UK: Pensions Update - September 2008

Last Updated: 1 October 2008
Article by Kate Richards and Susan Jones


The Advocate-General has issued his opinion in the "Heyday" case which challenges the "default" retirement age in the Age Discrimination Regulations allowing employers to retire employees from age 65 subject to certain procedural safeguards.

The findings of the Advocate-General are very broad (as were the questions asked). His view is that the UK is entitled to introduce legislation permitting a difference in treatment of employees of different ages (i.e., permitting employers to dismiss employees aged 65+ if the reason for dismissal is retirement) if it has determined that this is a proportionate means of achieving a legitimate aim.

If the European Court of Justice follows the Advocate-General's opinion then the matter will be remitted to the High Court which will have to determine whether the default retirement age provision is objectively justified by a legitimate aim relating to employment policy and that the details of the provision are appropriate and necessary for the purpose.

We understand that the final judgment of the ECJ is expected later this year.



On 1 October 2008 the Companies Act 2006 introduces new rules on conflict of interest for company directors. This will affect both directors of employers who also act as pension scheme trustees and directors of corporate trustees who are also directors or employees of a scheme employer (or even just scheme members).

From 1 October a director will have a statutory duty to "avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company". A director will avoid being in breach of this duty if the conflict is authorised in advance by the other (non-conflicted) directors. For private companies in existence before 1 October 2008, the transitional provisions require them to seek the approval of their shareholders if they want to permit such authorisation by the directors. Alternatively, shareholders may resolve that a director may retain his office despite a particular conflict situation.

Any company director who is concerned that his pension scheme interests or duties may put him in a position of conflict should take steps to ensure that the position is properly authorised in accordance with company law as outlined above.



The DWP has published draft regulations for consultation which will allow (but not compel) contracted-out occupational pension schemes to convert Guaranteed Minimum Pensions to scheme benefits, probably from 6 April 2009.

Among the requirements which schemes must meet before converting GMPs are the five conversion conditions:

  • Condition 1: the post-conversion benefits must be actuarially at least equivalent to the pre-conversion benefits.
  • Condition 2: pensions in payment at the conversion date must not be reduced.
  • Condition 3: post-conversion benefits must not include any money purchase benefits.
  • Condition 4: survivors' benefits must be provided post-conversion in certain prescribed circumstances.
  • Condition 5: schemes must comply with certain procedural steps (obtaining employer consent, advance notification to HMRC and the trustees taking all reasonable steps to consult members in advance and to notify members and survivors before, or as soon as reasonably practicable after, the conversion date).

The draft regulations 2009 set out how "actuarial equivalence" is to be determined by the trustees. The trustees must determine the assumptions to be used (on advice from the actuary). The actuary must then calculate and certify the actuarial value of the post-conversion benefits in a prescribed manner (using assumptions chosen by the trustees).

In certain circumstances the post-conversion benefits must contain survivors' benefits equal to at least half the member's entitlement (accrued from 1978 to 1997 for widows and 1988 to 1997 for widowers and surviving civil partners).

Annex C to the consultation paper is a simple guide explaining how the GMP conversion process might work in practice.



The Regulator has issued guidance on effective member communications for use by trustees and employers of DC schemes (although many points will be equally relevant in DB schemes). It sets out general principles of good practice in written communications to members and is for use by trustees, managers and employers because "Effective member communication can have a significant impact on financial outcome, particularly in relation to DC pension schemes".

Research by the Regulator had shown that many employers and trustees did not have a communications plan or take any steps to see how successful their communications had been. The guidance emphasises the importance of these considerations and the key messages contained in the guidance include:

  • identify your objectives and have a clear communications plan;
  • identify the best ways to communicate;
  • tailor communications to the audience;
  • remember the needs of all groups, not just active members;
  • be open and honest;
  • avoid jargon; and
  • try to get members to engage.

Much of the content could perhaps be regarded as mere common sense. Examples of different types of communication are included. The Regulator recommends challenging advisers or providers of group personal pensions if it appears that a communication may not achieve what it sets out to do.

A separate, but related, publication from the Regulator is an investment guide for members, Making pension fund choices: think before you choose. Trustees and employers can, if they wish, issue this to members of DC schemes to help them understand the fund choices available to them.



The European Commission has published a consultation paper on the harmonisation of solvency rules for pension schemes.

The draft Solvency II Directive proposes reform of the insurance industry, including funding requirements. Concerns had been raised that these could apply to all pension schemes currently regulated by IORP (implemented in the UK mainly by the Pensions Act 2004), but the position now is that most pension schemes will fall outside the scope of Solvency II.

The consultation asks whether Solvency II should cover cross-border schemes and "regulatory own funds". Both types of scheme have onerous funding requirements: cross-border schemes must be fully funded at all times; regulatory own funds must always hold additional assets above the aggregate of the scheme's technical provisions. Regulatory own funds (which are fairly unusual in the UK) are broadly undertakings which underwrite death, disability or longevity risk without involving the sponsoring employer, guarantee an investment performance or guarantee a level of benefits.

If anyone should want to undertake further background reading on Solvency II, a set of documents can be found on the Treasury website.



The European Court of Justice has given judgment in the Bartsch case.

Mr B was a member of the Bosch occupational pension scheme which provided for no spouse's pension to be payable where the spouse was more than 15 years younger than the member. Mr B died in 2004 leaving a widow who was more than 15 years younger than him. Mrs B brought a claim for age discrimination. Germany adopted its domestic age discrimination legislation in December 2006.

The court held that the claim could not succeed as the treatment of Mrs B had "no link" with community law. The claim was brought in relation to a private sector scheme and to a period before the time limit for transposition of the age discrimination requirements of the Equal Treatment Directive had expired.

As Mrs B lost on the first point, the ECJ did not go on to consider the interesting issue as to whether such a provision might be justified. In his opinion in June 2008, the Advocate-General had suggested it might be possible to objectively justify such discrimination on the basis that it was an appropriate and necessary means of achieving a legitimate aim; but because this younger spouse clause prevented any payment to the widow, it went beyond what was "appropriate and necessary"; a sliding scale might instead be acceptable, or payments starting only when survivors reached a certain age.

The UK Age Discrimination Regulations include an exemption allowing "the actuarial reduction of any pension payable from a scheme in consequence of a member's death to any dependant of the member where that dependant is more than a specified number of years younger than the member". It seems likely that this exemption will remain unless and until the ECJ rules otherwise.



The Pensions Regulator has published its response to the consultation on good practice in selecting mortality assumptions for defined benefit pension schemes.

The consultation document proposed introducing two new triggers for intervention by the Regulator. In the light of responses, the key change is that mortality assumptions will not be used as a primary trigger for funding plans. The Regulator will scrutinise mortality assumptions for DB schemes only where a scheme is flagged up by an existing trigger.

© 2008 Farris, Vaughan, Wills & Murphy LLP

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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