medical assessment, the member had not met the Schemes definition. The trustees had failed to fully address their minds and therefore the medical evidence to the question of permanence. The Ombudsman therefore redirected the trustees to reconsider the matter.

We are not surprised by the outcome of this case. While disputes to the Ombudsman in respect of illhealth early retirement are frequent, it is generally a failure by the trustees to apply the schemes rules properly and consider full medical advice that trips trustees up. The case further highlights the need for trustees to fully address their minds to their schemes definitions of incapacity and, as in this case, to address the minds of the medical practitioners giving the reports to the relevant definitions. Where you have a mismatch between the definition and the medical findings, it is likely the matter can be re-opened by the Ombudsman. Trustees should therefore ensure that their medical practitioners are aware of the relevant definitions on which they are being asked to comment upon and that the trustees, when reviewing the matter, are in possession of both full and complete medical evidence and medical evidence that addresses the areas upon which they make their decision.

Ignorance is no defence

The first tier tax Tribunal gave its decision in Scurfield v Revenue & Customs in relation to a late application for protection against the lifetime allowance charge.

Mr Scurfield had previous been a Director of Norwich Union until his retirement in 1992. He was also a former President of the Institute of Actuaries. He had been drawing a pension since before the introduction of the A Day changes, and he had also been working part-time and contributing to a personal pension scheme. In September 2010 he applied to register for primary and enhanced protection against the lifetime allowance charge even though the deadline had passed on 5 April 2009. Mr Scurfield was therefore subject to a 55% Annual Allowance Tax Charge of his lump sum on the benefits under the second pension because the value of his first pension was in excess of the lifetime allowance. Mr Scurfield tried to argue that, as he was a pensioner, he was not connected to the world of finance and therefore, as he did not have a financial adviser in 2006, he was without expert advice and had no reasonable way of understanding the complexity that was the revised tax legislation. He tried to argue advice from previous tax case law that because the change related to complex technical rules the general proposition that ignorance of the law is not defence should not apply.

The Tribunal found that the A Day changes were very much in the public domain and had been so for five years before the deadline passed. Therefore as Mr Scurfield had all of the basic knowledge of finance? he should have, at some point, noted either through the popular press or otherwise the introduction of the lifetime allowance and the consequences for his personal financial affairs. Given that the individual was a former actuary, it is difficult to say whether an individual with no knowledge of pension matters or complex financial affairs would be able to argue that the introduction of the lifetime allowance charges fell within the more technical matters defence. However, it does further show that it is often very difficult to argue ignorance for matters that have been in the public domain for a long period of time.

PPF warns against trustees seeking missing beneficiary insurance for FAS cases

On 23 August 2011 the PPF published advice to trustees regarding whether it will be prudent to them or not to seek missing beneficiary insurance for FAS 1 cases. The advice, available at FASNews/Pages/FASNews.aspx states that in most cases the PPF does not believe that trustees need to seek missing beneficiary insurance and, before they do seek it, they should seek advice from the PPF.

The dangers of issuing incorrect benefits forecasts

In this case Oxford County Council had issued an incorrect summary of pension benefits on redundancy to Mr Wilson which he then relied on. Following a merger of Council services, Mr Wilson was one of two applicants for a post which he knew was going to one or the other. He knew that if he didnt apply for that post there was also a part-time post he could apply for and it was in the context of understanding the financial consequences of taking the part-time post that he had sought the redundancy forecast. Unfortunately for Oxford CC, they had forgotten to take into account the fact that the minimum pension age for Mr Wilson would be 55 as he would be retiring after April 2010. He therefore could not seek the reduced redundancy pension that was contained within the forecast. Relying on the incorrect forecast, Mr Wilson did not apply for the full-time post and instead sought the part-time post. The Ombudsman found that Mr Wilson clearly relied on the incorrect benefit statement, to his detriment, and had therefore not applied for a role which he had a 50/50 chance of obtaining. His actual employer, who had passed on the benefit statement while being in possession of the facts which would have made it capable of understanding that the statement issued by Oxford CC was incorrect, was not found guilty of misdirection. The Ombudsman did not believe that the actual employer had a duty to review the early retirement redundancy forecast.

The damages that were awarded against Oxford CC were to compensate Mr Wilson for his loss of earnings to age 65, including future pension accrual at the level of the redundancy package he opted for on the basis of the incorrect information.

This is a further case which shows that where an individual can prove that he relied to his detriment on the incorrect statement issued, the party issuing the incorrect information will be held liable for the direct loss that follows. In this particular case, the measure of quantifying the loss by reference to the chance of obtaining the position was very easy to calculate since there were only two candidates applying for one job. However, in circumstances where more individuals are potentially in line for redundancy, the loss of a chance will be more difficult to assess.

Check your scheme rules

On 1 September 2011 the Deputy Ombudsman found that where an employer had offered appropriate alternative employment to an applicant for an incapacity pension, the trustees must ensure that the employer applied the scheme rules correctly.

This case is centred around the new Airways Pension Scheme and a British Airways flight crew member who, although based in Heathrow, lived in Liverpool. The requirements of the incapacity rule applied if the individual was prevented from carrying out appropriate alternative employment where it is offered by the participating employer. The rule defined appropriate alternative employment as being employment which in the opinion of the principal employer is suitable and reasonable employment, taking into account the members skills and current salary level. In BAs case it had also issued guidance on its llhealth policy which states that it considered suitable alternative employment as being where the persons work is the same or within a reasonable distance. The guidance suggested that affected individuals would have their cases reviewed by an occupational health specialist, which had not happened in this case.

In his decision, the Deputy Ombudsman found that while the rules themselves did not require BA to take into account location, the issue of the guidance, (even after the decision?), which did talk about distance, would suggest that location had always been a factor taken into account. In addition, if location was irrelevant, there was nothing to stop BA offering individuals employment in far flung locations which was non sensical in the context of an individual suffering from incapacity.

BA was therefore guilty by administration as it should have asked its expert to consider whether Ms Green was fit for her normal duties and then separately, if she wasnt fit, whether the alternative employment could be found, taking into account the travel difficulties. The Ombudsman found that the trustees should have reviewed the employers decision to ensure that it complied with the schemes rules. A failure to do so was held to be maladministration. The decision was therefore required to be reviewed again.

In our view this is a rather odd decision as far as it applies to the trustees. While trustees would only normally be required to ask the employer to confirm that the employment offered was suitable and reasonable, they would not normally be required to form their own view as to its suitability. In our view trustees cannot be held responsible for decisions made by other parties and, given that decisions such as reasonableness are subjective, it would be nearly impossible for them to conclude that the employers decision was reasonable without reviewing all the evidence, which they have actually no right to see in the first place.

Delay to new employer debt regulations

The Government announced in September that the amendments to the employer debt regulations aimed at introducing "flexible apportionment arrangements" are likely to be delayed until December 2011 (from 1 October 2011 expected launch date).

The original proposals, which were published for consultation in June 2011 and reported in our June Newsletter, are designed to allow an employer who ceases to participate in an ongoing multi-employer scheme the option of apportioning its accrued liabilities in the scheme among the remaining employers provided certain conditions are met, and without the need to calculate an employer debt. The amended regulations are also anticipated to include an extension to the "period of grace" during which an employer can cease to have active members, and then employ an active member before an employer debt is triggered.

A copy of the Governments statement can be found at dwp-2011.pdf

Government launches consultation to reduce pension levies

On 7 November the Department for Work and Pensions launched a consultation seeking views on the draft Occupational and Personal Pension Schemes (Levies - Amendment) Regulations 2012, which would make changes to the rates of the general levy and the Pension Protection Fund administration levy for 2012/13 onwards. The intention is that the regulations will come into force on 1 April, 2012 with comments on the consultation required by 30 January 2012.

The general levy is a levy on occupational and personal pension schemes which provides for all of the administration costs of the Pensions Ombudsman (PO) and the Pensions Advisory Service (TPAS) and some of the administration costs of the Pensions Regulator (TPR). The general levy excludes the Regulators costs in relation to compliance with new duties introduced for workplace pension schemes via the Pension Act 2008. The consultation is looking to reduce the levy rate by at least 12% from 2012/13.

The PPF administration levy is a levy on occupational pension schemes eligible for the Pension Protection Fund (not the Financial Assistance Scheme) and provides for the administration costs of the PPF in respect of the Pension Protection Fund and the Fraud Compensation Fund (FCF).

The consultation looks to reduce the PPF levy by at least 25%. This is largely because legislative changes made in 2008 and 2011 and consolidated in the Pension Protection Fund (Prescribed Payments and Investment Costs – Amendment) Regulations 2011 mean that since April 2011, certain costs have no longer been met by the PPF administration levy income, but are now funded out of the Protection Fund itself. The DWP considered that if the PPF were a pension scheme the activities that give rise to these costs would be charged to the scheme so should therefore not form part of the PPF levy.

This is welcome news as these changes, if enacted, should lead to a reduction in scheme expenses and therefore, for defined benefit scheme, an improvement in their funding position.

Useful link

A copy of the consultation can be found at: consultation.pdf.

Pensions act 2011 receives royal Assent

On 3 November 2011 the Pensions Bill became the Pensions Act 2011.

Key changes were:

Money Purchase Benefits

A new provision that went into the Act at the last minute was a new definition of Money Purchase Benefit which has been inserted into new Section 181B of the Pensions Scheme Act 1993. This new definition is the Governments reaction to losing the Supreme Court decision in Houldsworth and another v Bridge Trustees Ltd and another [2011] UKSC 42. (see the July newsletter).

The government indicated that as a result of the Supreme Courts judgement, certain pension schemes that previously would have been considered as hybrid schemes fell outside of the employer debt/scheme funding legislation as they would be classified as money purchase schemes and therefore also fall outside of the PPF. The Pensions Act 2011 now amends the definition of Money Purchase Benefits so that it is A benefit other than a pension in payment falls within this section if itsrate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member.

The DWP indicated that the term "money purchase benefits" should therefore only refer to benefits where there is no risk of a funding deficit. The DWP said that, without the changes, "anomalous results" could have arisen whereby schemes would have been unable to pay out benefits that had always been considered money purchase in nature, but equally these would not have been protected by the PPF.

The changed legislation also means that a defined contribution scheme that provides for pensions in payment out of scheme assets will also not be considered a money purchase scheme providing money purchase benefits, because of the potential for the underlying assets to mismatch the benefit.

The amendments, when they are enacted, will have retrospective effect from 1 January 1997. However to avoid schemes that have already wound up being required to re-open historic matters, the amendments include a power for the DWP to make transitional provisions in relation to past decisions that cannot practically be revisited. The DWP plans to consult on draft regulations making transitional and other consequential changes in the near future.

State Pension Age

The Government brought in transitional measures that will reduce the additional period that women will have to wait before receiving their basic state pension.

The Act still maintains equalisation of state pension age at 65 by November 2018, but then phases in the transition from 65 to 66 more slowly. Therefore, the state pension age reaches 66 in October 2020 instead of April 2020. The government said that the amendment will mean the maximum delay before a woman receives her basic state pension will be reduced to 18 months.

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There is now a cap on the administration charges that can be levied on active and deferred members of a qualifying scheme under the Pensions Act 2008 at levels to be prescribed by further regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Caoimhe O'Neill
Michael Jones
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