UK: Pensions Update - June 2017

Last Updated: 19 June 2017
Article by Martyn Shaw

IN THE NEWS

Government defers to industry on section 75 debt regulations

The DWP has consulted on introducing a new arrangement to allow an employer which ceases to actively participate in a multi-employer pension scheme to defer the obligation to pay an exit debt under the 'section 75' regime.

The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017 seek to address concerns expressed by many employers in such schemes – including third sector employers and participants in other industry-wide 'non-associated' schemes such as the Plumbing and Mechanical Services (UK) Industry Pension Scheme – that they are trapped because they can neither afford to depart and pay a 'section 75' debt, nor can they afford to stay in the scheme and continue to accrue liabilities.

Under the regulations, a proposed new type of arrangement (a "Deferred Debt Arrangement") would permit a departing employer that is liable to pay a 'section 75' debt to agree with the scheme's trustees to defer payment of the debt and to continue as an employer in relation to the scheme. The use of a Deferred Debt Arrangement would be subject to various conditions, including that:

  • the departing employer retains all its previous responsibilities to the scheme (including any share of 'orphan liabilities');
  • the employer continues to be treated as if they were the employer in relation to that scheme; and
  • the scheme meets the funding test applied to other easement measures such as flexible apportionment arrangements ("FAAs").

Also, the option of a Deferred Debt Arrangement would not apply where the scheme employers are restructuring.

The DWP proposes that the existing options for managing employer debts (such as FAAs) are retained, save for suggesting some minor amendments.

The draft regulations are available to view here, as part of the consultation response paper.

Conservatives promise M&A veto power for The Pensions Regulator

The Prime Minister has pledged that the Pensions Regulator ("TPR") will be awarded new powers to veto some mergers and acquisitions if the Conservatives are re-elected at the upcoming General Election.

In a statement, the Conservatives said that if a merger or acquisition was valued over a certain amount or there was a certain number of members in a pension scheme related to a transaction, an application would have to be made to TPR to approve the deal. TPR could then block the transaction in cases in which "there is no credible plan in place and no willingness to ensure the solvency of the scheme".

The new powers would also include the ability of TPR to fine individuals who have "wilfully left a pension scheme under- resourced" (a message repeated in the party's manifesto), and to strike off offending company directors.

PENSIONS REGULATOR UPDATE

Regulator warns "tougher approach" to be taken over late actuarial valuations

TPR has issued a warning to trustees of defined benefit schemes that it will start to take tougher action where trustees have failed to submit an actuarial valuation on time.

The statutory deadline for submitting valuation documents is the date 15 months after the effective date of the valuation.

From our experience, if there is a likelihood that the trustees and sponsoring employers will not reach agreement on a scheme's funding documents before their deadline, the trustees will put themselves in a better position with TPR if they engage with TPR beforehand and explain the delay, giving proper reasoning, rather than miss the deadline having not notified TPR in advance.

Regulator 'names and shames' employers for auto-enrolment non-compliance

TPR has begun 'naming and shaming' certain employers for non-compliance with their automatic enrolment obligations. Employers are added to TPR's publicised list if:

  • a court order has been secured against them and an escalating penalty notice (EPN) has been issued for non-compliance and is unpaid; and
  • they continue to ignore their automatic enrolment responsibilities despite having been issued with – and having paid – an EPN.

Regulator issues regulatory guidance on DB investments

TPR has issued investment guidance for the trustees of and advisers to defined benefit schemes.

The guidance includes sections on governance, investing in DB schemes, matching and growth assets, implement and monitoring.

The guidance highlights the importance of understanding and monitoring the employer covenant's strength, which is crucial to setting an appropriate investment strategy.

TPR also specifically addresses the issue of sustainable investing, highlighting the need for trustees to assess the financial materiality of long-term investment risks such as climate change and unsustainable business practices.

The guidance is available here.

PENSIONS OMBUDSMAN UPDATE

Council wrongfully withheld pension benefits from fraudulent former employee

In Mr A v Enfield Council (PO-7277), the Pensions Ombudsman ruled that Enfield Council could not withhold the pension benefits of a former employee convicted of fraud but whose criminal acts were not the reason for his dismissal.

The former employee, Mr A, was a member of the Local Government Pension Scheme (LGPS) while employed by the Council. After the Council had made him redundant, it was discovered that he had made a number of fraudulent payments out of a Council account. He was imprisoned and the Council secured a judgment against him for the repayment of over £500,000.

The Council then sought to withhold Mr A's LGPS benefits as a means of recovering part of the debt due to it, relying on regulation 74 of the LGPS (Administration) Regulations 2008. That regulation allows an employing authority to recover or retain funds from a scheme member where that member has left employment "in consequence of a criminal, negligent or fraudulent act" relating to it.

Mr A argued that regulation 74 did not permit the Council to withhold his benefits, as his dismissal was not "in consequence" of his fraud. Instead, it was by reason of redundancy.

While the Council accepted that, on a literal interpretation, it had not met the conditions set out in regulation 74, it argued that a more purposive approach to interpreting the regulation should be used so as to avoid an "absurd" outcome. Had the fraud been discovered prior to the redundancy, Mr A would have been dismissed as a result. Parliament could not have intended that recovery could be permitted in cases where a member is dismissed because of fraud, but not in cases where he or she leaves employment without the fraud being discovered at the time (essentially, the more 'successful' fraudster is rewarded).

The Ombudsman sided with Mr A, agreeing that the words "in consequence" created an "unequivocal" causative requirement that the dismissal be a result of the criminal act. The wording of the regulation, the Ombudsman stated, is clear and precise, and it would be "dangerous" to imply additional wording when there was no indication that a broader meaning to encompass the scenario in question was intended to be given by Parliament.

Additionally, the Ombudsman noted that Mr A was not permitted to retain the fraudulent funds and that criminal sanctions had been applied, including a requirement that he repay the money. The Council was directed to consider other means by which it could recover the debt.

Comment

Our Senior Associate, James Keith, is a member of the Association of Pension Lawyers' Public Sector Sub-Committee. James said:

"It was clear from the LGPS Regulations that the member's benefits could not be forfeited – no matter how unfair this appeared to be. The equivalent provision within private sector arrangements under Section 91 of the Pensions Act 1995 is drafted in a much broader sense and would have permitted forfeiture to take place if the scheme rules permitted it. I suspect that we may see changes to the LGPS Regulations to address this in the future – but it would be wise for all pension schemes to check that their forfeiture provisions are appropriate and sufficiently robust."

THE VIEW FROM THE COURTS

Not another RPI to CPI case...

It's a familiar topic in recent pensions litigation. In Thales UK Ltd v Thales Pension Trustees Ltd and others [2017] EWHC 666 (Ch), the High Court was asked to consider the viability of switching from the Retail Prices Index ("RPI") to the Consumer Prices Index ("CPI") in both the CARE and final salary sections of the Thales UK Pension Scheme, for the purpose of calculating revaluation and pension increases. The final salary section rules governed the benefits of members who transferred in from the Thales Optronics Pension Scheme ("TOPS"), and the wording of the rules for each section differed on revaluation and increases as a result.

In relation to the CARE section, the rules allowed for a switch from RPI to the "nearest alternative index" if RPI's "compilation is materially changed".

An expert analysis was undertaken on the materiality of changes made to RPI's compilation (indeed, trustees may find the judge's discussion of the analysis useful when grappling with the question of RPI/CPI in their own schemes). The judge determined that the incorporation of the new UK Housing Prices Index ("UK HPI") into RPI – which was classified by the Office of National Statistics as a "non-routine" change to RPI's compilation – was a 'material change' to its compilation and that, as the nearest alternative index to RPI, the employer had to select RPI with UK HPI incorporated as the appropriate measure for applying increases.

Regarding the TOPS section, if RPI was "revised to a new base" or was "otherwise altered", then subsequent increases would be applied "on a basis determined by the Trustees having regard to the alteration made to the Retail Prices Index". The judge attributed a wider meaning to "otherwise altered" than he did to "materially changed"; however, unless in "compelling" circumstances and only with a "material" difference to RPI having occurred as a result of an alteration, it would not be appropriate for the trustees to depart from RPI.

He added that the rules did not "give the Trustees a free range to adopt whatever basis they like" if an alteration was made to RPI, concluding again that, following the introduction of UK HPI into RPI, the adoption of the revised RPI was the only appropriate change the trustees could make.

Comment

Regarding the selection of the appropriate index, the judge's decision was very much based on the construction of the phrase "nearest alternative index". The wording of the CARE section rules essentially placed a limit on the scope which the employer had to pick an alternative. If the rules in this case said, for example, "RPI or any other appropriate index" instead of the "nearest alternative index", the court's analysis would have been quite different. What we can take from this case is that it should not be assumed that CPI can automatically be selected as the alternative index: an analysis of a scheme's rules must be undertaken.

In the recent Green Paper prepared by the government, the possibility was raised of a statutory override being created to allow schemes to switch from RPI to CPI even where schemes' rules have RPI hard-wired into them. We don't yet know if this will progress beyond the 'idea' stage.

STOP PRESS

In other indexation-related news, British Airways has been defeated in the High Court by the trustees of the Airways Pension Scheme ("APS"), in a long-running dispute over the trustees' decision to award members a 0.2% discretionary increase without employer consent.

We'll report in more detail on the case in our next update, but for now, given the level of scrutiny which the APS trustees' decision- making process came under, the key take-away is that trustees need to properly record the decisions they make, considering only relevant factors in making them and seeking legal advice.

LEGISLATION UPDATE

Finance Act 2017 receives Royal Assent

The Finance Act 2017 has become law after receiving Royal Assent on 27 April.

The Finance Bill was significantly shortened prior to its enactment in light of the snap General Election called for June 8. Two of the provisions which were removed were:

  • the proposed reduction in the money purchase annual allowance ("MPAA") from £10,000 to £4,000; and
  • the proposal to exempt from income tax employer-arranged pension advice (which changes the scope of the advice that can be provided and increases the amount from £150 to £500 from 6 April 2017),

both of which had been expected to take effect from 6 April 2017.

It is not yet clear whether these provisions will be revisited after the General Election, and we will continue to monitor the position.

DWP publishes quickfire regulations on transfers to schemes that have never been contracted-out

After a short consultation period, the DWP has published regulations enabling the transfer of contracted-out benefits to schemes that have never been contracted-out, in certain circumstances.

Under the regulations, transfers to these schemes may take place on the condition that member consent is obtained and in circumstances in which the scheme from which the pensioners are transferring is in a Pension Protection Fund assessment period or a Regulated Apportionment Arrangement has been entered into in respect of the scheme.

Given the limited scope of the regulations and the short timeframe of the consultation, it is broadly understood that the regulations were prepared with an aim of facilitating transfers out of the two BHS pension schemes, following the deal struck between TPR and Sir Philip Green.

The DWP added in its consultation response that it intends in the near future to consider extending the scope of regulations to allow the transfer of pensioner members to a wider range of occupational schemes, as well as reviewing provisions regarding bulk transfers that are made without member consent.

DC UPDATE

Pensions Advice Allowance for money purchase schemes now available

Members of money purchase and hybrid pension arrangements are now able to take advantage of the Pensions Advice Allowance ("PAA"). Under the new rules, from 6 April 2017 individuals (including those with AVC arrangements) can make up to three tax-free withdrawals of £500 from their pension pot during their lifetime (but not more than once in a tax year) to pay for regulated advice on their retirement planning.

The PAA is distinct from the employer-arranged pension advice offering which was removed from the Finance Act 2017 before its enactment (see "Finance Act 2017 receives Royal Assent" above).

New legislation on master trusts and early exit charges now in force

The Pension Schemes Bill 2017, which enhances the regulation of master trusts, has received Royal Assent.

Although not yet fully in force, the Pension Schemes Act 2017 will increase member protections in a number of ways, including introducing an authorisation regime for master trusts providing DC benefits, with TPR being given the power to de-authorise trusts if they do not meet certain criteria on matters such as their financial sustainability and the adequacy of their administration and governance processes.

The Act also lays the groundwork for changes to be made to rules regarding pension administration charges for DC schemes: the Secretary of State may now introduce regulations to restrict contractual charges imposed on members, such as member-borne commission or early exit charges.

PUBLIC SECTOR UPDATE

As mentioned above, our James Keith is a member of the Association of Pension Lawyers' Public Sector Sub-Committee. As part of his role, he considers and provides input to consultations and on draft legislation, recent case law and wider public policy proposals on various public sector pension issues.

Here are a few of the recent issues James has looked at and which could be relevant to all schemes alike:

Consultation on indexation and equalisation of GMP in public service pension schemes

HM Treasury issued a consultation document on an approach for GMP equalisation. If this was adopted by the public sector it could become a precedent for the whole of the pensions industry. As such, we will be monitoring the outcome of this consultation closely.

A Severance Policy for Scotland: Consultation on severance arrangements across the devolved public sector on public sector severance arrangements

The UK Government has set out its proposals for exit payment caps, recovery and reform of payment terms (which would cap the total cost of exit payments available to individuals leaving employment to £95,000 including any early unreduced access to pensions (or any form of pension 'top-up')). As this is a matter devolved to the Scottish Government, it has now published its own consultation document: the consultation period runs until 23 June 2017.

It will be interesting to see whether there will be a divergence in approach between the UK Government and the Scottish Government. Of particular note is the Scottish Government's statement that it is "considering carefully whether pension 'top- up' should be included in any future cap. Any cap which included this type of payment could potentially make exit payments less attractive to employees and tie employers' hands further in their ability to re-shape workforces."

© MacRoberts 2017

Disclaimer

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

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