Top of the agenda
Top of the agenda
1. DC Schemes must answer questions on compliance with the cap on charges and trustee Chair legislation in the Scheme Return
The Pensions Regulator has added further questions to its DC scheme return for 2015. The questions relate to:
- Whether the scheme is compliant with the legislation on caps on charges - from 6 April this year, with certain exceptions, charges in default arrangements in money purchase schemes used for auto-enrolment purposes must be capped.
- The requirement on DC occupational pension schemes to appoint a Chair of trustees by 5 July 2015 – the legislation requires trustees to provide the Regulator with the name of the chair. This must be done through the Scheme Return. If a scheme is exempt from the requirement, trustees must confirm this in the Return.
- Compliance with auto-enrolment – all schemes must now confirm whether any of their participating employers have passed their automatic enrolment staging date and, if so, whether they have automatically enrolled any staff since 6 April 2015 and used the scheme to meet the automatic enrolment duties for staff who were existing members of the scheme.
The further information required in the Scheme Return should focus the minds of scheme trustees as to whether they have complied with the cap on charges requirements and the requirement to have a Chair, or, if not, whether any exemptions apply. For more on these requirements, click here.
2. HMRC suspends ‘ROPS’ List
In last month’s bulletin, we outlined the new Pension Age test which QROPS need to satisfy from 6 April this year (click here for the update).
Aware that there are pension schemes which were previously on the list of recognised overseas pension schemes (ROPS) but which will not be compliant with the Pension Age Test, HMRC issued guidance, stating that it will temporarily suspend the ROPS list.
The guidance also explains that the published list is not a list of Qualifying Recognised Overseas Pension Schemes (QROPS) – it is, and always has been, a list of the overseas entities that have:
- notified HMRC that they are a ROPS;
- made certain commitments with regard to reporting matters to HMRC;
- been issued with a reference number from HMRC; and
- requested publication on HMRC’s website.
Accordingly, individuals and occupational pension schemes should make necessary checks to ensure that the scheme is a QROPS i.e by contacting the scheme, and not just relying on the ROPS list, when deciding whether or not to make the transfer.
Individuals, in particular, are reminded that they should confirm with the scheme manager of the scheme to which they want to transfer their funds that it meets with the requirements to be a ROPS (including the Pension Age test) and that they should seek professional advice before making the transfer.
Individuals who transferred their pension savings to a pension scheme before it ceased to be a QROPS will be subject to UK tax on the same basis as if the scheme had remained a QROPS. They will be able to remain as members and receive a pension paid from the sums transferred without automatically incurring additional UK tax charges (i.e. the transfer will not be taxed as an unauthorised payment).
Since issuing the guidance, HMRC has issued its revised ROPS list, dropping the number of schemes on the previous version of the list significantly, from 3,800 to 663.
3. Factsheet on damages for non-financial injustice
The new Pensions Ombudsman, Anthony Arter, has released a factsheet on the awards he may make for individuals for non-financial injustice (often known as an award for “inconvenience or distress”).
The factsheet highlights that non-financial injustice must be caused directly by maladministration and must be significant. Awards for significant non-financial injustice suffered by individuals usually range from £500 to £1,000. However, the factsheet recognises that there is now a “general shift” towards making higher awards, highlighting the cases of Lambden (in which the complainant was awarded £5,000) and Foster (where a £4,000 award was given).
In Lambden, the Ombudsman cited the guidance given by the High Court in the case of Swansea City Council v Johnson (1999) in which it was said that an award for inconvenience and distress should not exceed £1,000 except in exceptional circumstances. In Lambden, the Ombudsman held that there were such “exceptional circumstances” – the complainant in that case, relying on an incorrect record of his service with the employer, moved to New Zealand only to be told that he would have to come back and work for another four years in order to get a full pension.
As to how the Ombudsman assesses non-financial injustice, the factsheet explains:
- Individual circumstances, such as the person’s individual characteristics, will be taken into account.
- The Ombudsman would normally ask whether a reasonable person (with those characteristics) would have reacted in the same way. If, for instance, the applicant has mental health problems, then it might be reasonable to conclude that they would be more likely to suffer distress.
- Inconvenience awards are not calculated in direct proportion to the time spent and whether professional fees have been incurred or the individual’s pay. Instead, matters such as whether a complaint could have been avoided, whether the inconvenience arose on a single or a number of occasions and how the respondent handled the complaint, are relevant.
4. Ombudsman holds that a compromise agreement waiving a right to an unreduced pension did not contravene section 91
In the recent case of White (PO-5304), the Pensions Ombudsman has determined that a compromise agreement entered into on voluntary redundancy, under which the individual waived any prospective entitlement to an unreduced pension, did not contravene section 91 of the Pensions Act 1995. Section 91 broadly states that an assignment or surrender of a person’s rights under an occupational pension scheme is unenforceable.
Mr White, a member of the Thames Water Pension Scheme, took voluntary redundancy from his employment with Thames Water in April 2013 on the understanding that there will be no entitlement to an unreduced pension under the pension scheme for those who took voluntary redundancy. The early retirement position was explained in Q&As posted on the company's intranet. Although Mr White proposed changes to his compromise agreement in relation to the unreduced pension, he signed the agreement without any changes to the terms.
The Ombudsman discussed a number of points regarding the scope of section 91, making various references to the case of IMG v German (2010) (which decided that section 91 does not prevent a compromise agreement from having effect where it involves a bone fide settlement of disputed rights under a scheme).
- The compromise agreement was expressed to be in full and final settlement of any claims that Mr White may have, with certain exceptions - the exceptions included any claim for pension entitlement which had accrued up to the termination date.
- The Ombudsman held that the right to an unreduced pension was not an “accrued right”. It was a prospective or potential future right (a “putative” right as described in the IMG case), which is only available if the conditions attached to it were satisfied. These terms included the requirement that Thames Water certify to the trustees of the pension scheme that the member left employment for specified reasons. Hence, the early retirement term fell within the compromise.
- Mr White had argued that the IMG case only allowed “pre-existing” disputes about pension rights and entitlements as being capable of a bone fide compromise and, according to him, there was no pre-existing dispute here. The court held that Mr White was aware from the information on the intranet that a person who took voluntary redundancy was not entitled to an unreduced pension; he had even tried to negotiate revisions to the compromise agreement after his application for voluntary redundancy. Hence, there was a pre-existing dispute at the time of the compromise.
Whether certain agreements between employees and their employers concerning the employees’ pension rights fall foul of section 91 is increasingly become a fertile area for complaints to the Ombudsman and disputes before the courts.
In Low (79153/1), for example, which also concerned an agreement between an employer and the company on an employee’s redundancy, the Ombudsman held that a member had not given up a “right” under section 91 when accepting a higher lump sum over favourable early retirement terms as the latter right was subject to the discretion of the trustees and the employer.
The scope of section 91 has also come under the microscope in the context of contractual changes to pension terms agreed between employers and the employees. In the case of BBC v Bradbury , the Court held that the agreement between the employee and the employer to impose a cap on pensionable pay was not precluded by section 91 (see our update on the BBC case).
5. HM Treasury consultation on early exit penalties
On 17 June, the Chancellor of the Exchequer announced that the Treasury will consult on measures to ensure that people are not charged excessive early exit penalties and are treated fairly when moving their pension to a provider that offers the Budget 2014 flexibility options. Since the Budget 2014 flexibility options came into force from 6 April this year, 60,000 people have taken advantage of these flexibility measures with many providers offering customers a range of options.
The Government's consultation will look, in particular, at:
- Options to address any excessive early exit penalties including imposing a legislative cap on such charges;
- Making the process for transferring pensions from one scheme to another quicker and smoother.
In tandem with the Government's consultation, the FCA will gather information from insurance companies to understand the scale of the problem facing individuals who want to transfer to a different pension provider.
Since the announcement, the Pensions Regulator has also begun a survey on the prevalence of exit fees and charges, and the transfer process in occupational DC schemes. The survey will be conducted amongst a representative sample of schemes and will inform the Treasury's consultation on exit charges.