UK: What To Expect From Pensions In 2018

Last Updated: 5 January 2018
Article by Ian Chapman-Curry and Jason Coates

What is on your agenda for the coming year? Whether it is compliance with the new data protection regime, grappling with the detail on CPI / RPI or thinking about the bigger picture on Brexit, 2018 looks set to be both busy and challenging. To keep you ahead of the conversation, Gowling WLG's pensions team brings you eight things that should be on your radar for the next 12 months.

Eight things to watch out for in 2018

1. Business coherence - a phrase for 2018?

In 2016, the High Court considered the concept of 'business coherence' in the case of Shannan v Viavi Solutions UK Ltd. This was the first time that this concept (i.e. whether a deed had 'business coherence' as drafted or whether other terms needed to be implied in order to achieve 'business coherence') had been considered by the courts in a pensions case. Will 2018 see the courts adopt a more pragmatic approach to fixing the drafting glitches and execution oversights that cause such problems in pensions?

2. What is the difference between a firefighter and a judge?

This is not the start of a joke, but one of the issues facing the Employment Appeals Tribunal as it considers joined age discrimination cases. In McCloud and others v Lord Chancellor and Secretary of State for Justice and another, the Employment Tribunal considered age discrimination in the context of reforms to the Judicial Pensions Scheme. In Sargeant v London Fire and Emergency Planning Authority and others, reforms to the Firefighters' Pension Scheme were reviewed, again taking into consideration age discrimination. Will the higher courts provide useful guidance on age discrimination for other employers?

3. White paper on the future of defined benefit pensions

The government has promised a white paper on the future of defined benefit pensions. This will mark the first time in a decade that the DWP has considered serious reform of the legislative and regulatory regime. We expect that the white paper will focus on consolidation, costs and tightening the regulatory regime.

4. Preparing for the new PPF levy triennium

The PPF's third levy triennium (covering levies for 2018-19, 2019-20 and 2020-21) begins on 6 April 2018. The PPF will also publish new documents for contingent asset arrangements in January 2018. These will not have to be used when re-certifying existing contingent asset arrangements in the 2018/2019 levy year, but will need to be used for any new arrangements that are entered into after the PPF has published the new documents.

5. Don't be phased by increased in minimum contributions

Workplace pension reform will reach two key milestones in 2018. 1 February 2018 marks the last staging date. From this date onwards, automatic enrolment duties will apply immediately to all employers in the UK. On 6 April 2018, workplace pension reform finally enters the second phase for minimum contributions.

Minimum contribution levels will rise to 5% of qualifying earnings, with at least 2% being paid by the employer. The pensions industry will be watching closely to see if the increase has a noticeable impact on member opt-out rates.

6. The pensions industry braces for the new data protection regime

On 25 May 2018, the General Data Protection Regulation (GDPR) will come into effect in all member states of the European Union. The UK is also likely to have additional primary legislation in the form of a new Data Protection Act. Pension schemes process a large amount of personal and sensitive personal data. Trustees, employers, professional advisers and third party service providers have fewer than five months to get ready.

7. The courts get down to details on RPI / CPI

In the second quarter of 2018, both the Supreme Court (Barnardo's and others v Buckinghamshire and others) and the Court of Appeal (British Airways Plc v Spencer and others) will hear cases focusing on changes to the index used for the revaluation of pensions and increases to pensions in payment. The government announced the switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) in 2010. Ongoing litigation demonstrates that the devil really is in the detail.

8. Britain braces for Brexit

This year promises to be crucial for Britain's exit from the European Union. As we progress through 2018, politicians will have to make decisions that could shape the economic and political future of the nation for decades to come. With a legislative and regulatory regime rooted in primary domestic legislation, the pensions industry will be focused on the impact that Brexit has on investment returns, risk and macro-economic indicators.

The pensions world in 2018

Two big clashes will dominate newspaper front pages in 2018. In June, 32 national football teams head to Russia and will battle to win the FIFA World Cup. In November, American voters go to the polls in mid-term elections that will deliver a verdict on Donald Trump's first two years as President.

Will there be anything as compelling in the pensions world in 2018?

Although arguably not as thrilling as a semi-final penalty shoot-out, the eight issues that we've outlined in this update still promise to grip the pensions industry in the coming 12 months.

1. Business coherence -a phrase for 2018?

One of the most vexing issues for pension lawyers is what to do if historic deeds of amendment are executed by the wrong entity. In a case that will be heard by the Court of Appeal in February 2018 (Shannan v Viavi Solutions UK Ltd), judges will consider what degree of formality is required to execute a deed and document the exercise of a power.

The High Court's decision was the first pensions case to consider the concept of 'business coherence' (i.e. whether a deed had 'business coherence' as drafted or whether other terms needed to be implied in order to achieve 'business coherence').

This follows a Supreme Court decision (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72). Expect far more attention to be paid to these concepts when the case goes before the Court of Appeal. The Scottish courts have been receptive to a more pragmatic approach to glitches in the scheme amendment process; this case could be an opportunity for the English courts to show how far they might be prepared to follow suit.

2. What is the difference between a firefighter and a judge?

In February 2018, it is likely that the Employment Appeals Tribunal will join two cases focusing on age discrimination. McCloud examined alleged discrimination as part of the reform of the Judicial Pensions Scheme. Sargeant, meanwhile, focused on age discrimination in respect of reforms to the Firefighters' Pension Scheme.

Whilst both of these cases stem from public sector disputes, it is likely that the decision will have a wider impact for employers. If the case reaches the Court of Appeal or the Supreme Court, it may provide useful guidance on avoiding age discrimination issues when implementing pension benefit changes.

3. White paper on the future of defined benefit pensions

At October's Pensions and Lifetime Savings Association's annual conference, the Department for Work and Pensions' director for private pensions and stewardship, Charlotte Clark, confirmed that the government's white paper on the future of defined benefit schemes should be published by the end of February 2018.

The White Paper will mark the first serious consideration of changes to the legislative regime for defined benefit pensions in a decade. With the parliamentary timetable already groaning under the weight of Brexit-related legislation, there seems to be little chance of a Pensions Bill before 2020. Interestingly, the government could, at this point, choose to diverge from the existing EU pensions framework.

It is likely that the key themes in this year's white paper will be consolidation, costs and a tightening of the regulatory regime.

4. Preparing for the new PPF levy triennium

In December 2017, the Pension Protection Fund (PPF) published its final rules for the 2018-19 levy, with the deadline for certification of contingent assets for the 2018/2019 levy being 31 March 2018. This marks the start of the PPF's third levy triennium (covering levies for 2018-19, 2019-20 and 2020-21).

One of the main issues for pension schemes and their legal advisers will be changes to the documentation for contingent assets, particularly "Type A" contingent assets which are group company guarantees and "Type B" contingent assets, which include security over cash, equities or UK real estate.

The new contingent asset documents are expected to be published by the PPF in mid-January 2018. Contingent asset arrangements entered into before they are published will not, however, need to be re-executed for the 2018-19 levy year.

Schemes will then have to get ready to use new documents for certain contingent assets arrangements for the 2019-20 levy.

In addition, where a certified guarantee provides a PPF levy saving in a single year of £100,000 or more, the new levy rules require trustees to certify that they have obtained a "Guarantor Strength Report" prepared by a professional adviser. This report should be produced before the 31 March 2018 deadline. If the required report is not obtained in time, trustees risk the PPF rejecting the guarantee and therefore losing the levy saving.

5. Don't be phased by increases in minimum contributions

Workplace pension reform will reach two key milestones in 2018 -the end of employer staging and the start of the second phase of minimum contributions.

The end of employer staging

1 February 2018 marks the last employer staging date in the five and a half year programme that saw the gradual implementation of employer duties under workplace pension reform. From this date onwards, automatic enrolment duties will apply immediately to all employers in the UK.

The second phase of minimum contributions begins

On 6 April 2018, workplace pension reform finally enters the second phase for minimum contributions. This rise was initially planned for 1 October 2017, but the increases were delayed to give employers more time to prepare for higher costs.

Currently, the minimum total level of contributions for qualifying schemes is 2% of qualifying earnings, of which 1% must be paid by the employer (unless the scheme complies using one of the three alternative tiers of certification). This will rise to 5% of qualifying earnings, with at least 2% being paid by the employer. The pensions industry will be watching closely to see if the increase has a noticeable impact on member opt-out rates.

6. The pensions industry braces for the new data protection regime

On 25 May 2018, the General Data Protection Regulation (GDPR) will go into effect in all member states of the European Union. The UK is also likely to have additional primary legislation in the form of a new Data Protection Act. Further detail will be provided by a raft of guidance issued by the UK and EU data protection regulators.

Pension schemes process a large amount of personal and sensitive personal data. Many also rely on third parties to administer their schemes.

Trustees, employers, professional advisers and third party service providers have fewer than five months to get ready.

7. The courts get down to details on RPI / CPI

Barnardo's and others v Buckinghamshire and others

This case is a useful one for diligent drafters. In 2016, the Court of Appeal paid particular attention to the words: "or any replacement adopted by the Trustees without prejudicing Approval".

Does this definition of RPI in the scheme rules in question permit the trustees to select any index to replace RPI? Or does RPI first have to be officially replaced before this replacement index can be adopted by the trustees? Expect even more scrutiny when this is heard by the Supreme Court in June 2018.

More broadly, many in the pensions industry will be hoping for some clear and practical guidance from the Supreme Court on whether trustees have scope to change the scheme's measure of inflation (if not necessarily whether they should do so).

British Airways Plc v Spencer and others

The second quarter of 2018 will see another case focusing on CPI/RPI, highlighting that the government's 2010 switch from RPI to CPI as the basis for pension increase review orders is still causing issues for some private sector schemes.

In this case, the trustees of the Airways Pension Scheme introduced a power to award discretionary increases. This was then used to award members with 50% of the gap between RPI and CPI. In 2013, this amounted to 0.2% on top of the existing increases calculated by reference to CPI.

The case was, however, more interesting for its comments on the exercise of trustee powers and on the construction of a scheme's governing documents than for anything it said about the switch from RPI to CPI. Will the Court of Appeal reach the same outcome?

8. Britain braces for Brexit

This year promises to be crucial for Britain's exit from the European Union (EU). Although the deadline for the UK's trigger of Article 50 is March 2019, 2018 will see politicians in the UK and across Europe make decisions that could shape the economic and political future of the nation for decades to come. October 2018 has been highlighted as a deadline for all the talks between the UK and the EU, including on transitional arrangements and a future relationship, to be wrapped up.

But, if a week is a long time in politics, what does a whole year represent? At the start of 2017, few people predicted that Theresa May would call an early general election. Fewer than six months later, Britain went to the polls. Only one prediction seems a safe bet for 2018 -agreements, fudges and compromises will leave a decent chunk of the population feeling betrayed.

So, what does all this mean for pensions? Fortunately, the UK's legislative and regulatory regime for pensions is rooted in primary domestic legislation. There won't be an immediate change following the UK's exit of the European Union. It is also unlikely that there will be much material divergence between the UK and EU pensions regimes in the medium term either. This leaves the pensions industry free to focus on the impact that Brexit has on investment returns, risk and macro-economic indicators.

Are you ready for the challenges that face in pensions in 2018?

If you want to find out more, why not join Gowling WLG's pensions team as they explain some of the biggest challenges facing trustees and employers in the coming year and provide practical ways of dealing with them?

On 16 January 2018 (Birmingham) and 23 January 2018 (London), our experts will help you get ready for what promises to be a busy 12 months.

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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