UK: Pensions Update (August 2008)

Last Updated: 18 September 2008
Article by Kate Richards and Judith Clixby


  • Justifying age discrimination: two Employment Tribunal and EAT decisions
  • Ombudsman: trustees personally liable for scheme losses from unlawful loan to employer
  • Transfer values: draft guidance from the Pensions Regulator
  • IDR Code of Practice not yet in force
  • SIPPs and protected rights: regulations now laid


Two recent decisions of the Employment Tribunal and the Employment Appeal Tribunal deal with the issue of justification of age discrimination. Both are employment cases but they are useful examples of those tribunals' approach to age discrimination.

In MacCulloch -v- ICI the EAT looked in some detail at the issue of justification of age discrimination in the context of a contractual redundancy scheme.

Justification requires the respondent to show that its chosen measures are appropriate with a view to achieving the objectives pursued and are reasonably necessary to that end. The principle of proportionality requires an objective balance to be struck between the discriminatory effect of the measure and the needs of the undertaking. The more serious the impact, the more cogent the justification must be.

The Employment Tribunal (ET) had found that the direct discrimination was justified. The EAT overturned this decision: although the scheme was indeed based on legitimate aims (including encouraging and rewarding loyalty, assisting older employees with more limited prospects in the job market, and encouraging older staff to leave to make room for younger employees), the case should be remitted back to the ET for consideration of the issue of proportionality, which it had failed to address.

Of particular interest in the pensions context is the EAT's finding that, in a scheme where there is a standard set of rules, the aims must justify the scheme as a whole, not the individual's treatment; but the extent to which an individual is disadvantaged compared to his or her comparators is highly relevant to proportionality. However, in looking at proportionality the balancing exercise must look at the effect having a different scheme would have on the whole range of employees (i.e. proportionality is not purely an individual issue).

In Rainbow -v- Milton Keynes the ET found that a school had indirectly discriminated against Mrs Rainbow (aged 61) on grounds of age: a post had been advertised only for those with less than five years' experience. The school sought to justify this on grounds of cost.

In line with indirect sex discrimination cases the ET rejected this argument: cost can form the basis of objective justification provided it is combined with other factors. The ET also noted that, to rely on cost as a defence, the employer must provide evidence of budgetary requirements and of its consideration of other possible means of achieving the desired cost saving.


The Deputy Pensions Ombudsman has found a set of trustees (including MNTs) personally jointly and severably liable for losses to the scheme of £130,000 as a result of an unlawful loan made to the employer (case Q00623).

The trustees (acting on the advice of a "consultant" appointed by the employer) made an unlawful loan to the employer. The employer became insolvent and the trustees were unable to recover the value of the loan. The trustees argued that they had acted prudently in making the loan (as it was intended to be short term and the difficulties subsequently encountered by the business could not reasonably have been foreseen). They also argued that they had taken professional advice.

The DPO found that the trustees could not rely on the fact that they had allegedly relied on the advice of the consultant as he was neither a lawyer appointed by the trustees under s47 nor someone giving "proper advice" for the purposes of s36 Pensions Act 1995. Therefore they had failed to exercise care and skill in their investment functions and under s33 they could not rely on the exoneration clause under the scheme rules.

This case is a very useful reminder to trustees about the danger of s33 - the trust deed contained an exoneration clause on which they would almost certainly have been able to rely had the breach not been in relation to their investment functions.


The Pensions Regulator has issued draft guidance for trustees on the forthcoming new regime on transfer values. Consultation closes on 19 September.

The guidance follows the issuing of the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008, which will come into force on 1 October 2008 (see Pensions Update, April 2008). Trustees should review their processes for the provision of transfer values before that date.

Under the new regime the trustees, not the actuary, will become responsible for calculating statutory cash equivalent transfer values (CETVs), determining the assumptions to be used, after obtaining actuarial advice.

The legislation requires trustees to calculate the Initial Cash Equivalent (ICE), which is the amount the member's benefits would cost the scheme. The trustees must set the assumptions on a "best estimate" basis. This involves valuing accrued benefits and any options (exercisable by the member without consent) or discretionary benefits the trustees decide to include. The Regulator states that only those options which would increase the value of benefits may be included (it is arguable that the legislation does not make this clear) - so any option which would reduce the ICE should be ignored and cannot be used to offset another option which would increase the ICE.

With regard to discretionary benefits, the Regulator suggests that trustees should consider established custom, any allowance made for these benefits in the scheme's funding plan and any consent requirements.

Trustees should recognise that "best estimate" is not a precise concept and will need to be pragmatic and reasonable in the light of advice obtained. They must seek the actuary's advice on matters such as whether a particular assumption is likely to be influenced by scheme, industry or member-specific factors and whether it would be appropriate to divide the membership into groups. When setting assumptions they should consider the investment strategy, make evidence-based objective decisions and use assumptions consistent with those used for the technical provisions.

The alternative calculation method: trustees have discretion to calculate the cash equivalent in a different manner as long as it results in a higher figure than if it were calculated on the "best estimate" basis. The precise method is up to the trustees. They may increase the ICE only if they have obtained any necessary consents (usually the employer's). The draft guidance gives examples of when this might be appropriate. Where the employer has requested CETVs on a higher basis than best estimate, the trustees must consider whether it is proper to do this.

Trustees may (but do not have to) reduce ICEs where they have an insufficiency report (replacing the GN11 report). Matters they should take into account include the degree of under-funding, the strength of the employer covenant and any recovery plan.

It will usually be convenient to commission an insufficiency report at the same time as a scheme funding valuation but trustees may commission a report at any other time, for example if there has been a weakening of the employer covenant or a change of assumptions.

Non-statutory transfers and transfers in are not covered by the legislation but the Regulator has included guidance on them. Non-statutory transfers (i.e. those not covered by the CETV legislation) should be calculated in accordance with the scheme rules, or where the rules are silent, as the trustees decide. The Regulator would usually expect the same approach as for CETVs. When calculating transfers in, matters the trustees should take into account include giving fair value, not prejudicing existing members and not requiring additional funding from the employer.

In addition to the communication requirements set out in the regulations (see our April issue), the Regulator states that it would be good practice for trustees to include with the member's statement of entitlement:

  • details of the transfer value basis
  • an indication of which options and discretions have been included
  • a note of contracted-out benefits.


Regulations provided for the Regulator's Code of Practice No. 11: Dispute resolution – reasonable periods to come into force on 28 July 2008, having been laid before Parliament in March. However, we now understand from the Regulator that because of changes made to the code by Parliament (see in particular the second bullet point below), the code was relaid in June and now will probably not be in force until November.

The draft code currently on the Regulator's website does not differ substantively from the draft issued in October 2007 (see Pensions Update, November 2007), but there are some clarifications and some changes to the order of paragraphs, so any IDR procedure which refers to paragraph numbers of the draft code should be checked to see if amendments are needed.

The draft code sets out the following "reasonable periods", with the usual caveat as to appropriateness for the particular scheme:

  • a "person with an interest in the scheme" must make his application within six months of the date on which he ceased to be, or claims he ceased to be, a person with an interest in the scheme (though trustees should consider accepting late applications from those who could not have reasonably known about the matter in dispute within that period)
  • trustees should notify the applicant of the decision within four months of the date on which they received the application; it is now clarified that this applies to the entire IDRP if a one-stage IDRP is adopted and to each stage of a two-stage procedure
  • this notification should take place no later than 15 working days after the decision has been made (this period is additional to the four months).


The regulations which will permit self-invested personal pensions (SIPPs) to hold protected rights have now been laid before Parliament. The regulations, which also repeal a provision which allowed protected rights to be used for paying a pension to someone who was not the member's spouse, civil partner or child, will come into force on 1 October 2008.

For further information, see the July issue of Pensions Update, which included details of how to apply in advance for a contracting-out certificate (effective from 1 October).

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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